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Small Wonders
Gartmore Micro Cap Equity Fund
Interview with: Carl Wilk

Author: Manish Shah
Last Update: , :
Though Micro Cap sector has more than 4,000 stocks, the sector receives very little investors’ attention. Stocks in this sector have higher volatility in price, have lesser scrutiny of the analysts, and are generally not closely followed by investors. The disciplined investor with an analytical eye for growth can generate better return in the portfolio but one has to be prepared to withstand the volatility in returns.

Gartmore Micro Cap Equity Fund

A: SunOpta Inc. is one of our recent holdings. The company is a leader in producing soymilk concentrate and oat fiber. The company’s business focuses on the health and organic segments of the market, which are growing rapidly. The company has been adding manufacturing capacity and, of late, management has started to focus on opportunities for food distribution in the United States and Canada. The company recently began generating profits.

CyberOptics Corp. is one of my fund’s top 10 holdings. The company plays a critical role in manufacturing electronic consumer gadgets, in addition to the manufacture of testing equipment and optical sensors that are sold to Flextronics and other Asian contract manufacturers. The stock is trading at a price-to-earnings multiple of 14, and the company has no debt on the balance sheet. We believe that electronic gadgets, such as iPod from Apple and flat screen monitors and TVs, will be increasingly popular, which is going to generate consistent earnings growth. Even though the company’s testing equipment is a small niche, the market is big enough to allow the firm to prosper.

Radyne ComStream Inc. is another fund holding. The company is active in the ground-based portion of satellite communications systems and cable networks to transmit data, voice and video-over-Internet. The company's products are used in applications for telephone, data, video and audio broadcast communications, as well as private and corporate data networks, Internet applications, and digital television for cable and network broadcast. The company will benefit from the current trend in the TV signals to be broadcast in the HDTV format. There are some concerns that the company may experience quarterly volatility in booking orders. The stock is trading at a price-to-earnings ratio of 15, based on next year’s earnings. The micro-cap companies such as Radyne have volatile earnings, especially in the tech area, and we are concerned about that, though the company’s fundamentals are still solid.

Lowrance Electronics, Inc. is another of our top 10 holdings. This family-run business manufactures SONAR and GPS applications. The company’s products are generally known as depth and fish finders, as well as terrain marking and mapping devices. The management has been successful in expanding the business into the GPS-based application in the last two years. The Company's SONARs are principally used by sports fishermen for detecting the presence of fish and by boaters as navigational and safety devices. Its GPS receivers are used in a variety of marine and non-marine applications, including aviation, automotive, hunting, hiking and backpacking. The company has doubled its earnings in the past year and could repeat this performance; it is still selling at 10 times earnings. On the downside, the stock is not highly liquid and there is no analyst coverage on the company.

Q: When do you sell stocks in your holdings?

A: Changes in company earnings, the business environment and the management drive us to sell stocks. If any of these changes significantly affects earnings growth, we sell. We have one or two companies that miss their earnings target every quarter, and that is why the fund is diversified into about 70 stocks in order to reduce individual stock risk.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc