News - Archive
BusinessWeek – June 12, 2006
Q&A TICKER’s Choice –June, 2006
CNNMoney – June, 2006
CNNMoney – May 30, 2006
Bottom Line Secrets – May 17, 2006
MarketWatch – May 14, 2006
Bloomberg – May 9, 2006
Investment Advisor – May 2006
Chicago Business – April 27, 2006
MarketWatch – April 4, 2006
Investor’s Business Daily – October 10, 2005
Kiplinger’s – August 30, 2005
Kiplinger’s – August 23, 2005
Bloomberg – June 2, 2005
Bloomberg – May 25, 2005
Manager Commentary, 4th Quarter 2010
Q: Attribution Analysis: What Happened in 2010?
A: The Perritt Funds ended the year with strong performance as the Perritt MicroCap Opportunities Fund returned 26.52% and the Perritt Emerging Opportunities Fund returned 39.02% for investors during the full year of 2010. Our attribution analysis shows that while stock selection had a positive effect on both funds, the selection effect was most pronounced in the Emerging Opportunities Fund. The Emerging Opportunities Fund (PREOX) attribution analysis shows that the top ten holdings of the portfolio contributed approximately 15% to the return. Much of this return was due to a large number of companies that were bought out by larger companies. In fact, 10 of 148 (6.8%) holdings in the portfolio were acquired. Another contributor to the Fund’s strong performance was our investment in the technology sector. Technology companies owned by the Fund returned over 50% during the year. At the same time, the Fund was overweight in the technology sector relative to its benchmark.
Average Annualized Performance as of 12/31/10*
Cumulative Total Return Since March 9, 2009 Market Low*
The MicroCap Opportunities Fund (PRCGX) attribution analysis shows that the top ten holdings of the portfolio contributed approximately 11% to the return, also partly due to a record high amount of acquisition activity. During the year, 12 of 132 (9.0%) holdings in the portfolio were acquired. The Fund’s strongest performing sector was Health Care. During the year, health care related companies owned by the Fund returned over 60%. We remain optimistic about the future opportunities for microcap health care companies as the retirement of baby-boomers is just beginning. It appears that other investors would agree with us, as four of the ten companies acquired from the portfolio in 2010 were related to healthcare.
Q: Why was turnover ratio so much higher in 2010?
B: Turnover in the MicroCap Fund for the fiscal year 2010 was 41.5%, a significantly higher level than in previous years. During the past five years, the Fund averaged under 30% turnover annually. Most of the 2010 turnover was related to the record number of companies bought out of the portfolio. We are proud of our historically low turnover because it shows that we are long-term investors, which is a critical part of our investment philosophy. In the event of a buyout, the amount of time that we own a company is not always as long as we might have planned. However, acquisition activity can be rewarding for both the premium we receive and as evidence that our investment process is working to find undervalued, flourishingcompanies. Turnover in the Emerging Opportunities Fund for the Fiscal year 2010 was 29.1%, which is in line with historical turnover.
Q: How have small cap stocks performed during inflationary environments?
A: Conventional wisdom is that equities won’t perform well in an inflationary environment because profits are eroded by rising costs. However, analysis of small- and large-cap performance during the last two major inflationary periods offers a different conclusion. In fact, equities have historically performed well in inflationary environments, and small cap equities have shown the strongest performance (as seen in the tables on following page). The reason that small companies can outperform in an inflationary environment may be related to pricing power. Quality small companies have niche products and niche businesses, and they can respond quickly to changing market conditions. Small companies with niche products and services have the ability to quickly raise prices, and the consumer will be willing to pay those prices. Historically, equity prices have fallen at the onset of an inflationary environment. However, for small companies especially, over time inflation leads to greater margins and larger profits, which ultimately can lead to higher stock prices.
Manager Commentary, 3rd Quarter 2010
Q:It is widely discussed that large companies currently have record-high levels of cash on their balance sheets… but what are small companies doing with their cash?
A: According to our analysis, more than 50% of the companies in the Russell 2000 hold more than 10% of their respective market capitalization in cash. This compares to just over 30% of the companies in the S&P 500 Index. The level of cash held by large companies has been widely discussed because they hold the largest amount of absolute cash on their balance sheets. What may be less known is the fact that small companies actually have higher cash levels and stronger balance sheets relative to their respective market capitalization. Small companies have been using their cash to buy other companies, buy their own stock and pay dividends. One example from our portfolios is Omnova (OMN), a company that not only used their cash but actually took advantage of low-interest rates to borrow additional money for a strong acquisition. We also have companies such as Landec (LNDC) that has used their cash to buy back stock. Lastly, several companies in our portfolios have been paying nice dividends while we’re waiting for potential performance from the underlying stock. Examples include American Service Group (ASGR) and American Software (AMSWA).
Performance as of 9/30/10 (Annualized %)*
Q: How is the way you approach discussions with small company CEO’s and CFO’s different today than ten years ago?
A: Because we are often one of the first institutional investors in a company, small company executives tend to make themselves very accessible to us. Each week we have 3-5 companies meet in our offices to discuss their business process and approach. Thishas always been a key element in our investment process and that has not changed. What has changed is that we now make more suggestions to management teams about their business decisions than we have made in the past. We don’t consider ourselves shareholder activists and we don’t intend to run other companies’ businesses. However, with twenty years of experience talking to CEOs and CFOs, we believe that we have seen enough to know what works and what doesn’t. Monitoring past examples of management mistakes has led us to be more vocal to CEO’s and CFO’s about our suggestions. For example, Gilat Satellite Networks (GILT) is a company that had an excessive amount of cash on their balance sheet. The company held $160 million of cash in the bank, in addition to a building worth $50-60 million that they planned to sell in a reverse-lease transaction. With a market capitalization of $220 million Gilat was, in effect, trading for less than its cash value. We made a strong suggestion to the management team that something should be done with the excess cash. The company went on to acquire Wavestream, a provider of high-power amplifiers, for $130 million in cash. We are satisfied that the company was able to acquire new technology without diluting shareholders or taking on any debt.
Q: Third Quarter Attribution Analysis – What Happened?
A: While both funds were up in the quarter, our attribution analysis shows that company size detracted from positive performance in both Funds.
The largest companies in the Russell 2000 Index were the quarter’s best performers. As ranked by market capitalization, companies in the top quartile of the Russell 2000 Index (between $870 million – $3.2 billion) returned 12.5% in the quarter, while bottom quartile companies ($21 – $223 million) returned just 9.1%. The MicroCap Opportunities Fund attribution analysis shows that more than 80% of the portfolio’s holdings lie in the 3rd and 4th quartile of the Russell 2000 Index. These companies contributed 2.0% and 5.2% to the Fund’s quarterly performance, respectively, which was not enough to make up for the strong performance of the Russell 2000 Index’s largest companies. The fund did return 8.57% for the quarter, and is up 8.07% YTD, through September 30, 2010. The Emerging Opportunities Fund attribution analysis shows that 81.2% of the portfolio’s holding lie in the 3rd and 4th quartile of the Russell MicroCap Index. These companies contributed 2.7% and 4.4% to the Fund’s quarterly performance, respectively, which was not enough to make up for the strong performance of the Russell MicroCap Index’s largest companies. The fund did return 8.39% for the quarter, and is up 19.68% YTD, through September 30, 2010.
Russell 2000 Market Capitalization Quartiles*
Manager Commentary, 2nd Quarter 2010
Q: What did you learn from the recent rebalance ofthe Russell Indexes?
A: According to our analysis of the Russell rebalance, the number of investable stocks has declined by 40% since 1999. Each year at the end of June, The Frank Russell Company rebalances its indexes to account for changes in market size. In 1999 there were nearly 6000 domestic companies listed on the major U.S. stock exchanges. At the time of the Russell rebalance in late June, the number of domestic companies listed on the major stock exchanges was 3633. The reasons for the decline in the number of publicly traded companies include bankruptcies, acquisitions, companies going private, and the decline in the number of IPO’s. We feel that the significance of this development can be understood as a simple study of Economics: a shrinking supply of companies to invest in could have a strong impact on rising stock prices in the future.
Q: Where have you found opportunity as a result of Russell rebalance?
A: We increased our position in two stocks that wereremoved from the Russell Indexes as a result of the rebalance, PC Mall (MALL) and NovaMed (NOVA). In each instance, we felt that institutional selling due to the rebalance caused the stock price to fall to a level that was well-below our valuation of the business.
PC Mall is a distributor of electronic components. One of the company’s larger clients is Apple, Inc. – Apple products such as the iPod and iPhone are distributed through PC Mall’s pipeline. Following the Russell rebalance, PC Mall had a market capitalization of $40 million, a level nearly half of its tangible book value of $70 million. The company, which trades at approximately $3.50, earns $1.1 billion in revenue and has a current P/E ratio of less than 6. We believe that future earnings power translates to a P/E ratio of below 3, which to our minds represents opportunity for significant upside on a long term basis.
Performance as of 6/30/10*
NovaMed owns and manages offices for surgeons and other health care providers, an attractive option for doctors who prefer to focus on medicine as opposed to business. Similar to PC Mall, Nova Med’s share price declined following the Russell rebalance to a level that we believe is out of touch with fundamentals. Nova Med trades at approximately $8.00 which corresponds to a market capitalization of $60 million. The company earns $160 million in revenue but, more significantly, generates an enormous amount of cash flow. The company generates $45 million annually in cash, which makes today’s price equivalent to less than 2 times cash flow and is reason for us to believe that the investment has significant upside.
Q: Second Quarter Attribution Analysis – What Happened?
A: Although the quarter was a down period for our Funds, our attribution analysis shows that stock selection added the largest positive impact in both Funds.
The Emerging Opportunities Fund attribution analysis shows that stock selection impact was driven by several stocks that increased dramatically based on positive news events. One example was Hauppauge (HAUP), a stock that rose more than three-fold over several days after management announced the release of a new application (app) for the Apple iPod. We felt the stock price appreciated to a level that was unsustainable and as a result, we sold our entire position from The Fund. Over the period, HAUP contributed 1.00% to the Fund’s overall performance. Among portfolio detractors, no single investment reduced the Fund’s overall performance by more than 0.40%. We believe this is a testament to the Fund’s efforts to reduce stock specific risk by maintaining broad diversification. The Fund holds 100-150 names and initial positions are generally limited to 0.5%-1.5% of the portfolio. The MicroCap Opportunities Fund attribution analysis shows that the stock selection impact was a result of returns related to four companies that were bought-out of the portfolio during the second quarter, each of which was acquired at a nearly 100% premium. Over the period, these investments added more than 2.0% to the Fund’s overall performance. We believe that the environment remains favorable for acquisition activity in the microcap universe, due to number of larger companies searching for a better use of their cash considering the record-low yield it is earning today.
Acquisition Activity, January 1 – June 30, 2010*
Manager Commentary, 1st Quarter 2010
Q: How has acquisition activity in the micro-cap space changed this year?
A: Acquisition activity within the micro-cap space has become extremely robust over the past quarter. Through the first 16 weeks of 2010, we had 8 stocks acquired in the Perritt Emerging Opportunities Fund and 5 stocks acquired in the Perritt MicroCap Opportunities Fund (see detail in table on page 3). The number of companies that were bought out represents 5.4% and 4.7% of the entire portfolios, respectively. That level of merger and acquisition activity in one quarter is impressive: historically, buyout activity has averaged about 5% of portfolio assets during a calendar year. One trend that we have witnessed in the recent acquisition activity is that smaller companies are being purchased by public companies as opposed to private equity. Faced with low interest rates, management teams of acquiring companies are potentially receiving pressure from boards and shareholders to find better opportunities to utilize their cash. The result has often been the purchasing of profitable, small companies. On the other side of the equation, we have seen in most instances the companies being acquired have a considerable amount of insider ownership. This is significant because insider owners with a large voting stake can push a decision through if needed, and due to the likelihood that taxes may be higher next year, business owners have a motivation to sell their companies now. Added together, we believe that the conditions facing the management teams of acquiring companies and those of companies targeted for purchase have created an environment for acquisition activity in the microcap universe where “the stars are aligned.” This can certainly be a boon to microcap investors: buy-out premiums can be significant; two examples of companies bought out of our portfolios last quarter, Zareba and Global Med, were purchased for premiums of100% and 80%, respectively.
Performance as of 3/31/10*
Q: In conversations with small company managers, are you hearing a different tone over the past few quarters?
A: For businesses related to consumer spending (a sector that we remain underweight in), the general discussion continues to be that although sales have been decent, it feels to businesses that they are just restocking shelves. An area where we are beginning to see more concrete growth however is in companies related to business services. A major focus for managers of all companies seems to be related to finding ways to increase productivity. This is not surprising given that many businesses cut their workforce significantly and now need to find ways to do the same amount of work with less people. Our conversations with small company management relate to valuations because the big question that all investors are asking is, “when will the revenue growth start to kick in?” While we are not sure about business related to consumer spending, we do have higher confidence in industries related to business services in terms of revenue growth, as mentioned previously. What we have seen and heard from management of these types of companies tells us that they should see growth of revenue, earnings, and lower P/E ratio’s if prices remain stable. A final note on valuations is that although P/E ratios have certainly climbed, they were doing so from severely depressed levels. In our opinion, the P/E ratios of 15 to 16 where the Funds stand now, while well higher than we experienced during the March 2009 lows, are not egregious relative to any metrics.
Acquisition Activity, Jan 1 – Apr 15, 2010*
Q: Discuss attribution analysis – What happened?
A: Our attribution analysis shows that in the first quarter of 2010 stock selection added significant value to the performance of The MicroCap Opportunities Fund. Our selection within the Health Care and Information Technology industries were particularly strong, and our relative overweight to those industries contributed to our returns. However, our underweighting in other industries versus the Russell 2000 Index, primarily in financials, caused the Fund to underperform the bench- mark. Although the individual financial companies that we invested in did perform as well as the financial holdings of the benchmark, our large underweight to the sector led to a smaller return overall. Our attribution analysis shows that in the first quarter of 2010 an underweight in financials hurt performance of the Emerging Opportunities Fund in a similar manner as described for the MicroCap Opportunities Fund. However, stock selection in the Emerging Opportunities Fund contributed more than 7% to our overall performance during the quarter. Much of this contribution was related to the acquisition activity discussed earlier.
Red Chip Review – March, 2013
Michael Corbett, CIO and Portfolio Manager, discusses the firm’s investment strategy on “The RedChip Money Report.”
“The RedChip Money Report”™ delivers insightful commentary on small-cap investing, interviews with Wall Street analysts, financial book reviews, as well as featured interviews with executives of public companies. The weekly program airs on Fox Business as well as My Family TV and TUFF TV.