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Taking Stock(s)

Three professional small-cap stock pickers pan for gold on the Inc. 100.

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One caveat: Inc. asked three hot mutual-fund and investment managers to create their own miniportfolios from this year's Inc. 100 companies, but not all their comments constitute buy recommendations. So put down that phone. When citing companies that caught their eye, they often use phrases such as "worth looking into' and "interesting to watch.' And mixed in with observations about specific companies are more general thoughts about what smart investors might look for -- and be wary of -- on a list like this one. Hedging their bets? Maybe. That said, here's what they liked.

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Stephen A. Stone
President of Cowen Family of Mutual Funds, in New York City

This year's Inc. 100 offers a lot of opportunities in high technology, biotechnology, and even the medical industry. I'd give serious consideration to Cabletron Systems, American Power Conversion, Sepracor, Ventritex, and Cisco Systems.

Cisco Systems is a company that's proven, extremely well managed, and at the top of its field. It could grow between 35% and 39% a year, based on its current performance.

Another company in the high-tech area that's done well is PictureTel (#48). But it's competing with AT&T, and unless it can find a niche, it's vulnerable. A stronger company in the industry could take it over or merge with it, although I doubt that will happen. And that's not reason enough to buy the stock.

Even though some biotech companies have been disappointing, you don't have to stay away from those stocks. A lot of biotech companies lost market value because fashionable stocks such as Amgen go down. In fact, the reason I'm focusing on biotech is that it's an area that's been slammed hard. The time to buy a stock is when nobody else wants it. Then you can buy it cheap.

The trick to picking biotech stocks is to invest in companies that actually have a working drug. If you pick a company that just has a theory, it's really no better than a crapshoot. A company that has gone through the first or second hurdles of the Food and Drug Administration approval system has a good shot at getting through the third phase. It's better to pay a little more and get a company that has a cohesive plan and a product.

There are a lot of good biotech stocks out there. Sepracor supplies materials to biotech companies. It sells reagents, enzymes, and coenzymes to companies for research.

Another interesting company is Ventritex, which makes defibrillators. No matter what happens with President Clinton's health-care plan, you're still going to have to defibrillate people when their hearts stop. Ventritex has good management, it's in a niche, and although it has formidable competition, there's room in the market for a unique product.

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Stone's Picks
Cisco Systems #11

Ventritex #22

Sepracor #77

Cabletron Systems #80

American Power Conversion #94

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Sandra K. Shrewsbury
Comanager of the Piper Jaffray Emerging Growth Fund and an associate manager of the Piper Jaffray Value Fund at Piper Capital Management, in Minneapolis

When investing in high-growth companies on this list, you want to watch for changes -- changes in a company's performance, along with its industry's growth rate, its competitive environment, and its profit margins. In all of these companies good management is also key. You need to monitor all those factors. And you want to keep your portfolio diversified by buying in different industries and multiple geographic locations.

Cisco Systems and Wellfleet Communications are both in the area of internetworking products, which connect local-area networks. We estimate there is only about 30% penetration in that particular segment. It's amazing to me that Cisco's fundamentals continue to improve and that it keeps coming through with strong quarterly results. Well-fleet is teaming up with Novell to ensure that their products work well together. That should be positive for Wellfleet, even though Novell's router product line hasn't been so strong. But certainly Novell's marketing could be a real advantage to a small company such as Wellfleet.

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