BANGALORE - Healthcare and technology companies are among the top stock picks of Perritt MicroCap Opportunities Fund PRCGX.O as these sectors host various companies focused on niche businesses with tremendous growth potential.

An example is American Service Group (ASGR.O), which has both the cost containment and the niche business elements -- they provide healthcare services within prisons, said Michael Corbett, president of the fund.

Corbett said there is going to be a big push from governments to privatize prisons, and more importantly privatize healthcare services in prisons.

This will help them to save somewhere between 20 percent and 30 percent of the costs, Corbett said.

The fund had a year-to-date return of 46.61 percent as of September 30, while the benchmark Russell 2000 index of small-cap stocks .RUT had a return of 22.43 percent for the period.

Corbett said the upside was primarily driven by stocks such as specialty pharmaceutical company BioScrip Inc (BIOS.O) and HealthGrades Inc (HGRD.O), which provides ratings and profiles of hospitals, nursing homes and physicians.

The fund recently increased its exposure to stocks in the healthcare sector, due to the confidence and visibility the sector offers, though uncertainties surrounding the U.S. healthcare reform legislation pose a question mark.

The bill, which proposes a sweeping overhaul of the $2.5 trillion healthcare system, passed its first crucial test in the U.S. Senate on Monday, with 60 Democrats voting to put President Barack Obama's top legislative priority on a path to passage by Christmas.

The fund, which is overweight on technology and industrials, particularly likes the business model of Rentrak Corp (RENT.O), which is an information management and data gathering firm focused on media and entertainment.

They provide data on trends related to people's viewing habits, an area which has not really been documented. This new business could be pretty huge because of its ability to help making advertising decisions, Corbett said.

Bioscrip and Health Grades are the fund's two top holdings amounting to 1.72 percent and 1.71 percent respectively, as per the data provided on September 30.

The fund, which has total assets of $332 million, also has companies such as Smith Micro Software Inc (SMSI.O), Michael Baker Corp (BKR.A), Furniture Brands International (FBN.N), Star Gas Partners (SGU.N), and Flanders Corp (FLDR.O) among its top 10 holdings.

The fund is underweight on financial services and consumer discretionary due to the ongoing challenges in those sectors.

The issue is that those are two big underweight sectors and I would suspect they are going to be like that for some time, Corbett said.

The fund expects a fair amount of mergers and acquisitions to happen in the near term across industries, but counts energy and materials as one sector particularly poised for deals as it is cheaper to buy businesses in that space rather than build them.

Corbett said the percentage of companies that get acquired within his portfolio varies from 5 percent to 10 percent on an annual basis.

It has been on the lower end off late because of capital constraints. We certainly see that loosen up and improve. We would suspect it would move higher in the near future.

(Reporting by Bijoy Koyitty; Editing by Gopakumar Warrier)

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