ENTR), a maker of semiconductors with embedded software used to deliver high-definition signals. The company's stock, the fund's No. 3 holding, has tripled this year. Retzler's largest position is ATMI ( ATMI), a provider of specialty materials and packaging to the semiconductor industry. Its shares are down 2.3% in 2010. Among top-10 stocks held by Needham Small Cap Growth that are relatively cheap: data-storage companies Seagate Technology ( STX) and Xyratex ( XRTX). Retzler has pounced on a booming industry. Still, Seagate Technology, a maker of computer disk drives and storage technologies since 1979, is down 18% this year. As much as 75% of the company's revenue comes from big computer makers such as Hewlett-Packard ( HPQ) and EMC ( EMC). Seagate has a price-to-trailing-earnings ratio of 4.8 versus the 111 average for its industry sector. Its earnings-per-share growth is 26.3% over the past three years, compared with 18.6% for its peers. Of the 27 analysts that follow and rate Seagate, there are the equivalent of four "buys," 14 "holds" and two "sells," according to Standard & Poor's. Xyratex, a developer of network-storage and storage-infrastructure equipment, has a price-to-trailing-earnings ratio of 4.5, versus 21.7 for its industry niche. Its shares are up 17% this year. The market value is $457 million, less than a 10th of Seagate's. Of the seven analysts that cover Xyratex, there are two "strong buys" and five "buys," according to Standard & Poor's. The two companies stand to benefit on two fronts. First, there is growing demand for greater storage capacity due to the creation, sharing and aggregation of digital content, data-backup requirements, and the increasing use of storage in consumer-electronic devices.
Second, the data-storage sector is going through a consolidation, with big players such as IBM ( IBM), Hewlett-Packard and EMC buying up smaller firms, burnishing the value of those that remain. Earlier this month, EMC purchased Isilon for $2.25 billion after having been on a buying binge for the past few years. Standard & Poor's Ratings Services recently placed Seagate's BB+ corporate credit rating on credit watch with negative implications after the hard-disk-drive maker said it may go private. And that could spark share-price appreciation on potential takeover rumors.
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