What are the commonalities and differences in the two funds?

The Ultra Fund is broader, not a sector-specific fund, whereas the Global Tech is a carve-out of the science and technology part of that fund.   In both, we're looking to find companies that have significant headroom to become 3x, 5x, 10x bigger than they currently are, with at least a 25% earnings growth rate.

How do you determine growth?

We build a three-year earnings model.  We don't use the traditional metrics of looking at historical earnings growth rates and historical P/E to G kinds of analyses.  Because what we're saying is in a lot of these companies, which are small caps, the best is yet to come and they typically don't have a long track record.  So we're very forward looking in our model and we do our own extensive bottoms-up work.

This has not been a very good year for technology and growth stocks, and yet your funds have had double-digit returns.

I would have to disagree just a little bit, especially as I look at the Global Technology product.  We have tech names that have grown their earnings through this downtrend, companies like PEC Solutions (PECS) and Cognizant Technology (CTSH) that have done well because they have a unique angle.  PEC focuses on delivering IT services to the government with a special emphasis on IT security.  Cognizant focuses on delivering IT services to large corporations, but they source most of their work in India, so it's much more cost effective, and in a tough economic environment people are very concerned about their return on invested capital.  But if you were to say all IT services companies are doing poorly and we should not invest in them, we would have missed these two companies.

So it's become a stock picker's market?

Yes.  Like it always used to be, with the exception of recent years.   Of course, you need to stay cognizant of that fact that they are operating within this broad industry, and when the whole industry is melting away we have to take into account that some of their competition could focus on the sectors they're focusing on.  But it's possible when you're in a stock-picking environment to find companies that are going to do well because they have specific circumstances that work well for them.

How do you find these companies?

It's helpful if you can identify overriding themes that you expect to do well and fit these companies into this bigger-picture thesis, if you will.  If you look at the IT services companies that I mentioned, PEC and Cognizant, the thesis there was very simple:  There's going to be more software, more technology, in our lives, so you're always going to have a need for these kind of services.  We look at companies that seem to be doing well in the space, understand why they are doing well, and then say, 'Ok, does it fit into an overall thesis?'   In PEC's case, the government is early in the life cycle of their webification process, and with Cognizant, the more cost-effective delivery mechanism was very appealing.

Another name that's done well in the portfolio is Accredo Health  (ACDO).  The thesis there is that with the graying of America, people are going to need more drugs.  Moreover, with our having solved part of the puzzle of the human genome, you're seeing a lot more research on the biotech side, and a follow-up to that is you're getting more biotech drugs into the pipeline.   The problem with these biotech drugs is they're usually large molecules that don't typically work well in a pill format, which means they have to be injected.  They also require special handling and have to be refrigerated.  So you cannot dispense them through your traditional drug store channels.  Accredo works as a middleman who basically takes those drugs from the manufacturers and gets it to the end user.  They have a nursing staff that's on call all the time.  They will walk the patient through the process of mixing this drug, injecting it, and making sure they get all the questions answered.   So that's an indirect way we're playing biotech.

What are some themes you see going forward?

I think everybody will agree that there's going to be more silicon in our lives.  Chips will be everywhere.  There's a fundamental transition that's occurring as we move below .18 micron.  We call this deep-cell micron transition. Up until this point, the way the world got more out of their chips was shrinking the language, making it smaller.  The analogy you could use is all you needed to do was use a sharper pencil.  You could draw finer lines, draw more on a page, and pack more functionality onto a page, the page being the silicon real estate.  Now they've reached a point where the pencil is as sharp as it can be.  So they have to find different ways to add more functionality to the chip.

Without getting into too much detail, the fundamental issue is that technology has to change pretty radically to be able to continue making chips below .18.  The changes are in the design of the chips, the manufacturing, and the testing aspect.  We have companies that fit into all those categories. They're a little more expensive than we'd like to see them right at this point, but if they pulled back we would be very interested in owning them, and we're looking at a 3-5 year theme.

BRINGING RESEARCH TO ORPHANED SMALL CAPS:  A Message from Our Sponsor

By John Dutton, President & Director of Research, JM Dutton & Associates, LLC  www.jmdutton.com

Why have so many smaller-cap companies been 'orphaned' by the Wall Street research community?  Analyst Richard West, CFA, who has seen small-cap research virtually disappear in his nearly 40 years on Wall Street, explains in our interview with him on our Web site, www.jmdutton.com . 

'The biggest change in research coverage came with the beginning of negotiated rates in the mid-1980's.  Before then, brokerage firms performed research on all levels of companies, large to small cap.  Then in the early 1990's the corporate finance departments made their views known, and the analyst many times became a tool of the corporate finance department.  This was exacerbated in the last three years and the highest paid analysts were those analysts responsible for bringing in corporate finance business.  Also, in the late 1990's the small retail brokerage firm with their focus on `product' for retail brokers emphasized research on companies whose stock traded and resulted in trading commissions for the house and brokers.  Currently, with the state of economics of brokerage firms, brokerage research departments are most limited in what can be covered.  In addition, many firms have a minimum price of $5.00 and minimum market capitalization as criteria for coverage.'

As a result, many fine companies are left without a baseline of analysis for would-be investors -- both individuals and institutions.  These are companies like Warrantech (OTCBB:  WTEC), which services the warrantees for consumer products. Historically, two to three years ago, the company fell on bad times and has now recovered and began an aearnings turnaround, but lack of research kept this information from becoming widespread.

As West explains, 'Warrantech had a series of problems that have management has solved.  The latest problem was that their insurance underwriter, Reliance Insurance, was being liquidated, and Warrantech faced possible liability for 45% of the contracts they had administered for Reliance, because Reliance could not meet the payments of clients making claims on the warranty. The liability could have been quite large. But after Warrantech announced that their current insurance underwriter would be taking over the liabilities for what I believe was a stock payment in cash, the stock turned around.  About the same timetime, we published our report.  So we can take some credit for getting the information out.'

In the next few weeks we, Dutton & Associates, are coming out with five new initial reports.  Who is JM Dutton & Associates?  We are one of the largest independent research firms, second only to Standard & Poor's.  Our firm is operated like other top Wall Street research firms are run -- only our revenue model is different, allowing us to be effective in today's Wall Street environment where coverage and recommendations are driven by investment banking and commission considerations.  We have a team of 16 highly experienced analysts who look to Dutton & Associates a far more objective alternative to Wall Street's sell-side research, providing them the structure to operate in an environment conducive to quality investment research that benefits investors and companies.

"I believe that the charter of J.M. Dutton & Associates gives every qualified company the ability to have research coverage," says West.  "When a company enrolls in the research coverage program and pays the initial up-front fee, I am then free to do my job as an independent analyst to conduct the due diligence research and follow-up for the coming twelve months.  If during that period fundamentals change toward the negative, I am free to honestly report and change my recommendation.  I believe that analysts beholden to the corporate finance departments do not have that option.  Now, my only axe to grind as an analyst at J.M. Dutton is I want to be right and recommend a stock that's going to do well and if it doesn't I want to have the freedom to recommend Sell or to drop coverage."

On Monday, December 17, West's initial report on HPSC, Inc. (AMEX:  HDR) was released, in which he assigned a Strong Buy recommendation and a 12-month $15 price target (recent price: $7.85).

HPSC, Inc. is a unique specialty/niche finance company that provides lease financing to licensed healthcare practitioners in the United States.  Its appreciation potential is evident when HPSC's strong fundamentals and relatively low valuation is compared to those of its two peer companies, DVI, Inc. (NYSE: DVI) and Financial Federal Corp. (NYSE: FIF). HPSC completed a $527 million receivables backed securitization in late December 2000, and its gross lease contracts and notes receivables total $782.4 million at September 2001. HPSC's EPS increased at an average annual growth rate of 45% in the periods of FY1995 to FY2000 (adjusted), and 20.3% (adjusted) for the first 9 months of 2001. Based on our 2001 EPS estimate of $0.78, and $.97 initially estimated for 2002, HPSC's stock sells at an attractive P/E ratio of 10.3x for 2001 and only 9.4x for 2002.

We encourage you to read the report at www.jmdutton.com and join our Dutton & Associates mailing list to receive our other reports and alerts as soon as they are released.  

Please read disclaimers at www.jmdutton.com.