Here are some highlights from an interview with Richard Driehaus in Sunday`s Barrons:
"...Last year, $1.8 billion Driehaus MidCap rose an astounding 222.4%, and
$1.1 billion Driehaus Small Cap climbed 196.6%. The results boosted the
two portfolios' 10-year annual average returns to 34.7% and 32.9%,
respectively. Read on to see what this member of Barron's all-century
mutual-fund team has to say about the current U.S. stock market and where
he's placing his bets..."
"...Q: How so?
A: My philosophy is simple. Earnings growth is the primary factor in determining common-stock prices over the long term. Sustained earnings growth is what enhances cash flows, dividend growth and book value. But acceleration in
earnings and sales growth is even better. I especially love stocks that have positive earnings surprises and force analysts to make upward earnings revisions. Analysts tend to be too conservative and linear at times and are reluctant
to forecast earnings too far out. This is a factor I've always tried to exploit..."
"...Q: Given your caution, what do you like these days?
A: One company we like a lot is Ditech Communications. They make
echo-cancellation equipment. These are devices that suppress the sound
delays in long-distance phone calls that people find so aggravating. And with
more and more use of wireless communications, there's more and more
demand for echo-cancellation equipment. This market was historically a
half-billion dollars a year, but it's starting to grow at better than 20% a year.
Ditech competes against Tellabs, but has a superior product and is taking
share away by winning a substantial chunk of new business. The company
also had a huge earnings surprise in its latest quarter, ended October 31,
reporting 53 cents, versus what had been a consensus forecast of 30 cents a
share prior to a November pre-announcement.
Q: Trading around 182, the stock isn't exactly cheap, is it?
A: Maybe not. But this company could earn as much as $2.50 during the
fiscal year ending April 30, 2001, and, maybe $3.50-$4 in the following
fiscal year. Last week, it beat the consensus, earning 41 cents on a post-split
share in its third quarter. That would bring its earnings multiple to 50 or
under, which is cheap in my universe of stocks. Look, this is a company that
could compound its earnings growth at around 40% over the next three
years..."
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