Path: bloom-picayune.mit.edu!enterpoop.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.wpost From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Small-Company Fund's Manager Looks for Rapid Growth, Fiscal Self-Reliance=BY Date: Wed, 25 Nov 92 04:45:04 EST Message-ID: <14.1992Nov25.044505@AmeriCast.com> Lines: 135 Small-Company Fund's Manager Looks for Rapid Growth, Fiscal Self-Reliance=BY STAN HINDEN= Suddenly, small-company stocks are big news. After sliding for most of the year, small stocks broke out in early October and have been soaring ever since. Not surprisingly, mutual funds that invest in small stocks have been rising too, gaining 11 percent in the past six weeks. One of the best-performing small-company growth funds is John Hancock Special Equities Fund, which has moved up 20.3 percent so far this year. The $55 million fund is managed by Michael P. Di- Carlo, who likes nothing better than to find a familiar product made by a little-known company with an inexpensive stock. Although DiCarlo has thousands of stocks to choose from, only 46 have passed his tough screening process and made it into his portfolio. The 36-year-old stock picker tries to reduce the na- tural volatility of small-company investing by choosing stocks that boast, among other attributes, stable earnings. We asked DiCarlo to share with us some of his ideas on picking small company stocks. Small-company growth stocks are moving up again. Why do you think that's so? Small stocks rebounded, in part, because the election uncertain- ty was resolved. In addition, investors recognized that there were compelling values in the shares of many small companies - companies whose business momentum never waned even though their stocks did not perform well during the first six months of this year. How long do you think this trend will continue? We believe this most recent move is part of a bull market for small-company growth stocks that began in October 1990 and can last anywhere from five to seven years from then. How do you decide which stocks to buy? Before I will buy a stock, the company must meet several cri- teria. First, it must be growing at 25 percent a year - both in sales and in profits. A good example is GTECH Holdings Corp. (stock symbol GTK), which supplies lottery machines and services to government agencies. Its sales are growing at 38 percent while profits are growing at 56 percent this year. Second, a company must have the ability to self-finance its ra- pid growth. I don't want to see companies coming back to the markets - either the equities or fixed-income markets - asking for money to grow their business. I want them to make it and plow it back. What are your other yardsticks? Companies have to be in a leadership position within their own niches. They have to be number one or number two. These are com- panies that control their own destinies. They are price-setters, not price-followers. A good example is Marvel Entertainment Group (MRV). Chances are if you read comic books as a kid or if you dare to step into your son or daughter's bedroom, you would likely find that the comic book of choice, then and now, is a Marvel publication. With a 60 percent share of its market, Marvel dominates its industry. Finally, there's the matter of management. A company must have management that is driven, that is visionary and that is focused above all else on enhancing shareholder value - the reason we all own stocks. We try to find out as much about a company as possi- ble before we invest. After we talk to top-level executives, we go to middle manage- ment. We go to vendors. We go to competitors. We talk to every- body. Finally, though, it comes down to the executives. I will not touch a company whose management I am not comfortable with. Where do you get ideas for stocks? An idea can come from anywhere. I went out to get some lunch at a little sandwich place near my office one day and found this drink in the refrigerator. It looked very appealing. Afterward, I went back to the office and started looking into the company - called Clearly Canadian Beverage Corp. (CLCDF). We ended up buy- ing the stock at between $3 and $5 a share and selling it within nine months at $24. (It has since dropped back to about $11.) This is not to say that every idea comes along like that, but there are a good number that do. What are biggest holdings? They are Cisco Systems Inc. (CSCO), Informix Corp. (IFMX) and Jones Apparel Group (JNY). Cisco, which has exceptional business momentum, provides computer products that allow companies to in- crease their productivity and profits. Informix also will benefit from the trend toward using technology to boost productivity and profits. Jones Apparel has superior management and has a clearly defined niche in the women's apparel marketplace. How long do you keep a stock? My belief is that if you buy a company's stock, you should buy it with the intention of holding it for a long time, or until the fundamentals no longer support your reasons for owning it in the first place. What other interesting stocks have you added to your portfolio? One is Sun Television & Appliances Inc. (SNTV), a retailer of appliances and consumer electronics. They locate in really small towns, where there are not many shopping choices and where Sun TV may be the only choice. But at the same time, Sun TV maintains an everyday low-price policy. How risky are the stocks in your portfolio? There is a widespread perception that investing in aggressive growth companies is way out there on the risk curve. But our strategy is tempered by the discipline of looking for companies with very stable earnings. The earnings of the average company in my portfolio will grow about 74 percent this year, while the earnings of the average company in the Standard & Poor's 500 will grow at 18 percent. If you believe, as I do, that earnings drive stock prices, that's something you would like to see.<02:10 11- 25C9999----- Copyright 1992, The Washington Post. This story is from the Washington Post's Capitol Edition On-Line and is not to be ar- chived or redistributed. For more information, send-email to American Cybercasting Cor- poration (usa@AmeriCast.COM)