Time for Small-Cap Growth to Shine

10/06/2009 10:22 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis, editor of the Oberweis Report, and analyst Ken Farsalas say small-cap growth stocks do very well coming out of recessions, and they recommend two potential winners.

Now one year removed from the depths of the global financial crisis that claimed Lehman Brothers and crippled mainstay financial institutions like American International Group (NYSE: AIG) and Citigroup (NYSE: C), stocks have enjoyed a significant rally off the lows reached in March.

As we previously noted, periods (like 2008) characterized by economic weakness, extreme negative sentiment, and risk aversion have historically represented outstanding opportunities to buy small-cap growth stocks. This occurred following the 1973-74 bear market and following recessions in 1991 and 2003.

As Jim observed last October, “2008 still looks like a bad period, but is not substantially worse than others, and really only a blip on the long-term average. Notably, in the past each and every other bear market eventually gave way to bull markets, in some cases VERY favorable bull markets.” With the Russell 2000 Growth index up over 70% since its closing low on March 9th, it’s safe to say that history has indeed repeated itself.

While yearly results can be volatile, disciplined investors who remain invested in a portfolio of high-growth, small-cap equities have historically achieved an exceptional return over long periods of time.

Lincoln Educational Services (Nasdaq: LINC) is a for-profit provider of post-secondary education. The company offers recent high school graduates and working adults degree and diploma programs in five areas of study: health sciences, automotive technology, skilled trades, hospitality services, and information technology.

As of June 30, 2009, Lincoln had over 26,000 students enrolled at 43 campuses in 17 states. Nearly all of the company’s schools operate under the Lincoln Technical Institute and Lincoln College of Technology brand names. The company recently completed the public offering of four million shares of stock sold by Back to School Acquisition LLC, a selling shareholder, for $20.25 per share. Back to School Acquisition LLC still owns more than ten million shares post-offering.

In the company’s latest reported second quarter, sales increased approximately 50% to $128.1 million, from $85.1 million in the second quarter of last year, aided by acquisitions. Lincoln reported earnings of 43 cents per share in the latest reported second quarter versus five cents in the same quarter of last year. (The stock closed below $22.50 Monday—Editor.)

PrivateBancorp (Nasdaq: PVTB) provides commercial banking services, real estate services, wealth Management, and individual banking services to business owners and executives, entrepreneurs, and families within the communities they serve. PrivateBancorp has 34 offices in ten states, serving the greater Atlanta, Chicago, Cleveland, Denver, Des Moines, Detroit, Kansas City, Milwaukee, Minneapolis, and St. Louis metropolitan areas.

In the company’s latest reported second quarter, sales increased approximately 80% to $95.8 million, from $53.1 million in the second quarter of last year. PrivateBancorp reported earnings per share of six cents in them latest reported second quarter, versus a loss in the same quarter of last year. (It closed above $23 Monday—Editor.)

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