In a market decline high-growth, small-company stocks normally drop even more
than the broader market does. And in a market rally they shoot higher than the
rest. Small-value stocks, typically bolstered by asset-rich balance sheets,
usually don’t fluctuate so radically.
Recently small value has been hit hard. Since the market peak in mid- July the
Russell 2000 Value Index has fallen 8%, versus 6% for the Russell 2000 Growth
Index. Sure, a shift toward growth was long overdue. From when technology stocks
went bust in 2000 until the end of 2006, value performed very well. That’s a
long and unsustainable cycle.
The best strategy, then, is to find small-growth names that have held up well in
this tough market. They likely will perform even better once the market
recovers. My firm looks for profitable small companies with high revenue and
earnings growth, particularly those that Wall Street analysts ignore.
NetSol Technologies Inc. (Nasdaq: NTWK), a leading global information technology
provider to the financial services industry, is one example. The company offers
solutions within two principal segments, enterprise software and IT outsourcing.
Headquartered in Calabasas, California, NetSol specializes in custom< software
development and has more than 550 employees globally, with locations in the
U.S., Europe, China and Asia Pacific.
Within the enterprise software segment, the company currently offers three
primary product offerings. LeaseSoft is an end-to-end core accounting and
portfolio management solution for asset finance, consumer finance, loan finance
and motor finance. LeaseSoft is sold primarily in the Asia-Pac region, with
China showing significant growth in most recent fiscal year and representing the
company’s number one revenue generating market. LeasePak, a Webbased lease
origination solution for dealers, vendors, brokers and remote sales forces, is
sold primarily in the U.S.
NetSol’s third product offering, inBanking, is a newer product suite offering an
end-to-end solution for front, middle and back-office treasury requirements.
In the company’s latest reported fourth quarter, sales increased approximately
84% to $8.6 million from $4.7 million in the fourth quarter of last year. NetSol
Technologies reported earnings per share of $.07 in the latest reported fourth
quarter versus a loss in the same quarter of last year.
Shares doubled in price from October of 2006 to October 2007. For the four
financial quarters ended June 30, 2007, NetSol reported a cumulative loss of
$5.46 million and revenue of $29.28 million.
But the accelerating growth in sales and profits lead us to believe that NetSol
is the type of emerging growth company that has helped us produce three decades
of market beating returns.
Thirty-one years ago we began publishing a model portfolio with a stated
objective of outperforming the Dow Jones Industrial Average (DJIA) by an
absolute 10 percentage points per year. We met that objective in 17 of the 30
full calendar years. I’m pleased to report that 2007 is shaping up to be another
winner, with a 24.4% gain so far compared to 9.2% for the Dow (through September
30, 2007).
Of course, the number that really counts is the longterm average return. Our
Model Theoretical Portfolio has substantially exceeded our expectations with a
compound rate of return of 24.0% compared to 8.8% for the DJIA, 9.0% for the S&P
500 Index (excluding dividends), and 11.5% for the NASDAQ Composite.
NetSol Technologies, Inc. (NTWK)
Recommended: 9/30/2007 @$2.98
Year ends in June 2006 2007 2008E
2006 Revenue: $18.7 million
2007 Revenue: $29.3 millions
2007 EPS: -$0.30
2008 (est.) Revenue: $45 million
2008 EPS: $0.25
