Dreaming big? Think small

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Dear Mr. Berko:

Can you give me the names of a half-dozen or so issues that you believe will outperform the market over the next six years? I know that companies like Exxon Mobil Corp., Dupont Co., Monsanto Co., McDonald’s Corp. and Bank of America Corp. will continue to do well, but I would like a few names that might really shine like the technology and chip-related issues did a few years ago. I would appreciate some small company names that might have big appreciation potential.

D.G., Elkhart, Ind.

Dear D.G.:

Since 1990, I have written a number of columns that have discussed economist, Joseph Schumpeter’s observations on “creative destruction.” He maintains that in all capitalistic economies, every economic downturn is followed by an expansion of new entrepreneurs that is larger than previous expansion.

In a sense, Schumpeter tells us new businesses push old businesses out of the way so they have room to grow at an even greater rate, increasing employment and the gross domestic product.

The heroes of the last expansion, such as Lucent Technologies Inc., Cisco Systems Inc., Sun Microsystems Inc, Ericsson AB, Qwest Communications International Inc., WorldCom Inc., etc., are today struggling to earn a profit. Others have filed for bankruptcy, while still others have merged with larger companies. Companies such as Wal-Mart Inc., Home Depot Inc., General Electric Co., Exxon Mobil and Gillette Co. have become so big that double-digit increases in revenues and earnings are nearly impossible.

Schumpeter would tell you that the sticks and stones of a dynamic and vigorous economy are new ideas, innovation and entrepreneurs willing to take risks and create mountains. This is what small companies do best. So here are some small company names.

I’m reluctant to even give you a guaranteed “maybe” that any of them will have “big appreciation potential.”  Consider Fargo Electronics Inc. (FRGO-$13.87), which makes and sells desktop systems that personalize plastic identification cards, printing images and texts on the cards and laminating them while electronically encoding information into them. Last year, FRGO had $66 million in revenues and earned 55 cents a share. This year, FRGO may record $83 million in revenues and earn 67 cents. FRGO has zero debt, 12.4 million shares outstanding and plenty of cash.

Universal Display Corp. (PANL-$11.92) develops and commercializes organic light-emitting device technologies and materials for use in flat-panel displays and other applications. Revenues in 2002 were $2.4 million and the company recorded losses of $31 million. PANL does not expect to be profitable for a few years, but the potential in the OLED field is enormous. There are 22 million shares outstanding and no debt.

Cognizant Technologies Solutions Corp. (CTSH-$45.04) provides customer service technology design, development, integration and maintenance service for Fortune 500 companies, to assist them with Web applications and data warehousing. Revenues in 2002 were $229 million and per-share earnings were 54 cents.

CTSH has 63 million shares outstanding, zero debt and hoards of cash. This year CTSH expects to gross $348 million and earn 85 cents a share. In 2004 the company believes it can increase earnings to $1.10 a share.

Engineered Support Systems Inc. (EASI-$46.21) makes and designs specialized support and electronic equipment for the military and private enterprises. In 2002, EASI had $407 million in revenues and earned 97 cents share. This year, EASI expects $598 million in revenues and to earn $1.65 a share. Management thinks earnings for 2004 can come in at $2.07 a share. EASI has no debt and 25 million shares outstanding.

Synovis Life Technologies Inc. (SYNO-$25.20) makes implantable biomaterial products for microsurgery and surgery tools that reduce the risks of some procedures. On revenues of $40 million last year, SYNO earned $3 million. This year’s revenues may be near $60 million and earnings could be 47 cents a share. In 2004, SYNO expects to generate $91 million in revenues and earn 64 cents a share. SYNO has a strong cash position, zero debt and 9.8 million shares outstanding.

Exactech Inc. (EXAC-$17.31) makes and markets orthopedic implant devices, including knees, hips and shoulders, and related surgical instrumentation. Last year’s revenues were $59 million. Earnings were 48 cents a share. This year, revenues may reach $71 million and per-share income is expected to be 58 cents. For 2004, earnings should be 67 cents per share on revenues of $84 million.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.