The Stealth Growth-Stock Rally

07/12/2007 12:00 am EST

Focus:

James Oberweis

Editor, The Oberweis Report

James Oberweis, editor of the Oberweis Report, says that growth stocks may be poised for a big turnaround and he finds two small growth stocks he thinks will set the pace.

Growth stocks are on a sneaky winning streak this year after a long slumber. Since the dawn of the value cycle following the NASDAQ [Composite index’s] collapse in 2000, growth stocks have massively underperformed value stocks. Value beat growth six out of the last seven calendar years.

While it would be easy to stick with a winner and continue to ride your value stocks, the right move is to shake up your portfolio, be a contrarian and buy growth. Consider this: the magnitude of annualized outperformance by value stocks in this cycle actually exceeds the magnitude of outperformance by growth stocks during the Internet boom from 1995 through 1999.

We’ve been looking for an inflection point for some time now, something that would signal a shift back to growth. And those sneaky growth stocks have quietly rallied the first half of the year to a return of 9.3% (for the Russell 2000 Growth Index) compared to 3.8% for the Russell 2000 Value Index. The growth train is leaving the station, and if you wait until the cycle change is completely obvious, you’ll miss the boat.

When small-cap growth stocks rally, we would expect stocks such as [these] to really shine:

NVE (NASDAQ: NVEC) develops, manufactures, and sells devices using “spintronics,” a nanotechnology that utilizes electron spin rather than electron charge to acquire, store, and transmit information. The company licenses spintronic magnetic random access memory (MRAM) and also manufactures high-performance spintronic products including sensors and couplers used in healthcare and industrial applications. In the company’s latest reported fourth quarter, sales increased approximately 31% to $4.6 million from the fourth quarter of last year. NVE reported earnings of 33 cents per share in the latest fourth quarter versus 13 cents in the same quarter of last year. (The stock closed just below $40 on Wednesday—Editor.)

Visual Sciences (NASDAQ: VSCN), formerly known as WebSideStory, provides real time analytics applications for web sites, contact centers, retail point-of-sale, messaging systems, and the intelligence community. Analytics solutions help organizations to better understand how Internet users respond to website design and content, online marketing campaigns, and e-commerce offerings. Through this better understanding of the customers’ habits, they can tailor their business and more effectively optimize their business operations. In the company’s latest first quarter, sales increased approximately 53% to $20.6 million from the first quarter of last year. Visual Sciences reported earnings, on a non-GAAP basis, of 16 cents per share in the latest reported first quarter versus 12 cents in the same quarter of last year. (The stock rose nearly 6% Wednesday to close just above $17—Editor.) 

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