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Micro-cap companies' big returns

Go out hunting for micro-cap funds with long-term top-performing track records and they're not easy to find---many are even closed to new investors. But here's one that's been around since the late 1980s, and is worth a peek.

Michael Corbett has been the portfolio manager of the Perritt Mico Cap Opportunities Fund, ( 1-800-331-8936), since 1999. Last year, the fund was a top-performer in its category, up 34.5 percent, according to Morningstar. In 2000, it also scored in plus-territory--up 6.2 percent that year.

Corbett began his career with Perritt Capital Management in the early 1990s as an analyst Today, he technically co-manages the fund with Dr. Gerald Perritt, who started the fund, but it's Corbett who has the final say on the fund's investment direction and stock picking decisions.

Typicall, you'll find between 75 and 85 names in the Perritt Micro Cap Opportunities portfolio,(PRCGX); all, a blend of value and growth stocks. And all tiny companies, under $400 million in market cap. The top three industries that the fund's assets are currently invested in are health care, energy services and retail.

Here's more from Corbett about the fund:

Q: Are any of the fund's holdings going to names the public is familiar with; will they be regional names; or, ones we just don't know at all?

Corbett: A lot of them you won't know, but sometimes there will be names you may have run across. Monterey Pasta.for instance. It's a food company that sells in all of the big discount stores like Sam's Club or Costco. So you may know that name if you shop at any of those stores.

Another is called Blue Rhino. They sell propane tanks for your gas grill and, in terms of propane gas, are the leader in the whole industry. They have distribution in Home Depot's, Lowes and convenient stores. If you're someone who ends up shopping at Home Depot, need a replacement on your propane, they have bins right outside the store.

Q: When you're looking for companies to invest in, what comes first, the product or the company?

Corbett: It's kind of a combo of the two. But I tell people that we have a three-pronged approach to finding companies. One is that are constantly culling through a lot of screens and various databases looking for companies under a certain market cap, within various industries and with certain valuations.

The second angle relates to the relationships I've built up over the years with a network of regional brokers and investment firms across the country. They often come to me with new ideas or things that have changed in a stock or a company. And the third actually has to do with the companies themselves---calling management and getting to know them and what they're doing.

Q: What are some of the things investors need to know about investing in tiny companies?

Corbett: One thing is the environment right now. With interest rates at a 40-year low, that really does benefit smaller companies because they can go to the bank, borrow some money and grow their business. The underlying idea of why a smaller company is more attractive is because of their ultimate growth prospects. It's much easier for a smaller company to double their business in a short period of time than it is a larger company. And, that's why you invest in small companies.

Another thing is, you have to buy a bunch of them---you can't just buy a few and hope. I like to tell people that if I can get 20-30 percent of my portfolio to be really big winners, than I'm a winner.

Q: What about the risks?

Corbett: Risk is a relative term. What I mean by that is that investments are only risky from the standpoint of how they are valued. Larger companies can also be risky, as we've just seen with Enron. But if a smaller company is generating a significant amount of revenue, earnings, cash flow and is a true company, on average yes it will be riskier than a larger company. But, if you're diversified properly, that risk can be managed.

Q: Is there an investment cycle for small company stocks?

Corbett: Small companies, in general, tend to perform in streaks. Meaning, once they start to do well, the tend to do well for a long period of time. That over- and under-performance cycle tend to happen about every three- to five-years. Right now I think we're in an up-cycle that started in mid-2000.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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