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.