An interview with Gene Marcial
For the past ten years the stocks picked by BusinessWeek’s Gene G. Marcial have outperformed the S&P 500, the Dow Jones Industrial Average and the Russell 2000 after one day and after one, three and six months. Between 1997 through the end of last year, the stocks featured in Marcial’s “Inside Wall Street” column returned, on average, 7.1% in the immediate six-month time span, two percentage points better than the Russell 2000.
Small-cap stocks have been a big reason for Marcial’s success over the years. Among the companies Marcial has recommended this year are Pipex Pharmaceuticals, Inc. (AMEX: PP), Ultralife Batteries, Inc. (Nasdaq: ULBI), Exponent, Inc. (Nasdaq: EXPO), Cardiac Science Corp. (Nasdaq: CSCX), and USA Technologies, Inc. (Nasdaq: USAT).
In the following interview with SmallCapInvestor.com Marcial talks about his approach to stock picking and his outlook for small-cap stocks.
Explain your investment process and criteria for finding great stocks.
Since I am a financial journalist, the first question I ask about any investment idea is, "What is the story, and will it be of great interest to my readers?" I am not surprised that this approach results in me getting good stocks to write about, and often they are undiscovered and below the radar screen of the institutions. I believe that a good company with a great story -- about a product, technology, earnings growth, possibly a takeover play, or a restructuring, including spin-offs or asset sales -- could well be a great stock to buy.
How do small-cap stocks fit into your overall investment strategy right now?
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Gene G. Marcial |
What is your outlook for the Russell 2000 for the remainder of 2007? How does this compare with your outlook for mid- and large-cap indices?
The mainstream opinion these days is that the large-caps will outperform the small caps, for the simple reason that the small guys have always had free reign over the big guys. I disagree that the big guys will now excel because so far, there is no evidence that this is true. I am confident the small-caps will continue to outplay the big caps. When the sub-prime mortgage debacle settles down -- and I think it will -- the small-caps will start flying high again. Interest rates have not gone sky-high -- in fact they are tame and there is a likelihood that the Fed might cut later this year. And the economy is tame, as well, not hitting a homerun and not running full on all cylinders, but growing anyway, albeit slowly. There are the high oil prices to worry about, but it seems like everyone is starting to get adjusted to that problem and companies, including the small caps, are doing the same. This is the kind of environment in which small companies do better.
What sectors do you find appealing right now?
Technology and health care are on top of my list. Although technology consists of a vast mass of multi-faceted companies, the sector has a lot of promise in potential growth, having been so smashed in the past several years after the Internet bubble burst. The beauty of the technology space is that there are so many companies to choose from and so many ideas to consider. As to health care, it is obvious that the subject of health insurance, high medical and drug costs, and adverse conditions at hospitals and their services have become the subject of national debate. Whatever comes out of these discussions will surely benefit some sectors of health care, be it drug makers, health service providers, health insurers (those who can provide the least costly services) or biotechs. Once new policies are enunciated by either the incumbent officials or the next White House occupant, we will see which companies will be the beneficiaries. This will be an exciting new era for investors once again.
What sectors are you avoiding?
In my opinion, there is no sector that I would avoid because no matter how bad an industry may be, there will always be good companies within that industry -- and a good story for reporters like me. In fact, I usually look for stories like that, for a company in a down-and-out industry which is a standout not only because it is doing well vs. its peers but because they have something to say about why they are doing so well.
What countries or regions outside the United States and Canada do you find attractive for investment purposes? Are you avoiding any specific countries/regions?
Again I would not avoid any particular country. If there is a good investment in a given country, it deserves to be told. I think the emerging countries continue to be attractive -- countries like Brazil, China, India, Turkey, South Korea, Malaysia, Poland, and Hong Kong. The economies in these countries are stable and are in a growth mode. And they have companies and industries that are outperforming their rivals in the West. Most of them, too, have not been saturated with institutional investors. They are just being discovered and they continue to be unattractive to conservative investors and people who don't want to face risks overseas. That is when and where you will find opportunites -- where many people fear to tread. I think foreign stocks, in general, hold the key to an investor's golden opportunity. But you must know what you are doing and must know a lot about these places -- at least the basic facts and figures about them and the companies there. But in terms of "golden returns," you cannot beat these emerging countries. Most of them beat the Dow or the S&P every day, hands down.
