Small-cap valuations are quite high these days, but newsletter guru Jim Oberweis says there may be good reason for that: institutional investors being “desperate” to reach pension fund goals.
Newsletter guru Jim Oberweis, whose China fund is in the top 1% of funds in its class over the past one, three, and five years, according to Morningstar, says investors look at China the wrong way.
When it comes to investing in small stocks, newsletter guru Jim Oberweis says that fundamentals and financials are important — but not all you should consider.
“For small-cap stocks, a catalyst — such as a new partnership, a new product or regulatory approval — can drive earnings growth,” Oberweis writes in his latest Forbes column. “Understand this early on and you’ll have an edge. I look for stocks with a history of extraordinary earnings growth selling at reasonable valuations, with a clear catalyst.”
What catalyst-driven small stocks is Oberweis finding today? He examines three, including customer service/knowledge management software firm eGain, whose partnership with Cisco is providing a nice catalyst, according to Oberweis.
After being pummeled in the 2008-09 financial crisis, small-cap stocks have bounced back strong and small-cap valuations have moved back toward normal levels over the past few years. But newsletter guru Jim Oberweis says that, compared to their larger peers, small stocks are still quite attractively valued.
“With valuations no longer at bargain-basement levels, earnings growth will be the driver for high returns,” Oberweis writes in his latest Forbes column. “For companies under $1 billion in market capitalization and with annualized growth rates of 30% or more, the average forward price-to-earnings multiple is now 16.1 — a shade above the 15.6 times earnings for the S&P 500. But you’re paying for faster growth, and it’s actually an unusually small premium to those large-cap stocks.”
Oberweis looks at a handful of small stocks that he’s particularly high on right now. Among them: online postage provider Stamps.com.
Newsletter guru Jim Oberweis says that if you want to find good investment opportunities, keep an eye on secular shifts in the business world.
“While some companies succeed by changing the world, far more succeed by anticipating the needs of a changing world,” Oberweis writes in his latest Forbes column. “Secular shifts in technology and government regulations, for example, cause uncertainty and disturb markets. This creates new growth opportunities.”
Three areas where he sees opportunities are healthcare analytics, temporary staffing, and cell phone technology. He looks at companies with strong fundamentals in each of those areas.
Newsletter guru Jim Oberweis says that, while small-cap growth stocks have performed well recently, they remain at very attractive valuations.
In his latest Forbes column, Oberweis says that small-caps (those with market caps under $1 billion) that are growing both earnings and revenue at a pace of 30% or more are trading at a median forward earnings multiple of just 13, well below the 10-year average of 17. “Some of the difference may be explained by slower growth expectations for the overall economy, but some of that discount stems from good old-fashioned fear,” Oberweis writes.
He says he thinks smaller stocks will fare “considerably better” than large-cap value stocks going forward. He offers four of his current favorite small-caps, including Stamps.com.
Newsletter guru Jim Oberweis says the increase in corporate deal-making is a result of the economy improving, and valuations remaining attractive. Oberweis tells Bloomberg that historically, the S&P 500 has traded around an average of 16 or 17 times earnings; currently, he says, it’s trading around 14 times earnings. Oberweis says he wouldn’t be surprised to see a short-term correction in stocks, but he thinks any correction would be short term. He says investors should focus on real estate and equities right now. He thinks U.S. stocks are a safe bet, but he says he’d also look internationally in areas like China.
In his latest Forbes column, newsletter guru Jim Oberweis discusses the value of using the P/E-to-Growth ratio to pick stocks.
“As a small-cap growth investor I look for outstanding businesses where I think earnings will grow more than most analysts expect,” Oberweis says. “But sometimes less exciting cyclical and moderate-growth businesses — bought at the right price — can be just as rewarding.” Oberweis, who uses the forecasted earnings growth rate for the “growth” portion of the PEG, says he’ll thus buy a basket of low-PEG companies. He likes PEGs of 1.0 and below, and is “downright giddy” when a stock has a PEG under 0.5.
“Note that such companies are hard to find without a catch,” Oberweis warns. “If due diligence returns a story with reasonable risks or a blemish that isn’t as relevant as others might think, less glamorous small-cap stocks with low PEG ratios can become star performers. They also help diversify portfolio risk.”
Oberweis offers a trio of low-PEG stocks he’s high on, including freight container leasing firm CAI International.
Newsletter guru Jim Oberweis says that investors can make some nice profits by following the Fed.
“Government policies shape markets, turn winners into losers and, unfortunately, can distort the invisible hand of the market,” Oberweis writes in his latest Forbes column. “Only a fool would ignore the moves of Uncle Sam, particularly with government spending higher than ever.”
Oberweis says that several companies are “exploding” because of Ben Bernanke and the Federal Reserve’s easy money policies, which he says don’t appear to be ending anytime soon. And, though he warns that a “day of reckoning seems almost certain” because of the easy money policies, there are companies whose solid products will allow them to remain strong even when that far-off day comes, he says. He looks at four such picks, including online real estate marketplace company Zillow.
Many investors have been loading up on big, high-dividend stocks lately, but newsletter guru Jim Oberweis says they are making a mistake.
“Although gut instinct may lead you to avoid smaller stocks when uncertainty is high, it’s a mistake,” Oberweis writes in his latest Forbes column. “Rocky times are the best time to buy firms with explosive growth at reasonable valuations.” He says the median forward P/E ratio of small-cap stocks (market caps less than $1 billion) that are growing faster than 30% is 11.6 — a 33% discount to the average P/E since he started tracking it in 2003. Meanwhile, “Large-cap stocks with a 2% dividend yield may look better than bonds, but their returns correlate to U.S. GDP growth,” he says. “That’s not inspiring.”
Oberweis says that when the European debt crisis simmers down, investors will be on the prowl for growth. He says that means now is the time to be looking for “companies creating new markets or taking market share from peers”, and offers some of his favorites. Among them: Tangoe, which sells software that companies use to manage their telecom expenses.