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Still Like Small and Mid-Cap? Maybe He Can Help


Few investors are embracing small and mid-size stocks today. But for contrarians who want to shop in this beaten-up sector, Jim Collins may be able to offer some guidance.

The veteran Orinda, Calif., advisor's stock-picking methodology has led his OTC Insight newsletter to annualized returns of 27.3% over the 10 years through June 30, according to the watchdog Hulbert Financial Digest in Alexandria, Va., which evaluates newsletters.

That compares with a 17.6% annualized gain for the Wilshire 5,000 stock index. But with its focus on small and mid-size stocks, OTC Insight's picks naturally are volatile, with a risk factor 2.7 times that of the Wilshire, Hulbert says.

Collins, 64, began investing for his own account in 1956, but began his career as an engineer, working at such companies as General Electric Co., Raychem Corp. and Teledyne Inc. He received an MBA from Harvard, and in 1967 he entered money management, joining a San Francisco mutual fund group called ISI. Next he worked in venture capital and at an investment counseling firm before joining Wells Fargo Investment Advisors in 1973 as a senior portfolio manager.

A decade later he founded Insight Capital Management Inc., the publishing arm for OTC Insight. His money management firm, Insight Capital Research & Management, oversees nearly $1 billion in institutional and private accounts. The firm serves clients with at least $100,000 to invest, charging up to 1.5% in yearly fees.

Collins also manages the $23-million Dominion Insight Growth mutual fund, but its performance has been less impressive. Fund tracker Morningstar Inc. penalizes the fund for its volatility, giving it only one star out of a possible five. But Dominion has performed fairly well against similar competition, beating 52% of its mid-cap rivals over the five years through June.

Collins explained his strategy in an interview with Russ Wiles, a Times mutual fund columnist and financial writer based in Phoenix.

Times: Take us through your three-step process for picking stocks.

Collins: We start by screening about 6,700 companies--virtually everything that trades on the New York Stock Exchange, the American Stock Exchange and the Nasdaq National Market--by computer. Then we take the top 500 companies from the computer screen and look at the fundamentals for each one. That reduces the number of candidates to about 120. Then we do a performance check on those 120, which reduces it to 50 to 60 companies, from which we develop portfolios of perhaps 28 to 36 stocks.

Times: What are you screening for?

Collins: We rank stocks according to which ones have delivered the most reward [highest performance] per unit of risk. Technically, we measure a stock's "alpha" and divide by its "standard deviation," a volatility measure. We're looking for stocks that have a long-term track record of beating the market--that is, companies with high alphas. But we include standard deviation because we want to know just how volatile each stock has been. When you get into growth stocks, you'll find that they're quite volatile. We don't invest in really small companies. We ignore stocks trading for less than $6 a share.

Times: Why?

Collins: Generally, we've found that they are very volatile, and it's hard to find quality companies trading below $6 a share.

Times: What sort of fundamentals are you looking for?

Collins: We're looking for high growth rates of both sales and earnings, along with a high return on equity. We're also looking for firms with very strong management teams and strong products. And we prefer little or no debt--certainly no higher than the industry averages. Fundamental analysis is the key part of the process.

Times: How do you assess good management?

Collins: We used to visit companies, but it seemed like we were living on airplanes every third week. Now we attend Wall Street conferences geared to small and mid-size companies, where up to 120 companies or so make presentations. Another way we assess management is by giving very careful consideration to the management discussions in annual reports and other documents. We're checking, generally over a three-year period, what they said about the business--what their goals were and what they accomplished. Also, we look at returns on equity. If a company can generate a high return on equity, that says a lot about management. Finally, we check for managements that can manage their earnings. . . . What you like to see with growth companies is a steady increase in earnings per share, not erratic behavior, except for cyclical or seasonal factors.

Times: What's involved in the performance check?

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