TCS Daily

Time To Buy Small Caps? Consider These Five Great Techs

By James K. Glassman - March 5, 2001 12:00 AM

Going back all the way to the 1920s, history says that small-cap stocks perform better than large-caps. Investors may feel secure investing in the power of a global mega-brand, but it's the smaller companies that tend to grow faster and deliver superior returns. The big stocks deliver a long-run average of about 11 percent per year, while the smaller stocks deliver 12 percent annually.

One big exception was the decade of the 1990s, when large caps handily beat the small caps, especially in the last five years of the decade. In 2000, small-caps returned to the lead, perhaps a signal that it's time to look once again at the companies that have traditionally been most kind to investors.

Recently I went searching for great tech companies among the small caps. I like companies with little or no debt and a history of rapidly increasing revenue and earnings over the course of several years. I also like companies with a dominant, defensible position in a lucrative market niche. I found five stocks that would make excellent additions to a diversified portfolio -- assuming that an investor understands that small caps tend to be riskier than large caps. All five are profitable companies and should weather the current tech storm in excellent shape.

WebTrends (WEBT): This software company is fast becoming the industry standard for monitoring traffic to websites. Companies use WebTrends to find out how many people visited their sites, how long they stayed, the pages they selected, along with answers to numerous other questions about online customers. Yes, the bubble burst for dot-com stocks, but unless you think that people are going to stop using information technology and the Web, then you may want to take a closer look at WebTrends. During 2000, the year of the tech wreck, this debt-free company tripled revenues and earnings. The growth is bound to slow along with the economy for a few quarters, but this is a firm showing leadership in an important market.

Cree (CREE): During the last five years, this North Carolina firm has increased its earnings by an average of 100 percent annually. Cree makes semiconductor devices based on its silicon carbide technology. What does that mean? Well, Cree is a leader in the manufacture of light-emitting diodes (LEDs), which illuminate the tiny screen on your cell phone, for example. Short-sellers have pounded this stock on the theory that Cree's products are becoming "commoditized," but that's still a theory. Meanwhile, it's easy to see the shining numbers on Cree's balance sheet.

Carreker (CANI): This is probably the ideal investment for someone who wants a small cap tech play but wants to stay as far away from the dot-coms as possible. CEO J.D. Carreker launched this company 22 years ago, when many dot-com execs were still wetting the bed. Dallas-based Carreker sells software to banks and other financial institutions to allow these firms to offer their services online. Carreker also sells consulting services to show the banks how to use the software. The client list includes numerous blue-chip financial firms, and the recent earnings history is excellent.

Serena Software (SRNA): Serena's products help large companies make the transition to new enterprise software. For example, if a customer wants to move an entire organization, with thousands of employees spread across numerous locations, to a new standard software package, Serena helps make sure that the change happens quickly and efficiently -- without loss of data. Serena also ensures that old versions of software aren't hanging around making mischief in the customer's corporate network.

Microchip Technology (MCHP): This company doesn't live in the most glamorous section of the technology industry, but it's turned out to be a profitable neighborhood, and MCHP owns an increasing amount of the real estate. Microchip Technology is a leader in making chips for embedded systems, so you might find their chips in your remote control, your fridge, or your car. Buy into a commodity producer? MCHP's profit margins keep getting better.

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