As Cheap As They Get

12/09/2008 10:23 am EST


James Oberweis

Editor, The Oberweis Report

James Oberweis, Sr., founder of The Oberweis Report, says small growth stocks are as cheap as he’s ever seen them, and he recommends two.

After spending the last 40 years closely watching markets and investors, I believe that we have the opportunity of a generation unfolding in front of us. Interest rates are low.

[Price/earnings] ratios are well below average, though not at the most extreme level. Investors are fearful, if not panicked. We are most certainly well into a recession, probably the worst of our lifetime, but markets tend to bottom out six to nine months before the end of a recession.

These are all signs that owning stocks now will probably produce above-average returns over the next ten years. There are certainly risks. No one knows whether we have already seen the bottom or not. No one knows whether stock prices will be higher six weeks or six months from now. Most importantly, no one knows whether we are already halfway through this recession, or whether this recession might last another one, two, or three years.

But the odds are very good, in my opinion, that stock prices will be considerably higher ten years from now.

While the Standard & Poor’s 500 may not be at the lowest multiple, small-cap growth stocks may be. After hitting a low of 10.3x last week, the forward P/E for companies with a market capitalization of under $1 billion and growing faster than 30% stands at a very modest average of 13.3x (median currently only 9.3x). Remember, these are for companies with very rapid growth rates, [which] in the last ten years typically commanded a P/E of twice that figure.

For investors who can stomach the volatility, the time to seriously consider a diversified portfolio of these stocks may be at hand again. For those who can’t, inflation-indexed CDs may be the route to consider.

Emergent Biosolutions (NYSE: EBS) develops, manufactures, and commercializes
immune-related vaccines and therapeutics (immunobiotics), primarily focused on infectious diseases. Emergent currently produces the only available anthrax vaccine, Biothrax, which comprises the majority of the company’s sales. Emergent also has a portfolio of products in development, including vaccines for typhoid, hepatitis B, and meningitis B, among others.

In the third quarter, sales increased approximately 30% to $56.6 million, [while EBS] reported earnings of 35 cents per share versus ten cents in the same quarter last year. (It closed above $24 Monday—Editor.)

Green Mountain Coffee Roasters (Nasdaq: GMCR) sells specialty coffees and single-cup home brewing systems. The company’s coffee division roasts organic and free-trade coffees under [various] brands.

The main growth driver of the company, however, is sales of its Keurig-brand single-cup coffee systems and the patented K-Cup portion packs. The Keurig system is the market leader in the single-cup market and in the company’s latest quarter, sales of the Keurig systems were up 75% versus the prior year. In the company’s latest reported fourth quarter, total sales increased approximately 45% to $134.8 million, [while it reported] earnings of 28 cents per share, [double what it reported] in the same quarter of last year. (It closed above $36 Monday—Editor.)

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