An interview with John Barr and Chris Retzler

Portfolio Managers, Needham Funds

John Barr: We manage the Needham Growth, Aggressive Growth, and Small Cap Growth funds. We focus on domestic growth equities — but at a reasonable price. Our objective is to create wealth for long-term investors.

Our current point of view on the market is that, while things seem quite unsettled, we see opportunities in our small cap universe.

Two areas seem unsettled. First, there’s fear of monetary tightening. While the U.S. is tapering its quantitative easing program, Europe is just getting started with a significant program and will begin negative interest rates at the beginning of September. Japan continues to be quite accommodative and so is the United States’ Federal Reserve with continued low interest rates.

Second, international affairs are quite unsettled. Unfortunately, most decades are full of war. As we think back to the ’80s and ’90s, there was war in Eastern Europe, Africa, Asia, and the Middle East. And that is certainly the case today. Yet those were very good decades for investing.

Most importantly, we think there’s a technology revolution happening in areas including semiconductors, aerospace, communications, manufacturing, new media, content, Software-as-a-Service, and the cloud.

With that, I’ll turn it over to Chris, who will talk about our approach in more detail and focus on our current point of view regarding sectors.

Wally Forbes: Good. Go ahead, Chris.

Chris Retzler: Some of our best due diligence is done when we’re out on the road visiting our companies. We like to get to know management teams for the long term, as we value them as business partners.

We also like to visit industry conferences, where we have exposure to a broad number of companies within a concentrated industry. One example is the SEMICON West conference in July in San Francisco. We visited with a large spectrum of companies in the semiconductor capital equipment space. And to John’s point, investing in technologies, we think is a good long-term growth area for investors to focus.

One name I’d like to mention is MKS Instruments, Inc. (NASDAQ: MKSI). It’s a small cap company — with a $1.7 billion in market cap — based in Massachusetts with a focus on components for the ever-increasing technology requirements and capital intensity within the semicap equipment space. They’re also exposed to other industries that have been growing over the past five years, including medical devices.

There’s a new CEO, Jerry Colella, who had been a part of the company for many years. We think he has the company on the right trajectory to capitalize on many of these opportunities. We also think, for long-term investors looking for dividends, MKS has paid dividends since 2011.

Barr: Entegris, Inc. (NASDAQ: ENTG) is benefiting from the technology requirements of semiconductor manufacturing. We have owned Entegris in the funds for over five years. It’s also a small cap with a $1.7 billion market cap. They supply contamination control and wafer handling equipment used for semiconductor manufacturing.

They have very advanced filtration and membrane technology. Low power semiconductors require advanced semiconductor manufacturing, which needs very pure manufacturing environments. Smart phones and tablets require low-power semiconductors because everyone wants a longer battery life. This need for low power is what is pushing next-generation semiconductor manufacturing technology. And Entegris and MKS are both beneficiaries.

Entegris suffered in the June quarter, as some of the more cyclical nature of their business suffered. And the stock pulled back. Most recently, Entegris acquired ATMI, which supplies materials for semiconductor manufacturing, in a very accretive and complementary transaction. And in June, Entegris opened its new i2M Center for Advanced Materials Science. They are doing research and development that will really help position their business for the future. Their CEO, Bertrand Loy, has a long history with the company and is someone that we’ve known for a number of years.

The stock is valued at just 7 times estimated 2015 EBITDA, and 13 times estimated earnings. We think this is a company with good, strong growth prospects that is very attractively valued.

Retzler: Another company we’d like to discuss is Air Lease Corporation (NYSE: AL). As John mentioned earlier, we believe geopolitical issues will continue around the world. Along with that, we believe that higher oil prices will remain at these levels or higher for an extended period of time. These oil prices have been pushing a secular trend within the aircraft industry for higher fuel efficiency and an overall modernization of the worldwide fleet of aircraft.