Full Speed Ahead

Quick Take: After soaring 109.3% in 1999, the Rockland Small Cap Growth Fund (RKGRX) returned a modest 4.9% in 2000 and then posted consecutive annual losses of 22.7% and 36.9%.

“I wouldn’t say that there were problems” with the fund over the last two years, says Richard Gould, who manages the portfolio. “Other than that we went through the worst bear market since the 1930s for growth stocks.”

As bulls have returned to Wall Street in recent months, the fund, which invests in rapidly growing small companies, has turned around. Rockland Small Cap Growth was up 37.7% this year through June. That put it ahead of its small-cap growth fund peers, which returned 17.1%, and its benchmark, the Russell 2000 Growth Index, which gained 19.3%.

The Full Interview:

To call money manager Richard Gould a growth-oriented investor may be a bit of an understatement.

Gould, who has overseen the Rockland Small Cap Growth Fund since it started operations in December 1996, wants to own companies whose bottom lines are increasing faster than their top lines and expanding by at least 30% per year.

Over the life of the portfolio, its companies have sported median earnings per share growth of 40%-75%, and that figure rose to a record high of 89% in the last quarter, he says.

In addition, Gould, who focuses on companies with market caps of $100 million to $2 billion, prizes those whose quarterly results top analysts’ estimates because, he notes, this can serve as a catalyst to lift their stocks.

Moreover, Gould says he almost always buys stocks when their prices reach heights they’ve never attained before. “In a brutal bear market, if stocks are still able to break out to new all-time highs, that means” a company’s financial fundamentals are “overwhelmingly good,” he reasons. Gould adds that studies he’s done show that when down markets start heading up again these stocks can move higher still within 12-18 months.

In picking stocks, Gould also favors companies with what he terms “significant” insider ownership. As a rule, managements control 10%-20% of the shares of the small companies he invests in, according to Gould, who maintains that having a stake in a business gives executives an incentive to improve its performance.

Just as he seeks companies whose executives are also shareholders, Gould owns a piece of Rockland Small Cap Growth. “I invest, personally, 100% of all the money I’ve ever saved” in the $103 million fund, he says.

Using his and other people’s money, Gould recently bought more shares of Align Technology (ALGN), which makes transparent dental braces, a product “that I really think is going to take over the market,” he says.

Align’s sales increased by 86% in the last quarter, says Gould, who expects the company to break even in the third or fourth quarter this year and to end 2004 “solidly in the black.”

A long-term holding in the fund that Gould added to this week is OmniVision Technologies (OVTI), a manufacturer of sensors for digital cameras. Sales of these cameras have been outpacing those of traditional cameras, so the market for sensors like OmniVision’s is “very, very hot, right now,” Gould says.

The No. 1 stock in the portfolio currently is j2 Global Communications (JCOM), which transmits documents and messages over the Internet for individuals and businesses. The company has been able to increase profits much faster than sales, and the stock’s price-to-earnings multiple of about 20-times estimated 2004 earnings is “relatively” inexpensive, Gould says.

Internet-related stocks like j2 Global make up about 15% of the fund’s holdings, comprising its heaviest sector weight.

A favorite of Gould’s in the group is United Online (UNTD), which offers low-priced access to the Internet and electronic mail through its NetZero and Juno subsidiaries. Despite having fewer subscribers than larger rivals like AOL Time Warner (AOL), United Online is “extremely profitable,” Gould says.

Another stock the fund manager likes is NetFlix Inc (NFLX), which offers subscribers movies and television shows over the Internet. The company’s services are wider and more cost effective than those provided by stores that rent videos, says Gould, who believes NetFlix will grow robustly in coming years.

When it comes to selling, Gould will trim or eliminate a position if a company’s financial health takes a turn for the worse, or if its stock suddenly drops on heavy volume, which, he says, can indicate a fundamental problem that has yet to become apparent.

Earlier this month, technical factors led him to sell E-Loan Inc (EELN), which makes loans to people online, Gould says.

The fund’s turnover rate tends to be high. It hit 514% last year; normally, it ranges from 200%-250%, says Gould, who points out that in bear markets his preference is to cut his losses before they widen.

With three years of losses behind it, Gould thinks the stock market rally that started a few months ago has legs.

Brokerage houses have been downgrading stocks, which they typically do early in a bull market, he said in a report to the fund’s shareholders last month.

“I feel very strongly that we’re in the very early stages of a baby bull market,” Gould says. “It’s perhaps a bit wobbly on its feet right now, it’s getting stronger by the day, and pretty soon it’s going to be sprinting.”