Zoltek: A Giant Among Small Caps

Even in this surging market, Catherine Lawson insists "there are just too many good stocks to buy--particularly among small caps." The rise of small-cap stocks in the NASDAQ doesn't faze her. CEO of Highland Investment Group, she's convinced this secondary market is in the midst of a major change: "Price-earnings ratios are in a major upward revision, due mainly to globalization," asserts Lawson.

One of her top picks: Zoltek (ZOLT), a leading maker of carbon fiber--used in a variety of applications, including car bodies, where its light weight makes it a good replacement for steel. Although the stock has rocketed from 21 in mid-March to 53 on Sept. 16, Lawson remains high on Zoltek. Despite its lofty p-e of 69, based on estimated 1997 earnings, she believes the price will hit 75 in a year.

Zoltek is one of the five top producers of carbon fiber composites in the world. Initially, such materials were used mainly in the space program. But as the price of carbon fibers declined, Zoltek sought broader use for them. The Big Three carmakers became major customers: Because of government fuel standards, the auto makers needed to make lighter vehicles.

"More uses for carbon fibers are being developed," says Lawson. For instance, it can substitute for steel in the reinforced concrete of buildings and bridges.

Lawson notes that the stock has advanced 20 points in less than two months because of upbeat earnings: It reported profits of 19 cents a share for the June quarter, vs. expectations of 17 cents, up from 9 cents a year ago. The stock has continued to climb, she adds, because of new expectations that the September (fiscal fourth) quarter numbers will again beat consensus estimates of 20 cents. Lawson forecasts 23 cents a share, up from last year's 16 cents.

Forecasts for the year--a mean of 73 cents--are also low, figures Lawson, who expects 85 cents. For fiscal 1998, she expects $1.30 to $1.40, vs. First Call's estimate of $1.24. Based on her 1998 estimate, the p-e drops to 40.

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