A Good Fund Gets "Whipped Around"

Rockland's Dick Gould explains why he has fallen short of his record this year -- and what picks he's counting on to lead a rebound

By Robert Barker

Dick Gould's Rockland Small Cap Growth Fund (RKGRX ) recently celebrated its fifth birthday with a lifetime performance record that puts it in the top 3% of small-stock funds. Yet this year has proved no cause for ice cream and cake: The $65 million fund is trailing its benchmark by 12 percentage points.

Its losses in 2001 are such a sharp break from the fund's first four years that one investor was moved to post a message at titled, "Is this fund a BASKET CASE???". So what's happening at Rockland? And which stocks is Gould buying now in hopes of staging a comeback in 2002? I asked him those questions and more this week when I reached him by phone in his Rockland (Del.) office. Edited excerpts of our discussion follow:

Q: Your fund just turned five years old. What's the record?


We averaged 20.5% per year. The average small-cap fund has done 7.6% per year over that same period, according to Lipper. And that ranks us 8th out of 397 funds.

Q: O.K. But this year, your benchmark, the Russell 2000 Growth Index, is down 10.5% and you're down 22.4%.



Q: What do you attribute it to?


The difficulty in a bear market, and a potentially bottoming market, is knowing when is that bottom actually hit. There are a lot of false breakouts. It's easy to get whipped around if you're not careful, and I think we got whipped around a bit this year.

Q: A little more than a year ago we talked, and you mentioned three stocks that seemed to you to have good prospects. One of them has held up pretty well. That was Anixter (AXE ). But the others, Avocent (AVCT ) and 1-800-Contacts (CTAC ), have plunged -- 50% or more. What went wrong?


These are long-gone holdings. But let's see, Avocent was gone [from my portfolio] when it broke down hard in December.... I think what went wrong with almost all technology companies without exception was that the demand was artificially strong. And then, when things slowed, earnings get pummeled.

Q: What does Avocent do?


They make a product that controls multiple [computer] servers from one keyboard.

Q: How about 1-800-Contacts? It sells contact lenses direct via the Internet or a toll-free phone number?


Right. I get my contact lenses through 1-800-Contacts. They're definitely cheaper than anyone else I've found. But ophthalmologists didn't really like what they were doing, because they were taking away a profit source. So there were legal battles over whether or not you could order through 1-800-Contacts.

Q: What have you been buying lately?


My biggest holding by far right now, and mainly because it has done well, is Genesis Microchip (GNSS ).

Q: What's to like about it?


Genesis Microchip makes arguably the best chip for flat-panel [computer] displays. And flat-panel pricing has come down from $1,500 a year ago. So now, for $399 you can get a pretty nice flat-panel screen.... And you can look out into the future and say that the CRT [cathode-ray tube monitor] is definitely a buggy whip. I mean, it will be extinct.

Q: Is Genesis still worth buying? Or will you be selling?


I think it's still worth buying.... The thing I'm leery about -- and this is just from having owned so many of them in the past -- these graphics-chip companies have amazing, amazing success, and then, finally, a competing product or something catches up and gross margins plummet. Earnings get hit hard. So they are definitely cyclical names.

Q: What else are you buying?


Two health-care stocks are really, really fascinating.

Q: They are?


Cytyc (CYTC ), with their ThinPrep Pap Test.

Q: This is a test kit for physicians to use in Pap smears?


Yes. It's better than the existing Pap-smear test, and because of that I think it's going to take over all of the market there. But that has been going on for a while.

Q: So why buy Cytyc now?


I think the exciting thing about Cytyc is its breast-cancer test. They have a new product, and it's just going through final-phase studies right now. In a nutshell, what they do is they flush out the mammary duct with a saline solution and they collect that saline solution and analyze it.

They did a study with 507 high-risk women for breast cancer. They had already had mammograms, and none of them showed anything abnormal. Out of those 507 high-risk women, and that means women who might have had breast cancer in their families, 24% of the 507 had abnormal cells. Of those 24%, 17% were low-grade abnormal cells -- a cautionary flag [that means a woman should] be tested more often. Six percent had high-grade abnormal cells, which is a precursor to cancer, and in two cases they had cancer.

Q: Do you own this stock now?


I've owned it for a while. It has been quite volatile, but it has held up in a really lousy market.

Q: Other health-care stocks?


Given Imaging (GIVN ). Up until this point, to take an image of your gastrointestinal tract, you can get a colonoscopy. But with that, they can really only look at the large intestine. And you can also get an enteroscopy, where they go through the mouth and look down into the stomach. So the small intestine is one part of the body that they can't really analyze. If there's something wrong in there, doctors have had to do exploratory surgery, where they go and open someone up, opening up perfectly good intestines, look around, and it's a mess. Very difficult to tell if anything's wrong or not.

Q: O.K., you've grossed me out now.


With Given Imaging, what you do is swallow a capsule.

Q: How big is the capsule?


It's like taking a big vitamin pill. And it has a little digital camera on it.

Q: Amazing.


With a wireless transmitter. You have sensors placed on your stomach to tell where the capsule is. Everything is mapped out by their software. And you can go about doing whatever you were going to do that day. And at the end of the day, you just come back after it has passed, and they have about 50,000 images of your entire GI tract. Given presented [its procedure] at a medical conference and got a standing ovation. Because no one had ever seen the opposite side of the valve coming out of the stomach into the small intestine. And they were actually watching it live, working.

Q: This is a new stock. It just came public in October. Where was it priced?


At $12, and it immediately broke price -- not surprisingly, because it was a lousy market back then. And they pushed it all the way sub-$8, and then it came back very strongly.

Q: This is a horrible question, but I have to ask: Are these capsules recyclable?


I don't think so. They only cost about $450. I say "only," but considering what it does, it's not much.

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BW Online

Edited by Patricia O'Connell

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