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That said, you don’t have to invest in “America,” per se. We can invest in HMS Systems down the street that audits Medicare and Medicaid plans for insurance billing and fraud. Am I a big fan of nationalized healthcare, even healthcare reform? No. Is it going to help HMS’s business? Absolutely. It’ll be terrific.
So I think you have to be a niche player. You’ve got to find smaller ideas that are going to benefit in the conditions as they are. You can change the conditions and always try to find ways to make money in the conditions as they exist.
Forbes: Alright, let’s get to the juicy part.
Oberweis: Alright.
Forbes: You mentioned HMS Systems.
That said, you don’t have to invest in “America,” per se. We can invest in HMS Systems down the street that audits Medicare and Medicaid plans for insurance billing and fraud. Am I a big fan of nationalized healthcare, even healthcare reform? No. Is it going to help HMS’s business? Absolutely. It’ll be terrific.
So I think you have to be a niche player. You’ve got to find smaller ideas that are going to benefit in the conditions as they are. You can change the conditions and always try to find ways to make money in the conditions as they exist.
Forbes: Alright, let’s get to the juicy part.
Oberweis: Yes.
Forbes: What else is on your list that can get our viewers excited?
Oberweis: What has been a great area in the last couple years are folks buying and selling patents. We own a company called Acacia Technology that goes to companies, buys patents or licenses patents, and then sues to enforce them or license them to those that are infringing.
Forbes: Aren’t these just bloodsuckers, leeches just trolling and being a bane to everybody?
Oberweis: Some have said that. First of all, they’re profitable leeches, if you take that connotation. But I would say no. I mean, they do fulfill a niche, and here’s the niche. XYZ company is a small company, they do business with Microsoft, Microsoft infringes their patent. And if they decided to sue Microsoft, Microsoft buries them in paperwork for the next 20 years.
I am a strong believer that intellectual property rights need to be protected. It’s Acacia’s business, and they help companies in that situation because that’s their sole business and they’re very good at it. And they now have a reputation of success in monetizing their intellectual property.
As it works out, in the last three years, Acacia has gotten very significant settlements from companies like Samsung, Oracle, Microsoft. And those companies themselves are now utilizing Acacia to help them monetize their intellectual property. So they’re voluntarily licensing the patents to Acacia. The greater the recession, the higher the propensity for companies to want to monetize assets on their balance sheet that aren’t currently being monetized. So Acacia’s been a nice name for us.
Forbes: HealthStream.
Oberweis: Yes. Again, a boutique name. We look for companies that are growing faster than 20-30%, that have proprietary product or service in a great market position and have a reasonable stock valuation. The first two are definitely the case in HealthStream, and the valuation on the surface looks a little expensive. Now, let me tell you why it’s not. HealthStream develops software for hospitals to train their employees. It helps them to meet the regulatory requirements that, again, are rolling down the pipe.
Forbes: Yes, they are.
Oberweis: They’re the market leader for training software for hospitals. They recently signed a joint venture for a new product that will provide training certification on mannequins without human intervention. So someone could go and learn CPR on a mannequin using their software and be tested on it, where the censors on the mannequins paired with their software will provide the certification in probably a more effective way than somebody sitting there watching them would actually be able to do.
It’s a software as a service model, so they have extremely high ongoing revenue visibility. It’s effectively an annuity. So the valuation looks on the surface a little bit higher than I might otherwise pay, but we’re willing to do it because of their leading market position and their very high recurring revenue stream.
Forbes: Before we come back to the U.S., quickly, any individual stocks in China still attract you? Home Inns, does that still turn you on?
Oberweis: Home Inns is okay. Home Inns is starting to see more competition. In China, they’re seeing competition on the low end and they’re seeing competition on the high end. It’s an okay business, we think they’ll survive. But the valuations for China’s equities broadly have come down so much that we think we’re probably better off moving onto other companies.
I’ll give you one that we like. It’s a Hong Kong-listed company called Vinda. And they’re the third leading player in toilet paper and tissue paper. The number one is a company called Hengan. It’s an $11 billion company, trades for 35 times earnings. Vinda is number three and it trade for 20 times earnings.
As funny as it sounds, toilet paper consumption in China is roughly 15% lower than the global world average. And as far as I’m aware, across countries, it should be relatively similar. We think that there’s increased opportunities for market penetration for somebody like Vinda. Other companies in China – one misunderstood story that’s NASDAQ-listed is a company called Spreadtrum You talked about some of the short selling reports and accusations of fraud. Spreadtrum was one that was accused, I think unfairly, of irregularities.
I’ve been to their plant, I’ve met with their management team and we’ve owned the stock for a long time. We think they’re actually really well positioned. They make cell phone parts for low end cell phones – 2G cell phones that are sold to Africa and India. Then they also are starting to move upstream and creating 3G parts, which are going into the new Galaxy cell phones.
They have $4 in cash that trades at six times earnings and they’re going to grow it 25% in the course of the next 12 months. So those kind of valuations, I mean, I can’t believe I’m sitting here talking about a stock that’s going 25% trading, 6 times earnings with $4 in cash. Those just don’t usually occur, and we’re finding those all over the place right now in China.
Forbes: A couple more here at home that excite you?
Oberweis: Sure.
Forbes: You still like Francesca’s?
Oberweis: We do, we do. Francesca’s is a boutique retailing chain. They just had a fine earnings report. They sell trendy, value-priced merchandise, stuff that you world probably find in Nordstrom‘s – or looks like stuff you would find in Nordstrom’s. So it’s a nice design but at a much lower price point.
Especially in this economy, that’s been a pretty good recipe for success. It doesn’t feel like a chain. When I tell people we own Francesca’s, they say, “Oh, they have more than one?” And that is exactly the design of the company and they’re hitting nice same-store sales comps and nice growth
Forbes: How many outlets do they have now?
Oberweis: I don’t know the exact total right now, but I think they’re up about 20% over the last year, in terms of the number of outlets, so it’s been very good. One other company I’ll mention is Twin Disc in Racine, Wisconsin. Twin Disc makes high-power transmission systems. Originally they were used in yachts. And the yacht business, as I’m sure you’ll appreciate, has been a challenging spot to be.
That business has stabilized, it’s not really growing much. But what is growing is their oil rig business. Those same transmissions are used in oil rigs for fracking and for shale development. That business has been going gangbusters. They just are releasing a new product that is specifically designed for fracking. That’s the first device on the market that will be designed for that.
I think it’s going to grow very nicely. Last year, they grew 30% and I think they could be on track for another year of that type of growth. And yet, it’s getting the multiple of a company that makes transmissions systems for yachts. So those are great news when we can find them.
Forbes: So the bottom line is, at least, even though you stay fully invested most of the time, get in when the hand looks cold, because they always turn.
Oberweis: There’s no question that the time to buy high-growth stocks is when nobody loves them. And now, in the 16 years I’ve been doing it, is the second-best time I’ve ever seen from valuation perspective.
Forbes: So every time you hear on TV, “Oh, go for blue chips that have nice dividends because you get 3 or 4% versus zero on bonds, or near zero on bonds,” you say, “Okay, nice yield, but there’s bigger stuff.”
Oberweis: That’s right. We heard the same thing in the third quarter of 2008: “Why would anybody buy a growth stock when the end of the world is coming?” It turned out to be, hands down, one of the best times in history to be buying small growth stocks. I don’t think 2012 will be quite that kind, but I think they’ll certainly be above average for high growth companies like those in our emerging growth fund.
Forbes: Terrific. Jim, thank you.
Oberweis: Pleasure.
source: fobes.com
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