Telecom's Golden In Russia

Jim Oberweis is the chef du jour in the sizzling small-cap kitchen. Here's a taste of what he is serving up to clients and subscribers.

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So here we are again. Small-caps are hot. Even New York is taking note. The Model Portfolio of the Oberweis Report appreciated another 11% this past month, bringing the year-to-date gain to 35%. Our mutual funds managed here in North Aurora, Ill., also have suddenly become remarkably popular in New York. But here in North Aurora, we're not so much focused on what happened last quarter, but rather what will happen going forward.

We think that high-growth small-cap companies have risen a great deal very quickly. In the last three months, our portfolio is up about 27%. That's a remarkable jump for any three-month period. It gives us some reason to think that a market pause would not be unreasonable. It gives us the opportunity to remember that this has been an unusually favorable rebound.

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We believe that the best strategy is to focus on innovative companies. Buying good companies at reasonable valuations will eventually beat out any fad.

Though somewhat risky, one company that we think offers investors great opportunity is Golden Telecom, Inc. a Moscow-based telecom company whose shares currently trade around $29. Revenue was $199 million in 2002 and is expected to grow to $450 million by the end of 2004. Earnings-per-share were $1.15 last year but are expected to more than double to $2.50 by 2004. The price/earnings ratio on this fast-growing company is less than 14 times next years estimated earnings.

The company is a Russian integrated telecommunications and Internet provider. Although the U.S. telecom business has contracted in recent years, Russian telecom companies like Vimpelcom, Mobile Telesis and GLDN are experiencing rapid growth. Recently, Russia's national long-distance telephone company reported that it wanted to increase its stake in fast-growing Golden Telecom.

Like Verizon in the U.S., Golden Telecom provides its services to businesses and other high-usage customers and telecom operators. The company's competitive local exchange carrier services provides local exchange and access services, international and domestic long-distance services, data communications, Internet access and the design of corporate networks.

The company also provides mobile access to its customers. Golden Telecom's data and Internet services include business-to-business services which include web design, Web hosting, co-location and data-warehousing. Total revenue for the first quarter ended March 31 rose 115% to $78.4 million from $36.4 million in the same quarter a year ago. EPS rose to 47 cents from 23 cents. Clients of Oberweis Asset Management own approximately 46,000 shares.

We are looking for this high-risk stock, which has recently consolidated a little, to continue its upward trend. Of course, that could depend on its next quarterly earnings report, which has not yet been released.

Excerpted from the June and July, 2003 issues of The Oberweis Report.

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