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Strategies & Market Trends : Dave Gore's Trades That Make Sense -- Ignore unavailable to you. Want to Upgrade?

To: Dave Gore who wrote (6025)	4/21/2002 12:43:07 AM
From: Dave Gore	Read Replies (1) \| Respond to of 16631

"Orphan companies beat the street" (interesting comments) Joe Dancy, is co-editor of the IFC and editor of the LSGI Technology Market newsletter. A sample of his LSGI Technology Market newsletter (in Word format) is available on request to parties interested in subscribing members.aol.com Joseph Dancy focuses on profitable yet undervalued growth companies for his LSGI Technology Venture Fund. We interview him on the state of the market and some investment ideas he finds attractive. Q: Joe, your LSGI Technology Fund outperformed the NASDAQ composite index by 49.6% during the last 30 months. Can you tell us how you outperformed the index by such a large amount? A: We focus on companies that are profitable, undervalued, growing, and exhibit above-average relative strength Mark. In addition we invest in the most inefficient part of the market, the small and micro capitalization sector. The companies we invest in are very small, and few institutions for individuals have heard of them. "Orphan companies" we call them. But they are growing, and if they are priced right we take a position. We have plenty of publicly traded small companies to look at. Q: Isn't the small capitalization sector risky? A: All investments are risky. Look at Enron and Kmart. Historical data indicates that the stock price of smaller companies tend to be more volatile than the market. Some say this volatility is a measure of risk. We don't buy that argument, and many value investors like Warren Buffett don't either. We buy companies that are profitable, undervalued based on our due diligence, and have low levels of debt if they are not debt free. This value based philosophy reduces our risk. We also diversify our investments in these firms, but still run what many institutions would call a concentrated portfolio. Diversification also reduces risk. Q: Is this a good time to be investing in the market? A: I don't know the answer to that question Mark, we are not market timers. I will say that the valuation of the large capitalization indexes are at levels that historically are very high. I'm talking about price/book and price/sales ratios, as well as price/earnings ratios. The argument that earnings are depressed which inflates the price/earnings ratio does not hold water if you look at the other two valuation measures. It is interesting that Warren Buffett, arguable the best value investor of all time, recently released his Berkshire Hathaway annual report. He expects the pension funds of companies owned by Berkshire to grow at 6.3% a year. Federal Express assumes a 10.9% rate of return, Boeing 9.25%, IBM a 10% return. Based on the extended valuations of the large capitalization sector that some of these firms have an inflated expectation as to how well equities in their pension funds will perform. With regard to larger firms, we agree with Buffett. If the stock price of these firms grow at 5% a year for the next decade we would not be surprised. Many of these larger firms have overstated their historical earnings with off balance sheet financing vehicles, aggressive assumptions regarding the expected returns on their pension funds, and the use of stock options. Growth going forward won't be as impressive as they are force to use more conservative accounting assumptions. Q: What about the small capitalization sector? A: The valuations for these firms are much more reasonable, and some of these companies are growing at an impressive pace. Our LSGI portfolio is selling at price/sales, price/book, and price/earnings levels less than one-half those of the Standard & Poor's 500 index. Yet these firms over the last four quarters increased sales by over 44% versus only a 4% increase in revenues for the S&P 500 index. So we get both value and growth, mainly because these companies are overlooked or ignored by investors. So to answer your question, from a valuation standpoint smaller firms look much more attractive to us as investors. We would not invest in large capitalization stocks for the reasons we previously mentioned. Q: Can you give us a small capitalization idea that you like? A: One name we think is attractive is Photon Technology International (PHTO $3.50). A very small company selling at a price/sales ratio of 0.6 and a forward price/earnings ratio less than 10. They are growing revenues at a rate well north of 30% a year. They manufacture electro-optical systems that use florescence for scientific and industrial control applications. Florescence has some very desirable qualities, one of which it does not impact or destroy the material being sampled. Backlogs have also been impressive. When we put a portfolio of these companies together Mark, the potential returns can be quite impressive even when we make a mistake or two. Q: Do you have any other comments on investing or your fund that you would like to make in closing? A: Historical statistics indicate that our investment strategy has outperformed the major market indexes over time. In the 30 month life of the LSGI portfolio we have also found this to be the case, and we think the probabilities are favorable for us going forward. We publish a monthly newsletter for our investors that discusses firms we find attractive after we conduct our due diligence, and we also give them a spreadsheet of our portfolio. Third parties who are interesting in subscribing to the newsletter can contact us at 972-780-1805 or by email jdancy7658@aol.com Q: Thank you Joe!