O'Halloran's fund focuses on small-cap companies with potential to generate above-average revenue and earnings growth. The fund, which has earned four stars from
, has returned 43% during the past year, outperforming 70% of competing funds. The fund has gained 5.5% annually, on average, during the past five years, beating 97% of rival funds.
O'Halloran shares his thoughts on the market and technology in this edition of
Fund Manager Five Spot.
Are you bullish or bearish?
I believe that the U.S. economic recovery in 2010 will be stronger than expected, so I'm bullish. In addition to the heavy doses of monetary and fiscal stimuli that have been applied to the economy, corporations are facing easy profit comparisons based on what they earned in 2009. Better-than-expected corporate profits should lift the market in 2010. A return of about 10% is achievable.
Earnings at small-cap companies are coming off more depressed levels, so their growth rates are likely to exceed those of large-cap companies.
What is your top stock pick?
The portfolio is diversified and typically will consist of about 120 names. One of our largest positions is in a company called
. This is a company with a $1.4 billion market cap that provides human resource management software that its customers access over the Internet.
SuccessFactors' sales have recently approached $150 million, a big jump from the $2.5 million recorded in 2002, which was its first year of operations. We think the company's sales are going to accelerate from 2009's pace of approximately 20% to well north of 25%, which would be faster than the consensus expectations.
The company has made a substantial investment in its sales force, and so operating profitability is low at this point. However, with gross margins of 80%, we think it can be a 30% operating margin business in the future. If so, this would suggest profits could grow at a rate in excess of 50% over the next five years.
What is your top "sleeper" pick?
We like a number of names that are not well known, one of which is
. This is a company with a $600 million market cap that provides online transaction management software for the mobile device market, which covers everything from
iPhone to the
Kindle. The Synchronoss software can handle customer orders, shipping fulfillment, network activation and billing management.
There were approximately a billion mobile devices enabled during the desktop Internet era. This is expected to accelerate to about 10 billion mobile devices in the coming decade, according to industry sources. The more devices that are sold and activated on mobile networks means more potential revenue for Synchronoss.
The company will do about $128 million in sales in 2009, and the consensus expectation in 2010 and 2011 is that the revenue growth will be 15% and 23%, respectively. We think those estimates are too low.
Another name we like is
Altisource Portfolio Solutions
, which has a market cap of just over $500 million. This is a loan-servicing company that was recently spun out of Ocwen Financial. Altisource's software manages the collection of delinquent loans, such as those on credit cards and mortgages.
The company's former parent company should be a significant buyer of delinquent debt, which will help fuel Altisource's growth. In 2010, the company's revenues are expected to grow by 42%, while earnings are expected to grow by 72%. The stock recently traded at about 12 times 2010 earnings. We believe the company will sustain strong growth into 2011 at a rate that is significantly higher than consensus estimates imply.
What is your favorite sector?
I believe technology will continue to lead the market in 2010, after outperforming in 2009. The sector is on the verge of another burst of secular growth due to developments such as cloud computing over the Internet, mobile communication devices and the continued evolution of wireless computing.
What sector would you avoid?
If we believe the market is going to rise in 2010, then we would be underweight defensive growth sectors, such as consumer staples, health care and utilities.
We are also modestly underweight holdings of materials and industrial stocks. While these industries performed strongly during the 2003-2007 cyclical bull market, we believe this boom created overcapacity in those industries.
Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.