Small-Stock Gems

[mlk_man]

erritt MicroCap Opportunities Fund's (PRCGX) top holding today is not a stock but a financial instrument known as commercial paper. In the investing world, it is the equivalent of cash. Why is fund manager Michael Corbett so cautious? He's having trouble finding good values among micro-cap stocks, which he defines as companies with less than $500 million in market capitalization (the value of shares outstanding). And he doesn't want to tarnish his record. The $618 million no-load fund had a 23.5% annualized return for the five years through April 28, 2006. And Perritt MicroCap has gained 13.8% so far this year -- even with its whopping 26% allocation to cash.
Corbett is not bearish. He simply prefers to invest shareholders' money in a measured fashion rather than chasing the latest fads. As he points out, there is much stock-specific risk in micro-caps -- companies frequently have just one or two products or only a few major customers. If one thing goes wrong, investors can get hurt quickly.
While Corbett hasn't added new stocks to the fund's 175 holdings recently, he has boosted its position in these two companies:
Newpark Resources (NR). This Metairie, Louisiana-based energy services company deals primarily with major oil producers drilling in the Gulf of Mexico. Newpark executives told Corbett that they don't expect crude oil prices to retreat far from their record highs any time in the foreseeable future. Says Corbett: "I've always taught my analysts to find businesses where capacity is constrained and there is solid demand and that's pretty much what energy's all about now." Recent share price: $6.71.
Rimage (RIMG). This Minneapolis-based company makes machines that burn CDs and DVDs. These machines are used by governments and various businesses such as medical imaging firms, banks and finance companies. Corbett is especially keen on Rimage's joint venture with Eastman Kodak. The two companies are installing machines in department stores and convenience stores that can produce high-quality printed-paper and CD images from digital cameras. Consumers store enormous numbers of digital images on their cameras' memory cards, so he thinks there will be strong demand for this inexpensive service. Recent share price: $22.13.

 

[shiftomnimega]

It concerns me that this fund is going against its normal investment policy. They say in the prospectus that they normally invest at least 80% of their assets in stocks. I guess these aren't normal times, but it throws me off when a manager isn't doing what a prospectus says he'll normally do.

USAA tried to get me to invest in their Total Return Strategy Fund (USTRX) and I just wasn't comfortable with it. They're allowed to change their allocation of Stocks, Bonds, and Cash on a whim. Whatever the managers feel they need to do to ensure a positive return. Although most anyone would appreciate that, I choose my funds based on a plan.

If the prospectus says it will normally have at least 80% of funds into stocks, I expect that I'll have 80% stocks or more invested when I buy shares in that fund. The extra cash throws off the overall allocation of my portfolio.

Granted, the fund isn't that far off. It's 75% in stocks which isn't bad. Also it is closed off to new investors which is keeping it's assets at a nice managable level. Furthermore, I can appreciate how the fund would rather hold cash than start buying a bunch of bigger small caps and/or midcaps which may throw off one's portfolio even further.

If this fund is available during my next rebalance I will give it a look, thanks for the post mlk.

 

[phillyfed]

Look into NTWK. Its ready to take off. Trading at 3.80. 75 Mil$ Microcap