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Carl Wilk of Gartmore Micro Cap Equity Fund

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Quick Take: Because they’re very small, the companies Carl Wilk buys tend not to be widely followed by big brokerage houses or owned by big institutions. That can work to his advantage when Wall Street begins tracking and touting his stocks. He looks for cheap stocks of companies whose bottom lines are expanding.

To guard against Wilk getting swamped with cash, which could force him to invest in larger businesses, Gartmore Funds plans to close the $100-million Gartmore Micro Cap Equity/A (GMEAX) that he manages to new investors when its assets reach about $300 million, Wilk says.

In the meantime, investors can enjoy the fund’s strong returns, which have far outpaced those of its rivals in recent months. The fund, which began operating in June 2002, jumped 73.3% this year through June, while its small-cap blend fund peers gained 6.8%. Gartmore Micro Cap Equity was up 93.1% last year, compared to a 43.2% rise by similar funds. The fund is too new to be ranked by Standard & Poor’s.

The Full Interview:

What kind of stocks does Carl Wilk like?

To start, Wilk, who manages the Gartmore Micro Cap Equity Fund, looks for companies that are fattening earnings by at least 20% per year and whose shares are trading at a 20%-40% discount to the businesses’ growth rate.

“I’m really partial to owning companies that have good cash flow, no debt on their balance sheets, and double-digit returns on equity,” he says, adding that most of the fund’s holdings have no liabilities. Wilk keeps 65-80 stocks in his portfolio.

Wilk hunts for investments among companies with market caps of $30 million to $300 million, a group that Wall Street analysts and large institutional investors usually ignore. Of course, that means these stocks can jump when brokerage houses begin following and recommending them. “Sooner or later, other people become aware of the stock and then drive the price up,” he notes.

A couple of months ago, Wilk took a stake in OPTION CARE (OPTN), which provides pharmacy services to people with acute and chronic conditions in their homes or doctors’ offices. The company’s profits have been increasing by about 20% a year, says Wilk, who expects that pace to accelerate. Yet, its shares carried a price-to-earnings multiple of roughly 16 when he initially bought them, he says.

In May, Wilk added Rofin-Sinar Technologies (RSTI), a manufacturer of lasers, to the portfolio. He envisions the company’s bottom line expanding by 30% this year, and sees an even faster growth rate over the next year or two.

One of Wilk’s favorite stocks is Lowrance Electronics (LEIX), which makes fish finders, primarily for recreational anglers. The company’s revenues and profits have perked up over the last few years because of its addition of global positioning systems to its product line. Although Lowrance’s annual earnings have increased by more than 20% over the last two years, its stock sports a P/E ratio of only about 12, Wilk says.

The fund’s top holdings at the end of May included Celadon Group (CLDN), a trucking company that moves cargo in and between the U.S., Canada and Mexico. Celadon, Wilk says, is poised to benefit from recent free trade legislation enabling companies to increase Mexican imports. In addition, Celadon’s online unit, which provides tires, fuel and other supplies to trucking companies, is contributing to Celadon’s earnings, albeit “very modestly,” Wilk says. The company also looks good because its new chief executive and chief financial officer have brought in more business and improved operating margins, he adds.

Technology and health care stocks typically account for about half of the fund’s assets, “because that’s where we find the growth,” says Wilk. Tech stocks currently make up 30% of the portfolio, and health care 20%.

Wilk’s investments in the sectors include CyberOptics Corp (CYBE), which makes optical sensors used in manufacturing; THERMOGENESIS Corp (KOOL), a manufacturer of blood processing systems and products for separating stem cells from blood; and Bone Care Intl (BCII), a specialty pharmaceuticals company.

His preference for the smallest companies leads Wilk to sell those whose market caps reach $600 million or more. He will also trim a holding or eliminate it from the portfolio if its shares become pricey, or if the company’s financial fundamentals erode.

In April, Wilk sold KVH Industries (KVHI), which makes mobile satellite communications systems for cars, recreational vehicles and boats, because he thought that its automotive business was slipping.

His guess was on target. The company warned this month that second quarter sales would lag its original estimate, primarily because of lower-than-expected sales of its navigation products for the military and land-based mobile satellite systems.

“We’re happy we got out of the stock when we did,” Wilk says.

Contact Robert F. Keane with questions or comments at:

[email protected].