Déjà Vu All Over Again

07/10/2008 12:00 am EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of the Oberweis Report, says this market reminds him of the 1970s-a time of great opportunity for investing in small-cap growth stocks.

The economy doesn't look good. We've lost the war. Gasoline has just hit a new high and inflation is raging. Pressure is mounting to exploit North American oil sources. Oil-rich countries are booming from the windfall.

Sounds familiar right? I'm talking about the 1970s! Here's a clip from The Wall Street Journal on February 19, 1974:

"Over the counter has been one of the disaster areas of the market. 'It's a chaotic atmosphere,' says the head of one company. 'The attitude here is that you are better off staying away.'"

Sounds like market sentiment today. It is about this point that investors in smaller, high- growth stocks have either given up or are about to give up, even at these prices. Don't be fooled by sentiment.

As a result of the credit crisis and a prolonged investment cycle favoring value stocks, aggressive growth stocks trade at a much smaller premium than normal. We believe that current low valuations offer significantly lower downside risk than we ordinarily expect. If the broader market continues to fall, smaller companies will decline further, [but they] will likely emerge much faster because they are already so undervalued.

Looking at the long-term perspective, we believe that the middle of 2008 will be remembered as a good time to have bought small-cap growth stocks. 1974 was one of the best times ever to be buying small-caps! Small cap stock returns from 1975-1982 were among the best in recorded market history (see table). And it all came when everyone thought things would never get better.

Dawson Geophysical (Nasdaq: DWSN) is the leading provider of onshore seismic data acquisition services in the lower 48 states of the US. The company acquires and processes 2-D, 3-D, and multicomponent seismic data for its clients, ranging from major oil and gas companies to independent operators. Dawson's clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons and to optimize the development and production of hydrocarbon reservoirs.

Higher commodity prices have led to a significant increase in spending for domestic exploration and development of oil and natural gas reserves, resulting in greater demand for newly acquired seismic data. Sales increased approximately 31% to $78.4 million in the company's fiscal second quarter, while Dawson reported earnings of $1.07 per share versus 70 cents in last year's same quarter. (The stock closed at around $52.50 Wednesday-Editor.)

Dolby Laboratories (NYSE: DLB) provides audio technology that allows for a more precise audio replication for consumer electronics. The company also provides processing systems for the motion picture, broadcasting, and music recording industries. Dolby's technology is one of two standard formats for encoding movie soundtracks and is found in virtually all DVD players. Current growth has been driven from strength in the PC market as more PCs offer DVD publishing and playback capabilities.

In the company's fiscal second quarter, sales increased approximately 34% to $172.6 million from the same quarter last year, [and] DLB reported earnings of 49 cents per share versus 34 cents in last year's second quarter. (It closed below $39 Wednesday-Editor.)

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