S&P Rank: 5 Stars
June 30, 2003
Macro Gains from Micro Stocks
Quick Take: Michael Corbett of the Perritt Micro Cap Opportunities Fund (PRCGX) likes trawling in largely uncharted micro-cap waters for stocks he thinks will deliver extraordinary long-term growth. However, his job has become a bit harder in the past few years as more and more Wall Street analysts have begun covering this long ignored sector.
What Your Peers Are Reading
Despite that, the fund has been a strong performer of late. For the year ended June 30, the portfolio gained 10.1%, versus 1.4% for the average small-cap growth fund. For the five-year period ended in June, it rose an average annualized 8.9%, versus a loss of 0.3% for its peers.
Based in Chicago, Corbett has been primarily responsible for the day-to-day management of the fund since November, 1999. He was previously interviewed by FundAdvisor in June, 2001. In April, 2003, Perritt Micro Cap Opportunities was upgraded to 5 Stars by Standard & Poor’s.
The Full Interview:
S&P: How has the micro-cap sector changed in the past few years?
CORBETT: The big difference is that Wall Street appears to have taken a greater interest in the sector, which has led to some increase in liquidity. This is likely a result of the severe bear market in larger caps, which has forced some analysts to take a closer look at these long ignored stocks. However, micro-cap stocks have remained as volatile as ever in terms of price and performance.
S&P: Since we last spoke to you, has your stock selection process changed at all?
CORBETT: No. We still look for companies with market caps below $400 million that we think can dominate a niche, deliver long-term growth and outperformance, and trade at modest valuations. They should also possess low debt and high insider ownership. We still like our portfolio to have a mix of both value and growth stocks.
S&P: When Wall Street discovers and follows a micro-cap stock, isn’t that necessarily a good thing?
CORBETT: When a big brokerage house on Wall Street becomes enamored with a micro-cap company, it’s great for that company because it raises its profile and name recognition. But it could become a negative development for that company’s stock.
What makes investing in micro-caps so appealing is that the stocks are, by and large, ignored by Wall Street and priced inefficiently. Once brokers discover and follow a micro-cap company, its pricing patterns become more efficient. Moreover, when a company under analysis suffers some bad news, the stock’s price gets hurt a lot worse than it would have if it were still ignored by the Street. I typically move out of a micro-cap stock if it has been embraced by the analysts.
S&P: What are your top ten holdings?
CORBETT: As of June 30: Matrix Services (MTRX), 2.1%; Nam Tai Electronics (NTE), 2.1%; Modtech (MODT), 2.0%; Healthcare Service (HCSG), 1.8%; Layne Christensen Co. (LAYN), 1.7%; HPSC Inc. (HDR), 1.6%; Rimage (RIMG), 1.6%; Air Methods (AIRM), 1.5%; Flanders Corp. (FLDR); and Starcraft (STCR), 1.4%. The fund has about $50 million in net assets and about 89 positions. We typically hold between 75 and 100 stocks in the portfolio.
S&P: What are your top sectors now?
CORBETT: Our largest industry exposures currently are in medical/health care services, which accounts for about 12% or 13% of fund assets. That is followed by consumer products and business services, each at 10%. Then comes energy/energy services at 8%, and retail, at 7%.
One of the big changes in the past two years is that we have significantly cut back our exposure to financial services, particularly regional banks. From a macroeconomic standpoint, this low interest rate environment makes it increasingly difficult for these types of firms to generate higher profits and revenues. Valuations among regional banks have also become a bit too high.