Small-Cap Stocks Are Cheap

11/14/2011 11:00 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

Valuations of small-cap stocks are particularly attractive, finds Jim Oberweis, editor of The Oberweis Report, who shares one technology company in particular that he likes in this exclusive interview with

Jim, what’s your outlook on the market right now?

Hi Karen. You know, there are not too many times where I have a particularly strong conviction that the market is going one way or another…but today I do.

When we look back at stock valuations, there are very few times in history where we are seeing strong growth stocks as cheap as they are today. In fact, for that matter, stocks of all shapes and sizes. It’s particularly true for small growth names.

So, despite the fact that there are storm clouds on the horizon, there usually are storm clouds on the horizon where stocks are really cheap. Stocks are so cheap right now that we think that investors are probably over discounting some of those risks, perhaps because they still have a bad taste in their mouth from 2008. Really, it’s a great time to be buying stocks.

Will that mean that we might see a year-end rally or the sweet spot that everyone talks about from November to April, or am I just wishing?

Yeah, I wish I could tell you. I don’t know what the market will do in the next few months. I think that the odds are in our favor.
When we can buy companies growing at 30 or 40% for ten to 15 times earnings, those opportunities don’t come along very often.

What’s the catalyst that changes it? I don’t know, but it wouldn’t surprise me if it’s earnings reports. If earnings reports this fall come in reasonably nicely and guidance appears to be quite favorable—and so far that appears to be the case—it wouldn’t surprise me at all to see a rally into the year end.

Jim, why are you focused on the small-cap growth stocks?

I think all size companies are interesting places to look for investments. The problem is that it’s harder to be smarter than a very large group of people than it is to be smarter than a small group of people.

In small companies, there just are fewer fishermen in the sea. So we’d rather fish in those pools, in part because for a really large institutional investor, they can’t put enough money to work in that space to mean anything to them. So what happens is you have inefficiencies, and there are lots of academic evidence to document this.

So, we think through active stock selection, we hopefully can outperform some of the benchmark indices over a long period of time. We’ve been able to do that…and it’s much harder, I think, in the larger-cap space. Another place where I think it’s relatively easy to outperform is in the international markets.

Do you have any recommendations that you can give us to look at in the small-cap growth area?

Sure. One of the sectors that I think that is most out of favor right now is technology.

In fact, really since the bust of 2000, we haven’t really seen a really strong bull market for tech stocks. That has pushed valuations down to levels that we haven’t seen in 15 years, with the exception of a brief moment in 2008, and so I think that area is great.

Companies like Acacia Technology (ACTG) will be one to look at. Acacia has a unique business model. They buy patents—technology patents primarily—and they sue folks who infringe them.

So, they’ve won lawsuits or settled with companies like Oracle (ORCL), Microsoft (MSFT), and Yahoo (YHOO), and they’ve got three going here right now with Apple (AAPL), Google (GOOG) and HTC. I think any one of those three could have a meaningful impact on Acacia’s financial picture.

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