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Today concludes SmallCapInvestor.com’s Roundtable. In this final installment, our experts examine the alternative energy sector, compare the tech bubble burst with the current implosion of financials and take the temperature of the current state of the credit market. Taking a look at the international investing landscape, our experts still perceive the emerging nations, particularly China, to be the hottest destination for investment. And lastly our experts on average forecast the small-cap index Russell 2000 will end the year higher than it is today. (This is part five of a five part series.)

What do you think about alternative energy? Do you think that energy prices need to remain inflated for the alternative energy space to remain profitable? 

Oberweis: “No, the key for alternative energy is the subsidies, quite frankly. The real danger to buying solar stocks right now is there’s some momentum in the Spanish and German markets, which are the two of the large consumers and drivers of the adoption of solar energy, to reduce or remove the subsidies that are making the technologies economical and affordable. That’s probably a much bigger and more important driver of the success of solar companies than the actual price of oil.”

O’Halloran: “Alternative energy is an industry where we have very strong forces helping the companies. We have three holdings in solar energy: SunPower Corp. (Nasdaq:SPWR), Energy Conversion Devices, Inc. (Nasdaq:ENER) and JA Solar Holdings Co., Ltd. (Nasdaq:JASO). This year we have more wind energy companies in the portfolio because wind energy is just starting to ramp up aggressively like solar did over the past couple of years. 

“American Superconductor (Nasdaq:AMSC) and Woodward Governor Company (Nasdaq:WGOV) — whose equipment is used to adjust turbine-generated power for conveyance to electrical grids — are a couple. There are also companies such as RBC Bearings Inc. (Nasdaq:ROLL) and Kaydon Corp. (NYSE:KDN), which make bearings for the wind turbines. Another is ITC Holdings Corp. (NYSE:ITC), which is in the process of rebuilding electrical transmission lines as part of a federal government initiative. These upgrade lines will help take energy from [wind farms], put it on to the electrical grid and get it into homes. Fuel cells and their technology and ethanol are either too early or not profitable enough for us to be involved with . . .

Tom O’Halloran is a partner and director of Small Cap Growth Investments at Lord Abbett. He is responsible for managing the firm’s small-cap and micro-cap growth products, overseeing the investment teams, and directing the investment strategies.

O’Halloran has been in the investment business for 20 years. Prior to joining Lord Abbett, O’Halloran was an executive director and senior research analyst at Dillon Read/UBS Warburg from 1988 to 2001. Before beginning his career in the financial services industry, he was a trial lawyer from 1980 to 1986. O’Halloran earned an MBA from Columbia University, a JD from Boston College and an AB from Bowdoin College. He also is a holder of the Chartered Financial Analyst designation.

What qualities do you look for in a small-cap stock? Have your criterion changed given the current macro environment?

“There are 3,000 stocks that we look at that we could own. We try to screen out 80% of those through growth hurdles and size parameters in terms of market cap, and financial strength in terms of debt-to-asset ratios. Then we look at the 600 or so, or 20%, of the names. The first inquiry is a two step process after that. First we identify the best businesses then we pick stocks based purely on their growth, not on takeover potential, turnaround potential or valuations. Organic growth is the best kind of growth, but if there’s a strategy of acquisitions that is multi year and sensible to supplement their organic growth, then that’s fine. We require 12% minimum top-line growth, and we want earnings to be growing at least as fast. Our portfolio on average is growing closer to 25%. 

“In terms of what represents a good business, we’re looking at four things: the first two at the microeconomic level, or inside the doors of the company, and three and four are considering the environment in which they function.

1) “When we saw Morningstar at $750 million on the IPO, we said, ‘This is like Moody’s. Moody’s is $20 billion. This is a jewel of a business.”  We saw Mercadolibre, Inc. (Nasdaq:MELI) at $1 billion and we said, “This is the eBay of South America. This is a great business.’  

2) “Is it a good business? Does it have a strong management team? Is the management competent and credible? It’s very important at the small-cap level to have good management. [In terms of] competency, we look at Mickey Drexler at J. Crew. He worked magic at The Gap. He redefined casual clothing in America. He’s a genius of a retailing executive and an example of a highly competent . . .