Top 2 Small-Cap Growth Picks
07/03/2013 8:30 am EST
Jim Oberweis discusses two of his favorite small-cap growth picks, which are disruptive innovators and opportunists in their industries.
Jim, I know that you an expert in small-cap stocks. And there are certain niches that a lot of people just don’t understand, or they’re afraid to get into, because they're technology companies or health-care companies—people are afraid of Obamacare. But you have actually found a couple of companies that you really like.
Yeah, sure. Whenever you’re investing in small-cap growth companies, sometimes somebody will come out with just a new and better way of doing things, and that unsettles the incumbency.
Disruptive. Also, once in a while, you get a company where a competitor gets taken over and there’s a dislocation in the industry.
One example of that would be Medidata (MDSO). It’s a company we’ve owned for a few years. They developed clinical trial software that they sell to large companies. There’s only a couple dozen of them that buy most of the software.
They have one competitor that was called FaceForward; it was bought by Oracle (ORCL). Oracle took their eye off the ball; Medidata is eating their lunch, and Medidata is growing now—roughly 30%, taking a very large market share. So that’s a great company that we own.
Also, sometimes we get that disruptive technology that you mentioned. So a company to look at for that is IPG Systems (IPGP). They have revolutionized the industrial laser market with a new technology called fiber lasers.
This technology has been consistently gaining market share, and if you look at their numbers, it’s hard to see how fast they’re growing from a straight comparison in numbers, because you’ve seen some economic ebbs and flows, and that affects overall market demand.
But they're consistently growing market share. We see that, that’s great, and as the economy comes back to life again, they’re going to benefit both from market share gains as well as the overall market growth.
Now, explain to me what industrial lasers are. What do they actually do? I know what lasers do in medical technology, and one time I saw a laser in operation cutting plastic at a factory.
That’s an example. Also, cutting a concrete block. Anything that requires very precise cutting, typically a laser is going to be employed.
Interesting, one of their big customers are companies in China, so the ebb and flow of China has helped and hurt them in some periods. We think right now that some of the pressure that you see—the reason the stock valuation is where it is—is because of concerns about China. We talked to some of their customers, we think everything is going to work out OK over the next couple of years.
Yeah, and of course one of the risks in small-cap investing is that sometimes they only have a handful of customers. Or sometimes they only have a handful of suppliers. Now, how about this company?
The customer-supplier base is fairly diversified. They only have a handful of products, and it’s very aggregated around that single technology. So the risk for them, I think, is not so much customer-suppliers, but another disruptive technology that could come in, unsettle them, much the way that they unsettled the incumbents.