When thinking about growth stocks many investors think of Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google (GOOGL), or other large, well-known companies. Smaller or up-and-coming growth companies often get overlooked, observes Rosario “Sal” Salamone, director of research and contributing editor of MoneyLetter.

These smaller companies are riskier because they typically are not yet earning a net profit and/or it is much more difficult to forecast their cash flow for the next 3-5 years.

But that increased risk should not automatically disqualify small caps as a choice as we enter 2023. Yes, growth stocks have taken their lumps in 2022. But small cap growth stocks tend to lead market recoveries and once we get the much-desired Fed pivot it could be off to the races for some of these funds. Here is one idea for you to participate:

Needham Small Cap Growth Retail (NESGX) focuses on investing in stocks of smaller growth companies that the fund believes are trading at a discount to their underlying value. In addition, these companies should have a catalyst in place that will eliminate this discount through an acceleration of revenues and earnings over the next year or more.

Needham describes a company as small if it has a market capitalization of less than $5 billion (the fund will continue to hold it if the company crosses over this threshold). From here, they want companies they believe are emerging as market leaders and are backed by strong and incentivized management teams.

What does an emerging market leader look like? According to Needham, these companies have disruptive products and services; a coherent, well-thought-out strategy; and strong growth potential.

The fund will hold higher levels of cash during certain periods while searching for these appropriate investments. Worth mentioning, and a feature of this fund that differentiates it from many of its peers, is that Needham will utilize shorting techniques to dampen volatility.

This leads to a portfolio, as you would expect, with the technology sector carrying a sizable weight. As of 9/30/22, the leading industry weights within the portfolio are: Information Technology (68%), Cash (20%), Health Care (8%), Materials (2%), and Industrials (2%). Despite a tough year in 2022, Needham Small Cap Growth Retail has proven to be a strong performer over a longer review period.

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