Michael Corbett of Perritt Micro Cap Opportunities

S&P: What sectors have been looking favorable?

CORBETT: We have been adding to our positions in energy and consumer products/retail and cyclicals — all of which positions the fund to benefit from an expected rebound in the U.S. economy later this year.

S&P: What benchmark do you use?

CORBETT: Since no genuine micro-cap index yet exists, we still rely on the Russell 2000 Index. However, given what's happened in the markets the past few years, that benchmark is getting a bit closer to us in terms of market-cap.

For example, the smallest companies in the index now have a market cap of only $100 million. Just a few years back, they had nothing lower than $160 million in cap size.

S&P: How does your fund compare to the index and how have you performed against it?

CORBETT: The fund's average market cap is $115 million, compared to $550 million for the index. The fund has an average trailing 12-month P/E of 12.9, versus 24.6 for the index.

For the year ended June 30, the fund gained 10.1%, while the index dropped 1.6%. For the three year period, the fund gained 11.8%, versus a 3.3% drop for the benchmark.

S&P: Can you discuss some of your top holdings?

CORBETT: Nam Tai Electronics is an electronic manufacturer based in Hong Kong. They make telecom and consumer electronic products and currently have contracts with big corporations such as Texas Instruments (TXN) and Sony (SNE).

When we first purchased this company, the stock was trading less than 1 times sales. Nam Tai has performed well, having doubled in price since last November. Based on what we expect the company to earn in 2004, the stock is still only trading at a P/E of about 8. There is also no debt on its balance sheet.

S&P: What about Matrix Services?

CORBETT: This has been another extraordinary outperformer, tripling in value since last October. Matrix provides "above ground" storage and construction services for oil companies. The company stands to benefit from new laws to take effect later this year connected to the government's "Clean Fuel Act," requiring energy companies to comply with stricter environmental regulations. This guarantees increased revenues for Matrix, which has already enjoyed stable and recurring business patterns. Moreover, the company has a small amount of debt and generates a couple of hundred million in revenues and $20 million in cash flow annually.

S&P: What are your sell criteria?

CORBETT: We typically sell when a company's market cap becomes too large — generally when it reaches around $1 billion — but we might sell before that as well. We will also sell when fundamentals deteriorate, when valuation becomes inexplicably high, or when a company's financial condition slips.

S&P: Can you cite some stocks you recently sold?

CORBETT: We sold Tractor Supply (TSCO), which is a farm and ranch retailer: its valuation became too rich, its market cap reached the $800-million level, and a number of Wall Street firms started covering the stock.

We sold Stratasys (SSYS), a maker of rapid prototyping and three-dimensional printing devices that create physical models from computerized designs, earlier this year as its P/E got as high as 30. That is much too rich a valuation for us. We still like the company a great deal, but I can't understand its valuation.

We also recently sold Blue Rhino (RINO), a supplier of propane grill products to retailers, which had been a long-time holding. We disposed of this stock once we learned that one of the company's insiders did not disclose his personal ownership in a few distribution companies doing business with Blue Rhino. This represented a "corporate governance" problem to us and we got rid of the company.