Two Picks in a Battered Sector

10/06/2008 11:00 am EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of The Oberweis Report, says small-cap growth stocks have been pummeled, but he finds two he likes.

[Excellent] long-term results notwithstanding, 2008 has been humbling, to say the least. No other year in our history has been as challenging. Only 2002 and 1977 are in close contention for sharper index declines.

For investors in high growth small-caps like those covered in this report, the decline has been considerably sharper than the indices. Our model portfolio may finish 2008 with its largest decline [in 32 years].

While certainly unpleasant, when viewed over a much longer time, 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.

While no one knows for sure what the market will bring, stock valuations today
are substantially cheaper than at any other time in the past decade. In the past, some of the tougher periods for the model portfolio were subsequently redeemed by fantastic return years, such as 1980 (+105.0%), 1991 (+87.5%), and 2003 (+74.7%).

Although year-by-year results can be volatile, disciplined investors who remain fully invested in a portfolio of [well-chosen] high-growth equities have historically achieved an exceptional average rate of return over long periods of time.

Pegasystems (Nasdaq: PEGA) is a leader in business process management (BPM), [offering] a rules-based suite of software products to help customers plan, build, and manage business process solutions, delivering benefits including substantially improved revenues, cost reductions due to work automation, and increased customer retention.

PEGA's products also [automate] compliance reporting while reducing overall auditing expenses. The company has a substantial pile of cash on the balance sheet and has recently been buying back their own shares in the open market. In the company's latest reported second quarter, sales increased approximately 43% from the second quarter of last year. Pegasystems reported earnings per share of eight cents a share in the latest reported second quarter versus two cents in the same quarter last year. (It traded near $12 Friday-Editor.)
 
Suntech Power Holdings (NYSE: STP) is one of the leading solar energy companies in the world as measured by production output of photovoltaic, or PV, cells, with leading positions in key solar markets such as Germany and Spain.

Suntech designs, develops, manufactures, and markets a variety of PV cells and modules, including a broad range of value-added building-integrated photovoltaics, or BIPV, products. Suntech believes that its China-based design, development and manufacturing facilities provide several competitive advantages, including access to low-cost technical expertise, skilled labor, and facilities.

In the company's latest reported second quarter, sales increased approximately 51% from the second quarter of last year, [while earnings rose to] 38 cents per share versus 25 cents in the same quarter of last year. (It traded near $35 Friday-Editor.)

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