Three to Buy when Fear Fades

11/11/2008 11:55 am EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of The Oberweis Report, finds some small growth stocks he thinks will gain when markets turn.

In our experience, those who buy when fear is the driver are likely to profit when a normal tolerance for risk returns to equity markets and [price/earnings ratios] begin to expand. Note that this strategy has failed miserably, at least so far, during this bear market. Cheap stocks have become cheaper.

But fear, in the short run, does not cause a rational response. Math trumps fear over the long term. The opportunity today, when viewed three years hence, will prove to be among the best buying opportunities of our lifetime.

That said, even though mathematics of history is on our side, the solitude of the wait can be equaled only by the loneliness of a spurned lover. Even if the economy is in for a rough haul, not every company will succumb. We’ve put together [some]] of our top ideas that have already reported earnings this quarter and whose earnings and outlook remain robust.

Healthcare companies like Illumina (Nasdaq: ILMN) fit that bill well. Illumina is a developer of next-generation life science tools for the large-scale analysis of genetic variation. In the third quarter, Illumina grew revenues by 54%. Before stock compensation and amortization charges, net income grew 44% to $29 million.

Besides benefiting from the high market growth for DNA analysis tools, they are taking share from competitor Affymetrix (Nasdaq: AFFX). Illumina is now the dominant leader with high barriers to entry. Most of their customers are research organizations and academic institutions. Illumina will buck a tough economy, as government and private funding for DNA analysis remains strong. (The stock closed at around $27 Monday-Editor.)

While technology overall has been spotty this quarter, these technology firms reported no sign of slowing down: ClickSoftware Technologies (Nasdaq: CKSW) and Baidu.com (Nasdaq: BIDU).

Click Software is a pint-size developer of mobile workforce management software who recently announced a partnership with SAP (NYSE: SAP). Click’s solutions result in higher productivity, increased compliance, lower operational costs, and higher customer satisfaction.

In the third quarter, revenues were up 56% and earnings were nine cents a share versus two cents. Orders can be big and lumpy for Click, though management put out very strong estimate guidance for the next quarter. (The stock closed under $3 Monday—Editor.)

Chinese Internet search engine Baidu.com is finally trading at a relatively cheap valuation. With the number one position for Internet search in China, BIDU should command a premium P/E. The carnage of the Chinese equity market leaves shares trading for a mere 25x forward 12-months estimates, despite growth in excess of 100% in the third quarter. While ad rates could moderate in China, Badu at $211 is worth the risk.

Despite a very tough market environment, buying shares in good companies which are performing well despite a tough economy should bear fruit over time.

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