My Yahoo!Best Letters Buy Into Small Caps
NEW YORK - Small caps are back. From April 1999 until May 2002, small-cap stocks gained 26%, while large caps lost 20%. But the sharp selloff this summer hit small caps much harder: From May 15 to Oct. 9, the S&P 500 declined 28%, while the Russell 2000 lost 36%.
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Jim Oberweis Jr., money manager and editor of the Oberweis Report, says the renewed small-cap ascendancy is a "long-term event in its early stages." According to the Hulbert Financial Digest, Oberweis and his father have produced average returns of almost 16% a year since 1987, largely by discovering and buying undervalued small-cap stocks with good growth prospects. Oberweis also manages three mutual funds, two of which--Oberweis Emerging Growth ( OBEGX) and Oberweis Micro-Cap ( OBMCX) --are up more than 30% since October's lows.
One of Oberweis' profitable positions is in J2 Global Communications (nasdaq: JCOM - news - people ), which he began buying in the low single digits last year. The stock was one of the strongest in 2002, but thanks to a damaging story in the Nov. 10, 2002, issue of Barrons, J2 now trades down 33% from its high. Oberweis says the corporate messaging and communications company is still a great buy at $20.
Generic drugmaker Able Labs (nasdaq: ABRX - news - people ) is also high on Oberweis' list of top buys, along with chemical and pharmaceutical firm Aceto (nasdaq: ACET - news - people ) as well as medical testing company Biosite (nasdaq: BSTE - news - people ). On what may seem a more speculative level, Oberweis recently bought Chinese online service company Netease (nasdaq: NTES - news - people ), saying it has a sound business model. Most of Netease's business is selling messaging services to mobile phone users in China--a profitable business that does not depend on the vagaries of advertising.
"Small caps have probably seen their bottom," says Oberweis. "But even if you buy at these prices, you're going to be very, very happy down the road."
With a market-beating average annual return of 15.4% since 1980, according to the Hulbert Financial Digest, NoLoad Fund*X has the best long-term record of any mutual fund newsletter. In the last month, Fund*X boosted its holdings of small-cap funds by buying Wasatch Ultra Growth ( WAMCX) and Thompson Plumb Growth ( THPGX) . These funds join fellow small-cap funds FBR Small Cap Financial ( FBRSX) and Royce Special Equity ( RYSEX) in Fund*X's Upgrader portfolio, which chooses funds based on relative strength over the past three-, six- and 12-month periods.
"We try to stick with our model and listen to what it's telling us," says Fund*X principal Martin DeVault. "Right now it's telling us that the strength is in small caps," adds DeVault, who cites 30 years of data showing that small caps have usually outperformed as the economy has recovered. Small growth funds have outperformed small value funds in the past two months, but DeVault says he's still uncertain that growth looks ready to outpace value.
Kevin Kennedy at the Coolcat Explosive Small Cap Growth Stock Report has a 48.5% average annual return over the last four years. In the current issue of his newsletter, Kennedy's top pick is jeweler and moissanite gemstones maker Charles & Colvard (nasdaq: CTHR - news - people ). He also likes Neoware (nasdaq: NWRE - news - people ) in the $18 range.
Kennedy is an aggressive investor but only 60% invested, waiting to see if Nasdaq breaks out above 1,521 or breaches support at 1,411 before committing more capital to stocks.
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