Winning Big In Small Caps

Small-cap stocks have been a rotten place to invest, but Rockland Growth Fund's Dick Gould is bucking the odds. Last year, the fund jumped 25.1%, even as the Russell 2000 Index of small caps sank 2.6%. This year, through Apr. 30, the fund is up 8.6%, vs. the index's 2.6% gain. Gould picks companies with growing earnings, but he also credits the fund's small size and his willingness to trade swiftly. BUSINESS WEEK's Robert Barker reached Gould in his Rockland (Del.) office.

Q: How have you avoided death by small caps?

A: One big reason is that I listen to what the market says. If a stock is acting poorly going into an earnings release, I am not going to hang around unless I know the company cold.

Q: You lack conviction--or you just aren't stubborn?

A: A lot of money managers out there think they know companies better than anyone else, and I never do. If people are dumping massive amounts of shares, I always wonder is there something lurking. You never know a company as well as the insiders. They may be unloading shares. There might be a legal issue, an accounting issue. It might be a backlog issue that isn't really going to be evident for the next two or three months.

Q: What's your favorite position today?

A: I still like Concord Communications a lot. They sell software that tells you what is going to go wrong with your corporate [computer] network and when. For example, you need to add five Cisco [Systems] routers by May 14, otherwise you're going to run into problems.

Q: What else?

A: Ryanair, I think, will be the Southwest Airlines of Europe. They're taking Europe by storm, mainly out of Dublin but also out of London. They're adding routes into little-known airports. They say they are deliberately holding growth back to 25% a year. The [earnings] estimates for the March [2000] fiscal year are for $2 a share. I think they'll do more than that.

Q: Other names?

A: I own Cost Plus, which is a mixture of Linens `n Things and Williams-Sonoma. They have about 90 stores in 16 states. The Southeast is wide open; the East is wide open. They're adding about 20 stores a year, which is pretty good unit growth. And on top of that they're getting margin expansion.

Q: Expeditors International is your top holding. Why?

A: It's a global logistics company and customs broker for air and ocean freight. Earnings estimates for this year are 18% growth, $2.09 a share, and they have met or exceeded estimates going back seven quarters.

Q: And what about Adobe Systems?

A: I always look for earnings surprises, and they've now had two pretty substantial ones. You're just starting to get upgrades from analysts.

Q: Any value in Internet stocks?

A: They're all way overvalued. However, you'd be crazy not to take advantage of the moves they make. So I've been trading them. As an example, a company like CMGI or E*Trade, I've bought them, ridden them a month, and then sold them. And then waited four or five weeks, bought them back, ridden them for a month or two, and then sold them.

Q: What else have you sold?

A: AnnTaylor Stores. It has been reporting 20% same-store sales [gains], but I hear those may be coming down to 5%, maybe 6% to 8%. Business was strong; they just ran out of inventory. I guess it's a good problem to have, but not really...I just cut [my position] in half, but I'm going to dig hard and fast and, if need be, blow it all out. That's a perfect example of the advantages of being small and nimble.