Q&A: James Oberweis (extended)

James Oberweis, who oversees three Oberweis Funds (www.oberweis.net), is always looking for "the next big thing." Oberweis focuses on emerging-growth companies that are increasing revenues and earnings by at least 30% each year, while selling at price-earnings ratios of less than half of their annual growth rate. His Oberweis Micro-Cap Fund, which invests in companies with market capitalizations of $100 million to $250 million, was the No. 3 diversified equity fund in 2003, gaining 105.1% through Dec. 12, according to data from Standard & Poor's.

Oberweis, 29, chose stockpicking over working at the family's dairy farm in North Aurora, Ill. BusinessWeek Personal Finance Editor Lauren Young recently caught up with Oberweis in a telephone interview. Here are edited excerpts from their conversation. Note: This is an extended, online-only version of the Q&A that appears in the December 29, 2004, issue of BusinessWeek.

What's appealing about micro-caps?

We identify small growth stocks in the early stages of an earnings acceleration. We don't know which companies in our portfolio will be the next Microsoft (MSFT ). But we've done this a long time, and investors who buy a diversified portfolio that fits our criteria will hit a few very big winners.

What will drive the economy in 2004?

As soon as companies become comfortable that the rebound is for real, that the tough times of 2001 and 2002 are over, then we think they will start spending again. We're also optimistic because inventories are really low.

What sectors look most appealing?

We tend to be drawn to areas with a lot of change -- including technology, health care, and retail. Health care is probably our favorite, mainly because stocks are so cheap. Specialty generic pharmaceutical companies are especially interesting. First, a heck of a lot of drugs are coming off patent in the next few years, and generic-drug manufacturers have an opportunity to pick up significant market share.

In addition, companies are now able to effectively license delivery technologies to create a hybrid between generic and branded drugs. Then there's the aging of baby boomers, which is shaping the future of health care. And don't forget about politics -- the President is talking about the importance of taking control of health care.

How do you play those themes?

One really interesting place to be is in pharmacy benefits. Companies like Caremark Rx (CMX ) and Advance PCS (ADVP ), which have announced a merger, administer benefits for a wide variety of corporations. There's a lot of growth potential.

What about technology?

We're seeing a lot of opportunities within semiconductors. Innovative companies with proprietary technologies are having an easier time selling their products. The semiconductor cycle is coming into play -- especially from companies related to MP3, DVDs, and cell-phone technologies.

One company we really like is Omni Vision Technologies (OVTI ). Its chips are made for digital cameras. They just had a terrific quarter. Another new name for us is August Technology (AUGT ), which makes machines to inspect wafer systems for the chip industry. Companies that can help other companies save money and be more competitive are terrific.

With micro-cap names up so much in 2003, is the party over?

At the beginning of 2003, micro-caps were cheap. Now the area with the slight discount is mid-caps. Mid-caps haven't had the same run-up as small-caps had this year. On a valuation basis, the mid-cap sector is probably the most attractive. But micro-cap is still an interesting place to be.

Are you shying away from anything?

There are a number of successful retail concepts. The problem is that valuations are pretty high. We're light on retail names.

What's your take on the recent mutual-fund scandal?

When we started this fund company, two of our funds had a redemption fee of 0.25%. The fee gets credited back to fund shareholders. It's not much, but it's enough to annoy someone who is trading the fund a lot. We just replaced the redemption fee with a 6-month, 1% redemption fee, which will be effective on January 1, 2004.

And while we've been approached by hedge funds who wanted to trade our funds in the past, we've never said yes. Our funds don't tend to be good candidates for market-timing anyway, because we have no real international exposure.

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