Lee Molendyk, equity analyst at Insight, said the firm's small-cap portfolios had been defensively positioned before 2003, with health care stocks and modest growth stocks. "In 2003 we saw a lot more aggressive earnings growth, and were able to quickly rotate to high-growth companies. We select companies on a case-by-case basis, and continue to own them if the growth story remains intact," he said. The firm is always looking for the next growth companies. Often they're undiscovered stories that may not have any sell-side research, but that do have earnings or prospects of earnings, Mr. Molendyk said.
In 2003, the portfolios were overweight in information technology. They also did well with niche-driven health care specialties such as biotech and generic drugs, Mr. Molendyk said. Recently the firm's been adding more financials and commodities.
Companies that contributed to the strong performance were eResearch Technology Inc., which provides cardiac services; USANA Health Sciences Inc., which sells health care products; and Sina Corp., a Chinese Internet portal.
At Daedalus, CIO Stephen Coleman said the firm's focused equity management portfolio holds no more than 10 to 25 stocks at a time. "We resist being typed as growth or value, and won't climb into that box, because those styles go in and out of fashion. Our mission is to grow money in good times and bad," he emphasized.
Mr. Coleman's been partial to telecom for the past year, and still believes there's money to be made with many companies in the industry. His portfolio benefited from a large position in Nortel Networks Corp. "Nortel had a market cap of $343 billion at its peak in October 2000, which fell to $1.7 billion at its trough in October 2002. It fell to the point of absurdity," Mr. Coleman said. "Its bear market valuation should have been more like $80 billion, because the company was still delivering services, and continued to be the preferred supplier to major carriers, despite the depressed environment."
Daedalus began buying the stock at $1.07, and continued to buy when it fell to 64 cents. His average cost was $1.01 a share. It's now trading around $8 a share. Mr. Coleman said his current target price for the stock is $20 a share.
Other companies he likes are entertainment giant Time Warner Inc. and cable service provider Charter Communications Inc.