Tech-stock picks that are small and focused: This fund invests in unsung innovators. Here are 2 top choices.


When investors think of technology stocks, they might automatically gravitate toward “the next big thing,” or to the giant companies that dominate the S&P 500
But Robert Stimson, chief investment officer of Oak Associates Funds, makes a case for diversification through exposure to smaller innovators which he believes are “overlooked in this environment.”

The River Oak Discovery Fund
invests in tech-oriented companies with market capitalizations of $5 billion or less, with an average of about $2 billion. It has a five-star rating, the highest, from Morningstar, despite having what the investment information firm considers “above average” annual expenses of 1.19% of assets under management. The fund is ranked in the 6th percentile among 546 funds in Morningstar’s “Small Blend” category for five-year performance and in the 13th percentile among 374 funds for 10-year performance. The performance comparisons are net of expenses.

The Black Oak Emerging Technologies Fund
has more of a midcap focus, with some small-cap stocks and follows a similar strategy to that of RIVSX. But with no restriction on the size of companies this fund invests in, “we don’t have to sell stocks,” Stimpson said. So long-term holdings of this fund include Apple Inc.
and Inc.
This fund is rated three stars within Morningstar’s “Technology” category and has a lower expense ratio of 1.03%.

Both funds are concentrated. The River Oak Discovery Fund held 34 stocks and the Black Oak Emerging Technologies Fund held 35 stocks as of March 31. Lists of both funds’ largest holdings are below.

During an Interview, Stimpson, who co-manages both funds, said that when investing in the small-cap technology space, he and colleagues identify companies that are “focused on niches.

“I want a company that knows who they are, what they do and do it well, rather than a small company trying to growing into the next Microsoft, Google or Salesforce,” he said.

More about giant companies dominating stock indexes: This twist on a traditional S&P 500 stock fund can lower your risk and still beat the market overall

Stimpson said Oak Associates pays close attention to what corporate management teams say during earnings calls and in presentations, preferring comments related to improving sales and operations with a market niche, rather than expressions of grand visions for exponential growth.

That type of narrow focus can support higher valuations over time, Stimpson said. “They have better execution, a better ability to fend-off competition and they are quality acquisition candidates.”

“I caution everyone that until there is revenue, earnings and a product, the hype can be more dangerous than an opportunity.”

— Robert Stimpson, chief investment officer at Oak Funds, when discussing AI and ChatGPT.

All of those factors can be important to investors, considering how easily tech giants such as Microsoft Corp.
or Google holding company Alphabet Inc.

can begin to compete with smaller innovative companies because they can afford to make such large investments, he said.

Simpson went further, saying that when running screens for “quality” metrics, such as improving free cash flow yields, the Oak Associates team also looks for “shareholder friendly practices.” For example, a company may be repurchasing shares. But are the buybacks lowering the share count significantly (which boosts earnings per share) or are they merely mitigating the dilution caused by the shoveling of new shares to executives as part of their compensation?

Finally, Simpson cautioned investors not to get caught up in tech-focused hype.

“When I talk to our clients, I get questions about AI and ChatGPT and how to play it. People get focused on a new great tech innovation,” he said. “You can replace ChatGPT with bitcoin, metaverse or 3-D printing.”

“I caution everyone that until there is revenue, earnings and a product, the hype can be more dangerous than an opportunity.”

Two examples

These companies are held by theRiver Oak Discovery Fund and the Black Oak Emerging Technologies Fund.

Cirrus Logic Inc.
is the largest holding of the River Oak Discovery Fund. Stimpson calls the company “a derivative play on the success of Apple.”

“They are focused on the chips that go into mobile and [vehicles],” as well as the needs of their customers, including Apple, “rather than problem areas of the chip sector, such as memory or PCs. They are not talking about chips for AI, for example,” Stimpson said.

Cirrus focuses on systems and related software used in audio systems..

Kulicke & Soffa Industries Inc.
makes equipment, tools and related software used by a variety of manufacturers of computer chips and integrated electronic devices.

Stimpson likes the company as a long-term play on the worldwide disruption in semiconductor manufacturing and supply, in the wake of the Covid-19 pandemic. “All chip companies learned that any supply disruption in Southeast Asia is a problem. Over time, the opportunities for semiconductor equipment makers are very good. There will be more plants in more locations, so more equipment,” he said.

He said KLICK was in a “protected” position, with returns on equity of about 20% and free cash flow yields of about 10%.

Top holdings of the funds

Here are the largest 10 holdings of the River Oak Discovery Fund as of March 31:



% of portfolio

Cirrus Logic Inc.

CRUS 4.9%

Kulicke & Soffa Industries Inc.

KLIC 4.6%

Advanced Energy Industries Inc.

AEIS 4.5%

Cohu Inc.

COHU 3.7%

Asbury Automotive Group Inc.

ABG 3.7%

Korn Ferry

KFY 3.6%

Kforce Inc.

KFRC 3.4%

Ambarella Inc.

AMBA 3.3%

Applied Industrial Technologies Inc.

AIT 3.3%

Perficient Inc.

PRFT 3.2%

Click on the tickers for more about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Here are the largest 10 holdings of the Black Oak Emerging Technology Fund as of March 31:



% of portfolio

Apple Inc.

AAPL 5.7%

KLA Corp.

KLAC 4.6%

Advanced Energy Industries Inc.

AEIS 4.5%

Cohu Inc.

COHU 4.1%

SolarEdge Technologies Inc.

SEDG 3.9%

Cirrus Logic Inc.

CRUS 3.9%

Cohu Inc.

COHU 3.9%

Ambarella Inc.

AMBA 3.4%

Applied Industrial Technologies Inc.

AIT 3.4%

Salesforce Inc.

CRM 3.3%


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