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.
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.