As if climbing the big hill on a roller-coaster ride, investors in the Oberweis fund may be getting some heart flutters.
The fund is soaring, but only after a few dismal years. And anyone who has followed its tracks knows just how volatile it can be.
Invested in small companies with rapid growth, Oberweis Emerging Growth has been a standout recently. The fund gained 26.8 percent for the 12 months through May, placing it among the top 5 percent of small company funds, according to Morningstar Inc., fund researchers based in Chicago.
Occasionally, the fund soars. In 1991, a banner year for small company funds, Oberweis shot up 87.1 percent, compared with 50.1 percent for its peers. That single burst has given it an average annual return for five years of 16.4 percent, despite several rotten years in between.
"When the climate for this fund hits, it really runs," said John Rekenthaler, editor of Morningstar Investor, an investment newsletter. "That kind of market may hit only every few years, but it can make so much money that it carries it through the dry spells."
And dry spells they are. The fund lost 3.5 percent in 1994, compared with a 0.6 percent loss for its peer group. The previous year, it trailed its peers by a full 7 percentage points.
Because the fund's performance is so uneven, "it is a very hard fund to own," Mr. Rekenthaler concluded.
The fund's manager, James D. Oberweis, has a penchant for companies growing at rocket speeds. He looks for revenue and earnings growth of more than 30 percent a year -- preferably 50 to 100 percent. To stand out so much from competitors, a company must have a big advantage, often a technological one that creates a short-term lead, Mr. Oberweis said in a phone interview from his office in Aurora, Ill.
Such an edge is hard to maintain, as is soaring growth.
Mr. Oberweis began the fund in January 1987 after years of writing an investment newsletter, the Oberweis Report, on emerging companies. The fund, which now has $107 million in assets, typically owns most of the 50 stocks in the newsletter's model portfolio, and perhaps as many as 80 more issues.
"I believe our success has been in defining a universe of about 200 to 300 companies that meet our criteria at a given time," Mr. Oberweis said. "What I've not been particularly successful at was identifying that one or two or three which would be big winners."
The heart of the fund -- and the newsletter -- is Mr. Oberweis' stock selection process. While he doesn't strive for concentrations in any particular industries, his process unearths small, highly volatile shares.
Technology stocks now account for nearly half its holdings, double the portion in the average small company fund. When the technology sector took off in the third quarter of last year, the fund began its latest upward streak.
The median market capitalization of the stocks in the Oberweis fund is just $200 million, compared with $513 million for its peers.
"We tend to find spectacular stocks very early in the cycle, so they tend to be very small," Mr. Oberweis said.
The fund buys stock in companies as large as Compaq and the Intel Corp., which it sold earlier this year, but only rarely.
This year, the fund has bought stakes in No. 9 Visual Technology, which provides high-resolution and high-speed enhancements to personal computers and has been bid up to $21 a share from its recent public offering at $15, and II-VI Inc., which makes lasers for medical and military applications and is trading at more than $25, up from its 52-week low of $3.625.
The fund's biggest holding, at 5 percent of assets, is Valujet Airlines, a low-cost airline based in Atlanta.
"When we find a good one, we try to hold on forever," Mr. Oberweis said of his stocks.
For that reason, the fund's turnover is slightly less than average for its peer group. Two of its largest stakes -- the U.S. Robotics Corp., which makes modems, among other items, and Lone Star Steak House and Saloons, a restaurant chain -- were acquired when those companies went public five and three years ago, respectively.
The fund's fourth-largest holding, after U.S. Robotics and Lone Star, is Madge N.V., a Dutch computer company specializing in local-area networks. Overseas investments account for 10 percent to 15 percent of the fund's overall assets.
Besides rapid growth in revenue, Mr. Oberweis looks for consistent growth in pretax income and earnings per share. He also uses a formula to see if price/earnings ratios have become out of hand. If a company's earnings are growing at a 50 percent rate in 1995 and are expected to grow 75 percent in 1996, he
considers the earnings growth rate to be 50 percent. Under his formula, the price/earnings ratio should not exceed half that amount, or 25.
Finally, no matter how good a company looks on paper, if its stock is falling in a steady or rising market, Mr. Oberweis does not buy. Serious problems, he figures, may be lurking. His focus is on companies whose stocks are performing better than 75 percent of the market.
Mr. Rekenthaler of Morningstar said the fund was among the most volatile in its group -- funds that buy stakes in emerging companies. Other funds that specialize in emerging companies and that have significantly less volatility are Delaware Trend, Founders Discovery, Oppenheimer Discovery and Wasatch Aggressive Equity, he said.