Growth Is the Antidote to Debt

07/13/2010 12:00 pm EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis, editor of the Oberweis Report, and analyst Ken Farsalas say that debt problems may slow the economy, and they recommend a fast-growing small company.

Developed economy governments (and the politicians who run them) are addicted to debt and are running the tab at unsustainably high levels.

Greece, of course, is the poster child for fiscal mismanagement, with estimated government debt at 124% of its [gross domestic product]. Other European countries are also approaching Greek-like proportions, including Spain (66%), Portugal (84%), and Italy (116%). The US federal debt is expected to hit 94% of GDP this year, and many US states requiring balanced budgets have large holes to plug as well.

Of course, there’s nothing wrong with occasional bursts of deficit spending. Keynesian economic theory advocates the use of counter-cyclical fiscal policy—deficit spending when an economy suffers from recession or when unemployment is persistently high. The problem this time is that many countries had high levels of debt even before they introduced fiscal stimulus programs in response to the most recent recession.

Many European countries—some would argue at the prodding of fiscal vigilantes armed with credit default swap “weapons”—have picked their poison and announced austerity programs.

While this should help appease the fiscal vigilantes in the short run, these austerity measures are likely, at a minimum, to curtail European growth, and could cause deflation and a double-dip recession in that region.

Will European stagnation impact the US? The [Federal Reserve] already issued a preliminary warning in its statement on June 23rd: “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”

In the meantime, investors should recognize that the global recovery is likely to be more measured compared to past recoveries. [So,] focus on smaller-cap companies that boast a unique product or service and the potential for above-average growth.

Alpha and Omega Semiconductor (Nasdaq: AOSL) is a designer, developer, and global supplier of a broad range of power semiconductors. The company has an extensive portfolio of power semiconductors, and has introduced over 100 new products each year during the past three fiscal years.

The company’s portfolio of products targets high-volume end-market applications, such as notebooks, netbooks, flat panel displays, mobile phone battery packs, set-top boxes, portable media players, and power supplies. Alpha and Omega’s products are incorporated into devices branded by leading original equipment manufacturers, including Dell (Nasdaq: DELL), Hewlett-Packard (NYSE: HPQ), and Samsung, and into devices manufactured by leading original design manufacturers, including Compal Electronics and Foxconn.

The company has a team of approximately 250 scientists and engineers globally, including 34 PhD’s, and has developed an extensive portfolio of intellectual property. In the latest reported third quarter, sales [rose] approximately 187% to $77.7 million from $27.1 million in the third quarter of last year. Alpha and Omega reported earnings per share of 43 cents in the latest reported third quarter, versus a loss in the same quarter of last year.

(Oberweis clients own shares of AOSL, which closed above $13 Monday—Editor.)

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