July 2008 Roundtable Part 2

There are many macroeconomic headwinds to contend with in the current environment; however, our panel insists that it’s an opportune time to deploy capital — specifically in small-cap growth stocks. Conducting stringent due diligence to take advantage of low valuations on fundamentally sound small caps will warrant considerable upside when the sun finally outshines this financial tempest. And our experts take the temperature of the institutional flow of money as well as risk aversion. (This is part two of a five part Roundtable series.)

How should investors handle their portfolios in this environment? Is it a good time to initiate new positions? 

Lisanti: "As this year goes forward people will probably get nervous. I think what we’ll see is what we saw in the first quarter, which is the earnings guidance for small caps – not a lot, but many—will be lowered modestly.
 
"I think you’re going to see much bigger drops in large cap earnings as we go forward. So, stocks may pull back, but realistically, we’re at the 1,200 range for the S&P. So, we’re probably closer to being done. You have to do something you haven’t done in a long time: you have to do a lot of work on the companies. Really get to know them. You have to buy them when they don’t look pretty on those little charts. It’s the opposite of how people have invested for the past 10 years, 15 years, but that’s how you have to do it."

Oberweis: "I wouldn’t leave cash on the sidelines. I think the predominant sentiment right now continues to be very negative. Most people have very modest expectations for the economy and for the stock market for the coming six months. I found that one of the best times to be buying smaller higher-growth companies is when nobody else wants to, and I think we’re still in that environment. Valuations are still substantially below what we typically see for high-growth equities."

Riley: "I think this is a great time. There are the macro dynamics to contend with, but I think a lot of that is reflected in the valuations of small-cap companies, and, again, you have to be in the right ones. I wouldn’t be indiscriminate, but there is wonderful opportunity out there."

O’Halloran: "I’m more bullish on growth versus value. The U.S. consumer is leveraged, with a low savings rate, and has just experienced a decline in its biggest asset (the home). So a lengthy period of slower consumer spending than we’ve had in the last 20 years seems likely. I think that will cause economic growth in the United States to be slow over the next five to ten years. In a slower growth environment as long as we don’t have a lengthy recession, growth companies, which are companies that . . .

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