Amigos y Amigas,
Here is the article from TheStreet.com FundWatch
>>>>>>
Fund Watch Features: Roundup:
Small-Cap Funds Take It on the Chin
By TSC Funds Staff
5/29/98 7:22 PM ET
This week was a wake-up call for domestic fund investors
who forgot that global tremors can roil U.S. markets.
With emerging markets from Russia to Brazil to Asia
struggling to keep their economies afloat, investors began to
question whether U.S. companies could maintain their
earnings growth. The S&P 500 fell 1.5% for the five trading
days ended Thursday and domestic diversified equity funds
tumbled even further, losing 1.9%, according to Lipper
Analytical Services.
The selloff was most severe in non-blue-chips. "People are
just staying with the most liquid names so if something goes
wrong they can get out," says Carl Wilk, portfolio manager
of Munder Micro-Cap. "It's a flight to quality, a flight to
liquidity, and right now there appears to be no impetus or
need to get people back."
Indeed, small- and micro-caps were the two worst-performing
general equity categories tracked by Lipper. Small-caps lost
2.5% and micro-caps fell 3%.
The upshot: The performance gap this year widened between
active managers, who tend to look beyond the big
companies that make up the S&P 500, and the indexers.
The average actively managed domestic diversified fund
tracked by Lipper is more than four percentage points behind
the S&P 500 funds' 13.6% return year to date. A mere 14%
are ahead of the indexers.
So what was a small-cap manager doing last week?
"Hiding under my desk!" says Rick Lane, portfolio manager
of the $20 million FMI Focus fund.
Last year, Lane guided his mostly small-cap fund to the top
of the mutual fund heap, finishing third among all equity
funds, with a 69.7% return. But even before this week --
when it lost 2.4% -- the road's been bumpier for FMI Focus.
This year it's up 9.7%.
The ride hasn't soured Lane, though. He says there are too
many small companies with great earnings and low price
tags. "Sooner or later value surfaces."
Wilk, of Munder Micro-Cap, agrees. Last year Wilk's bets on
tiny companies earned his $52 million fund the No. 2 slot
among all equity funds, with a 71.5% return. So far this year
that fund is up only 1.7%, having lost 3.4% this week.
But, like Lane, Wilk believes solid earnings and low prices
among smaller stocks will bring investors back "as we go
through the summer and see more weakness in the earnings
growth of larger names and smaller names are still strong."
Until then Lane and Wilk say they are stocking up on some
great buys. Wilk likes: Air Methods (AIRM:Nasdaq), Alpha
Industries (AHA:AMEX), Oshap Tech (OSHSF:Nasdaq)
and Sapiens International (SPNSF:Nasdaq) .
Lane's bulking up on some old favorites like: Superior
Telecom (SUT:NYSE), Imax (IMAXF:Nasdaq) and
Microtouch Systems (MTSI:Nasdaq). And as a mid-cap
play: Covance (CVD:NYSE).
<<<<<<<<
Obviously, AIRM is gaining attention. now we just need some larger sized funds to jump on the bandwagon.
I wish to point out another useful indicator that helps with determining fair value of a stock. The PEG (price-Earnings-growth ratio) is useful in helping to make this determination. A reading of 1 on this ratio means a stock is fairly valued. As a general rule these days, many stocks are valued based on their growth rate. As an example, a stock with a 25% growth rate would deserve a 25 PE ratio (PEG 25/25 = 1 fair value) to be fairly valued.
To show you how grossly undervalued AIRM is ..... assume AIRM hits their earnings targets for the next two years and only grows 10% the three years after that.
Forward PE (for FY 98) 8.6
1st year (FY 98) 124% growth rate ..... PEG (8.6/124) = ~.07
Yr 2 (FY 99) 40% GR....avg 82% 2 yr GR ... PEG (8.6/82) = ~.104
Yr 3 (fy 00) 10% GR....avg 58% 3 yr GR ... PEG (8.6/58) = ~.148
Yr 4 (fy 01) 10% GR....avg 46% 4 yr GR ... PEG (8.6/46) = ~.187
Yr 5 (fy 02) 10% GR....avg 39% 5 yr GR ... PEG (8.6/39) = ~.22
If you take todays trailing PE of 13.5 and extrapolated the numbers... they read like this:
1 yr PEG (13.5/124) = .1088
2 yr PEG (13.5/82) = .1646
3 yr PEG (13.5/58) = .2327
4 yr PEG (13.5/46) = .2934
5 yr PEG (13.5/39) = .3461
Remember that a ratio of 1 indicates a fair valuation by today' market standards. TALK ABOUT GROSS UNDERVALUATION ..... if I'm not mistaken I think the S&P 500 is somewhere around 3 right now. YIKES. I will patiently wait til the marketplace finds AIRM. Remember that I assumed only a 10 % growth rate the last three years. If AIRM has ZERO growth rate the last three years ..... the 5 yr PEG is still .411 and would have to trade around $10 tomorrow to give a PEG reading around 1. This stock is worth double it's current price !!!!!!
Hopefully there will be some play from the TheStreet.com article.
Amigo Mike |
