SMALL STOCKS // JIM OBERWEIS
Down but not out small caps.
LAST YEAR WAS ANOTHER great one for large stocks. Unfortunately the high-growth small stocks I recommend in this column did poorly. In 2014 my column picks returned –1.8% after commissions versus a gain of 3.6% for a portfolio similarly invested in the Russell and 9.6% for the S&P 500. Indeed, the Russell 2000 returned just 4.9% in 2014, trailing large caps by the widest margin since 1998.
But given that small stocks have a long history of outperformance relative to large caps, it would be foolish to give up on them. Valuations for high-growth small caps have fallen 20% since January 2014 and are again below their long-term average levels. Small caps tend to fare better when GDP accelerates. Cheap oil will be the catalyst for earnings growth that I believe will produce better-than-expected GDP in 2015. And if you are worried about the strong dollar, keep in mind that small companies tend to have less currency exposure than multinationals. Here are four great candidates:
Santa Clara, Calif.’s INPHI (IPHI, 19) develops and sells high-speed analog and mixed-signal semiconductor systems to the communications, data center and computing markets. An explosion in data from high-speed LTE communications is driving the need for faster fber networks and faster communication within cloud data centers. Inphi product oferings, which expanded after its $131 million acquisition of Cortina Systems last October, help move big data faster. About 75% of Inphi’s business is booming and riding the wave of 100-gigabit optical network adoption. Expect revenues to grow 85% in 2015, both due to organic growth from 100G adoption and from the Cortina acquisition. Shares trade for 21 times forward earnings of $0.90 per share.
Marietta, Ga.’s MIMEDX GROUP (MDXG, 8) develops patent-protected regenerative bio-implants and biomaterials from placentas. Mothers delivering full-term Caesarean section babies can elect in advance of delivery to donate the placenta in lieu of having it discarded as medical waste. Mimedx processes the placenta via a proprietary process to produce a safe and efective implant. For example, its wound-care product Epifix is a tissue graft used for the treatment of conditions like diabetic foot ulcers. Mimedx says Epifix beats the competition in terms of efcacy, speed of healing and cost. Mimedx is growing revenues at 75% organically, and profts are growing even faster. The frm’s large growth opportunity explains its steep valuation at 53 times my forward estimate of $0.15 in earnings per share.
WAGEWORKS (WAGE, 59) provides on-demand administration solutions for programs like fexible spending accounts (FSAS) and health savings accounts (HSAS). These pretax programs are increasingly popular, and Wageworks benefts from growth in highdeductible health insurance plans, which are often paired with HSAS. I also expect growth in FSAS as well, as a recent change loosened the “use it or lose it” provision and now permits up to a $500 carryover into the following year. Due to its highly predictable and recurring revenues, the San Mateo, Calif.based company’s shares trade for 50 times my forward earnings-per-share estimate of $1.12, which is for 30% growth.
Beijing’s TARENA INTERNATIONAL (TEDU, 12) is a professional education provider primarily focused on information technology. Instructors deliver lectures from a classroom in Beijing that simulcast at its learning centers throughout China. Growth is being driven by additional learning centers and expansion into new verticals, such as digital arts. Shares trade for 19 times my forward earnings-pershare estimate of $0.62, for 35% earnings growth.
Among last year’s picks hold on to LIGAND PHARMACEUTICALS (LGND), ZELTIQ AESTHETICS (ZLTQ), CHINA MOBILE GAMES (CMGE), SYNCHRONOSS TECHNOLOGIES (SNCR) and DIPLOMAT PHARMACY (DPLO). Sell the others to make room for new ideas.
CHEAP OIL WILL FUEL GDP AND SMALL-COMPANY STOCKS