Quick Take: Just as the Brazos Micro Cap Portfolio/N (BMIAX) invests in small companies, its stock pickers like to keep the fund’s assets at a level they consider small enough to be manageable. Because of that, the fund, which reopened to new investors in July after being shut for two years, will close again when its assets, which now total about $250 million, reach $300 million, says co-manager Brian Gerber.
Gerber and fund’s ten other portfolio managers focus on companies with market caps of $600 million or less whose top and bottom lines are growing by 15% or more. However, they’re willing to bet on unprofitable companies if they envision them generating earnings soon. The team also favors companies that aren’t burdened by debt.
The fund was off 39.8% last year. Gerber attributes the loss partly to weakness in the overall stock market, which pressured the stocks the fund typically invests in. But the fund has recovered this year, with help, Gerber says, from its technology stocks that make up about a third of the portfolio’s assets.
Brazos Micro Cap’s class N shares posted a total return of 40.4% through the end of September, versus 27.5% by its peer small-cap blend funds. That version of the fund is too new to be ranked by Standard & Poor’s. The fund’s institutional class Y shares carry a 3-Star rank.
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The Brazos Micro Cap Fund buys very small companies, but its list of holdings has been getting bigger.
The roster of stocks has risen to 87 from just under 50 at the end of 2002, says Brian Gerber, one of the fund’s 11 managers.
The three-year bear market made it difficult to find suitable investments, and as a result the fund became overly concentrated, leaving it vulnerable to potential blowups, he says. As stocks and the economy have rebounded, so have buying opportunities, he says.
“I think we’ve probably put in more new names this year than we’ve ever contributed to any portfolio in the history of the firm,” says Gerber, a principal and partner of John McStay Investment Counsel, Brazos Micro Cap’s investment advisor.
One of those names is NetFlix Inc (NFLX), an online film renter with a library of more than 15,000 titles that ships up to three DVDs at a time to customers and charges no late fees.
Its subscription base gives NetFlix and investors a good idea of what revenues will be like in a given period, Gerber says, adding that the company’s sales increased over 74% in this year’s second quarter. He sees profits rising more than 150% in 2004.
The fund bought a stake in the Los Gatos, Calif., company in June. Its average cost in the shares is in the low $20s, Gerber says. The stock closed at $43 today.
In August, handheld computer maker Palm Inc (PALM) entered the portfolio. Although the company currently is losing money, it has been generating “substantial” revenues, and features a well-known brand name, Gerber says. Following its acquisition of rival Handspring Inc (HAND), Gerber expects analysts to hike estimates for the combined entity, which he thinks will also get a boost from the introduction of new products.
The fund’s average cost for its Palm shares is in the mid-teens, Gerber says. The stock closed at $22.28 today.
Another recent addition to the fund is K-V Pharmaceutical Cl`A` (KV.A), a maker of brand name and generic drugs. The company’s top and bottom lines expanded by 21% in the June quarter, Gerber says, and he envisions it churning out similar results going forward.
The fund’s average cost for its K-V shares is in the low teens, Gerber says. The stock closed at $22.65 this afternoon.