Quick Take: Louis Navellier and his fellow money managers at Navellier Funds primarily use computer programs to determine which stocks to buy and sell.
This quantitative method of investing led the Navellier Performance Aggressive Micro Cap Fund (NPMCX) to lose 12.3% this year through July, but that still put it ahead of the Russell 2000 growth index, which was off 30.1%, and its small-cap growth fund peers, which slid 27.2%. The fund returned 2.6% on average for the five years ended last month, compared with a loss of 1.4% by its peers.
Navellier and Michael Borgen, a former analyst on the fund who became lead manager in March, said consumer stocks have helped in recent months. They currently make up about a third of the portfolio.
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Even market sectors that look bad can have stocks that look good.
For instance, three of the latest additions to the Navellier Performance Aggressive Micro Cap fund are technology companies. Portfolio managers Louis Navellier and Michael Borgen bought shares this week of software makers DocuCorp Intl (DOCC), Neoware Systems (NWRE), and Fidelity Natl Information (FNIS), which provides databases to real estate professionals and lenders.
Despite the battering tech businesses have taken over the last two years, all three have attractive and improving financial underpinnings, including increasing earnings. In addition, their stock prices don't move up and down dramatically, says Navellier. He looks for these qualities in picking stocks, or rather lets his PC look for them.
Navellier and Borgen are quantitative money managers who rely on a computer model to identify potential investments. The program scans for companies whose profits are rising robustly and that are expected to continue moving up. It also hunts for stocks that analysts have upgraded estimates for within a one-month period and that beat expectations.
The companies in the portfolio are growing earnings by about 35%-40% annually on average, primarily because their operating margins are expanding, according to Borgen. He says their revenue growth has been about 12%-14%.
In addition, the program focuses on stocks that are widely held by institutions, which can reduce price volatility, Navellier notes. The overall goal is to generate "good, risk-adjusted returns," he says.
Borgen cites Panera Bread`A` (PNRA) as an example of the kind of stock the fund invests in. The company operates and franchises combination bakery-cafes.
The stores, which attract upscale customers, utilize space and equipment very efficiently and "keep inventories real tight," he says. Navellier adds that the chain is an "institutional darling."
The company's earnings climbed about 70% in the 12 months ended in March, the managers say. They began buying Panera in May 2001. Their shares cost about $15, on average; the stock closed at $34.86 today.
Panera is one of the top ten holdings in the fund. The No. 1 stock is homebuilder Hovnanian Enterpr Cl`A` (HOV). The company also has a financing arm, which Navellier describes as a "very lucrative" business. Hovnanian has benefitted from low interest rates, which have spurred housing sales and encouraged homeowners to refinance mortgages in recent months, he points out.
The managers have owned Hovnanian in the fund since October 2001. Their shares cost $11.33 on average. The stock closed at $29.89 today.
About 30% of the assets of the $12-million fund are in consumer stocks, including retailers. The sector is attractive right now because consumers are continuing to spend, Navellier says.
The fund's second-largest holding is Chattem Inc (CHTT), which makes consumer products like Gold Bond medicated powder, Dexatrim, and the Icy Hot patch. The fund has owned Chattem since May,at an average cost of $30.41 per share. It closed this afternoon at $37.87.
Elsewhere in the sector, the fund has stakes in restaurant chains Steak n Shake (SNS), Landry`s Restaurants (LNY) and P.F. Chang`s China Bistro (PFCB); and retailers Fred`s Inc `A` (FRED) andA.C. Moore Arts & Crafts (ACMR).
Technology makes up approximately 17% of the portfolio. Most of the the managers' investments in this area, including DRS Technologies (DRS), a major holding, have been profitable because they provide products or services to Washington, and particularly to the Department of Defense, Borgen says. Parsippany, N.J.-based DRS supplies electronics products and systems to the military.
The fund buys stocks with market caps of $1 billion or less, and usually has 25-40 stocks in its portfolio. That concentration is typical of funds in the Navellier family.
While some money managers invest in more than 150 companies, "across the board here, that's just not how we do things," says Navellier. He feels focused funds offer sufficient diversity. Enlarging a portfolio also does nothing to lower risk, he argues.
Navellier says he expects small-cap stocks to do well over the next few months because investors traditionally buy them late in the year and in January. Also, small companies in general appear sound, he says.
"I'm just a greedy person and I'm buying fundamentals," he says.