John & Ken, Oberweiss' new portfolio additions:
Volume 3, Issue 3
March 1999
Currently Recommended Stocks; Model Portfolio Performance
Carrier Access Corp. (CACS-NNM-39 1/2)
1997 1998 1999E
Revenue (millions) $18.7 $48.1 $100
E.P.S. $.04 $.28 $.65
Carrier Access Corporation provides multi-service digital access equipment ("MDA") to telecommunications carriers including local-exchange carriers, Internet service providers and other wireless carriers. The company's MDA equipment is used for the provisioning of enhanced voice and high-speed data services by carriers to end users such as small and medium-sized businesses and government and educational institutions. Carriers using Carrier Access' products include Pacific Bell, WorldCom, and Logix Communications. Revenue in the latest fourth quarter rose over 175% to $18.2 million from $6.6 million. EPS grew to $.13 vs a loss in the year-ago period. Clients of Oberweis Asset Management own approximately 10,000 shares. These shares may be appropriate for risk-oriented investors. The company is located at 5395 Pearl Pkwy., Boulder, CO 80301. (303) 442-5455. carrieraccess.com.
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Cognizant Technology Solutions Corp. (CTSH-NNM-43)
1997 1998 1999E
Revenue (millions) $24.7 $58.6 $100
E.P.S. $.16 $.73 $1.20
Cognizant Technology Solutions delivers cost-effective, full-life cycle solutions to complex software development and maintenance solutions. The company was spun off from Dun & Bradstreet in 1996. The company's solutions include Year 2000 (currently 34% of revenue and falling) and Eurocurrency compliance services, along with technology solutions for Internet and Intranet applications on data warehousing. Revenue in the latest fourth quarter rose over 140% to $19.5 million from $8.0 million. EPS grew 170% to $.27 vs $.10 in the year-ago period. These shares may be appropriate for risk-oriented investors. The company is located at 1700 Broadway, 26th Floor, New York, NY 10019. (212) 887-2385. erisco.com.
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Gentner Communications Corp. (GTNR-NSC-3 11/16)
Year ending June 1997 1998 1999E
Revenue (millions) $13.4 $17.2 $22
E.P.S. def $.18 $.25
Gentner Communications Corporation develops and markets telecommunications products for radio and teleconferencing. The company's telephone interface products are primarily used to put callers on the air for call-in talk shows. The company's Audio Perfect products utilize advanced digital technology to permit high quality audio teleconferencing used in conference rooms, distance learning centers and court rooms. Customers include TV/Radio stations, broadcast networks, recording studios, etc. Sales in the latest second quarter rose 31% to $5.3 million from $4.0 million. EPS grew 50% to $.06 vs $.04 in the year-ago period. Clients of Oberweis Asset Management own approximately 100,000 shares. These shares may be appropriate for risk-oriented investors. The company is located at 1825 Research Way, Salt Lake City, UT 84119. (801) 975-7200. gentner.com.
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SpectraLink Corp. (SLNK-NNM-4 1/2)
1997 1998 1999E
Revenue (millions) $27.8 $35.1 $50
E.P.S. def $.11 $.25
SpectraLink Corporation designs, manufactures, and sells on-premises wireless telephone systems which complement existing telephone systems by enabling employees to remain in telephone contact while moving throughout the workplace. In 1998 the company received orders from American Stores Co. and Lowes Co. Revenue in the latest fourth quarter rose 33% to $10 million from $7.5 million. EPS grew 600% to $.07 vs $.01 in the year-ago period, beating estimates by $.02. Clients of Oberweis Asset Management own approximately 75,000 shares. These shares may be appropriate for risk-oriented investors. The company is located at 5755 Central Ave., Boulder, CO 80301. (303) 440-5330. spectralink.com.
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Xeikon N.V. (XEIKY-NNM-30 3/8)
1997 1998 1999E
Revenue (millions) $81.7 $136.1 $200
E.P.S. def $.32 $.60
Xeikon N.V. develops, produces and markets digital color printing systems and related consumables to meet the speed, quality, reliability, cost, variable content and on-demand requirements of the global digital color printing market. Xeikon supplies both original equipment manufacturers and a network of over 30 value-added distributors. Xeikon's OEM partners sell Xeikon technology under their own brands and include: Agfa-Gevaent (selling the Agfa Chromapress), IBM (InfoColor 70), Xerox (DocuColor 70) and Nilpeter (Nilpeter DL 3300). Revenues in the latest 4th Quarter rose 45% to $40.6 million from $28.0 million. EPS grew to a fully taxed $.32 vs a deficit in the year-ago period. 1999 earnings estimates reflect fully taxed calculations. Clients of Oberweis Asset Management own approximately 25,000 shares.These shares may be appropriate for risk-oriented investors. The company is located at Vredebaan 72, 2640 Mortsel, Belgium, 011-32-3-443 1311. xeikon.be
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Oberweiss' Portfolio's record:
Model Portfolio Performance
Compound
Growth Theoretical
$ Change % Change Rate $1 Grew To:
Model Theoretical Portfolio (original investment - $50,000) +7,538,975 +15,078% 25.1% $151.78
Dow Jones Industrial Average 9,306.58 +8,298pts. +822% 10.4% $9.22
S & P 500 Index 1,238.33 +1,132pts. +1,059% 11.6% $11.59
NASDAQ Composite 2,288.03 +2,196pts. +2,379% 15.4% $24.79
Note: While past performance does not guarantee future sucesss, we believe investing in rapidly growing companies will produce superior investment results. Dividends and commissions are ignored in performance calculations. The theoretical portfolio contains many high beta growth stocks which tend to be more volatile than DJIA stocks. Tax consequences must be carefully considered. Changes in our theoretical portfolio and current quote prices are made as of the last Friday of each month. (This issue as of close of 1/29/99)
MEGASTOCKS
For the past 22 years our investment team has recommended hundreds of extraordinarily rapidly growing companies selected using the eight criteria of the Oberweis Octagon. Over those 22 years, our theoretical model portfolio yielded an average compound annual growth rate of 25.1% per year versus 11.6% per year for the S&P 500. As you can see from the year-by-year returns printed annually in our October issue, the degree of reward (and punishment) that small-cap growth investors experienced each year varied widely depending on the prevailing market psychology of the time. From 1972-1973, large-cap companies were the rage of Wall Street. In the late-1970s, small-caps dominated the market. In certain periods, emerging market stocks have gone wild. The past several years have been dominated again by the large-cap stocks. The point is that the market tends to be cyclical, sometimes favoring certain areas of the market over others. An inexperienced investor might easily be fooled into believing that these short-term trends are predictable and exploitable. In our experience, we have found no investor who has successfully chased the latest “hot” sector and achieved above-average results over time. Such investors tend to be late in the curve. When that sector corrects, he or she will likely feel all of the pain without having experienced most of the upward run. It is with this problem in mind that we have consistently shunned market-timing. To the best of our knowledge, virtually all empirical evidence confirms our skepticism.
If we are in agreement that we cannot identify in advance which sector of the market will outperform in the short run, what should we do to achieve superior results in the long run? Over the long run, small company stocks have substantially outperformed the S&P 500. The famous Ibbotson study indicates an average outperformance of about 2% per year over the past sixty-plus years. The objective of this letter is to try to find the best small stocks by concentrating on rapidly growing companies, typically those with sales and earnings growth rates in excess of 30% annually. We are frequently asked “What criteria do you use for emerging growth stock selection?” For some of our newer readers, I would like to repeat an explanation of the process. We look for “Megastocks,” stocks that have the potential to appreciate by 300%, 500% or even 1000%. I believe that investors should look first at the company and then at the stock. Find a company that makes or sells something that we as consumers or corporate purchasing agents want to buy more of each year. If a company's sales are growing at a 30% rate or faster, excluding any acquisitions, and profits are growing at a similar rate, we have a potentially explosive situation. Whether that growth is occurring because of a technological advantage or just because of stronger marketing or management is not of prime importance. McDonald's certainly had no technological advantage thirty years ago but ended up a huge success. If a company makes widgets and manages to sell 40% or 50% more each year, chances are it's doing something right and we ought to look at its stock. We must next be sure that this company has a product or service that has the potential for continued growth in the future and that we are not paying too much for that future growth.
To select stocks for The Oberweis Report, we use a system of eight points called the Oberweis Octagon. In the next several issues of this advisory letter we will explore each of those eight criteria in detail and explain how to apply them to your own investments. While we realize that it has been a difficult market for small-caps over the past two years, we firmly believe that the disciplined investor who applies these time-tested criteria to build a diversified portfolio of rapidly growing companies will achieve superior investment results over time.
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