A Momentary Departure From the 21st Century

Mar 8th, 2005 | By Penny Sleuth Contributor | Category: Investing Strategies, Penny stocks

Irwin Greenstein reports from Lovegrove Street in Baltimore…

*** The hottest stocks on the Nasdaq last week were small caps. It was an incredible run for 11 companies that saw stocks surge between 27.1-70.3%. Wait a minute. Did I say they were all small caps? Let me readdress that claim. Two of the 11 stretched our definition of small cap, which tops out at $1 billion. USF Corp. has a market cap of $1.41
billion, and Siliconix’s market cap is $1.11 billion.

The other nine top performers were Blue Martini Software, Retek, EDGAR Online, Wilsons Leather (a winning pick by our Penny Stock Fortunes team), Integral Systems, NetLogic Microsystems, Evergreen Solar and ICT Group. Although some of these companies may not fit the profile used by our CXS Money-Multiplier System (www.psfortunes.com) for picking small-cap champs, these 11 still merit a look-see.

While we generally talk about leading small-cap indexes the Russell 2000 and the S&P 600, the Nasdaq’s big winners last week illustrate the point that the tech-laden is indeed a source of excellent small-cap opportunities. For those of you who feel that software, networking and semiconductors are still too risky, that’s understandable. But small-cap daredevils with a thirst for adventure should be paying daily visits to the Nasdaq.

*** And in the spirit of risk, it looks like hedge fund managers, Wall Street’s equivalent of biplane wing walkers, are focusing their attention on IPOs. This is terrible news. BusinessWeek reported, on March 14, that hedge funds are now competing with buyout firms to take public companies private — then cleaning them up for an IPO sequel. Since
so many IPOs find their way into the small-cap universe, the growing competition between hedge funds and buyout firms for IPO sequels indicates a rise in inferior offerings.

Here’s why…

Generally, companies going public for the first time have legitimate business reasons, such as funding product development, international expansion and debt reduction. By contrast, the impetus for an IPO sequel is to fatten the wallets of major shareholders and deal-makers. It’s important to remember that a public company that has been taken private probably wasn’t doing too well, and opted to hide from the unflinching scrutiny of shareholders and regulators.

Personally, I think it takes a big leap of faith to believe that big corporate problems can be repaired in a year or so before these companies are offered to the public as viable investment opportunities. While some IPO sequels are doing fine, pay extra attention here. When it comes to IPO sequels, remember Gordon Gekko’s infamous line from the movie Wall Street: “Greed…is good.”

*** At Penny Sleuth, we consider greed only a poor substitute for sharp investment instincts, solid trading fundamentals and due diligence — the hallmarks of the greatest mutual fund managers on the planet. In our ongoing pursuit of small-cap investment excellence, Sala Kannan will launch a monthly series on the best small-cap mutual funds, beginning March 18.

Sala will profile the brilliant fund managers, their trading secrets and the top small-cap companies in their portfolios. Sala is a professional pragmatist, so I’m sure her articles will give extremely useful advice.

But here’s more good news. You won’t have to wait until March 18 to get Sala’s incredible insights. In our March 11 issue, she’ll supply us with a new screen as part of her occasional series, which we fondly call “Sala Screens.” She won’t reveal what it is yet, so make sure you check in with us on Friday.

*** Regular Sleuthers know that I’ve been bugging Chris Mayer, editor of the The Fleet Street Letter (www.fleetstreetltr.com) like crazy to give us an advance peek at his upcoming service, CrisisPoint Trader. Am I finally getting to our steely former bank VP? Chris shared with me that part of the approach at CrisisPoint Trader is to use Dow Theory to gauge market trends.

Dow Theory is way to forecast the market based on the price movements of selected industrial and transportation stocks. Dow Theory determines the market’s primary trend and ignores short-term movements. As Chris explains it, with CrisisPoint Trader, he will aim to make trades consistent with this view of the marketplace — working with the
currents, not against them.

According to Chris, we were stuck in a trading range for months, and Dow Theory was silent on which way the market would go. Friday, though, was a momentous day as far as Dow Theory was concerned, as both averages — the industrials and the transports — topped their previous Dec. 28 highs. Not only that, but they did so on higher volume. That means we have, at least for the moment, an “all-clear” sign. Dow Theory just gave
us a strong bullish signal.

*** Speaking of strong signals, Angela Roberts writes about dialing for profits in the cell phone market…

A Momentary Departure From the 21st Century

It happened this past Sunday: I decided to never again leave the 21st century…

That morning, I thought with reckless abandon that I could actually leave the 21st century — at least for a few hours. I closed my laptop, walked past my unopened Wall Street Journal and made the deliberate decision to leave my cell phone on the kitchen table as I headed out to the car. The idea was to relax, to leave the modern world behind, and visit the collection of Amedeo Modigliani paintings on exhibit at The Phillips Collection in Washington, D.C.

And oh, I was so happy go lucky as I sped toward the D.C. Beltway, turning up the tunes on the radio and zipping from lane to lane. I was speeding south, away from Baltimore, down Interstate 95. And that’s where the trouble started.

Look, I’m from Baltimore…I just don’t know much about D.C. or its notorious beltway. I was barreling toward it at about 80 mph, took the left exit instead of the right, and before I knew it, I was speeding away from Washington. I was suddenly lost, on a high-speed lap toward Virginia around one of the country’s busiest public speedways. Without a cell phone.

I know, I know. I shouldn’t have left it at home. And while I circled D.C. at a frenzied pace in the wrong direction, I realized that these days it’s almost impossible to live without one. I thought back to last month’s Penny Stock Fortunes, when I told you that the average person talks over 600 minutes a month on his cell phone. And that usage is expected to grow by at least 15% over the next five years.

It’s an industry that refuses to slow down. Every day, companies develop and offer new technology that consumers want and are willing to shell out big bucks for. And as the major providers compete for market share by offering competitive prices and products, consumers are more apt to jump from one provider to another to take advantage of those deals. In fact, J.D. Power also states that in 2003, “42% of current U.S. wireless subscribers [were] considering a new cell phone purchase over the coming year — a 14% increase over 2002, when 37% had purchasing intentions.”

This past Sunday’s crazed, disastrous lap around D.C. and into various parts of northern Virginia brought it all home for me. I chastised my decision to leave my phone at home, hissing to myself, “This is precisely why 170 million Americans own a cell phone.” As I drove, I decided that I’m never going anywhere without one again and — in my panicked state of mind – I promised myself the reward of marching right out and buying myself a new one. As I maneuvered my car in and out of traffic, searching for an even slightly familiar road sign, I dreamed of what my next phone would look like.

Look like? Yes, as much as I loathe admitting it, the hardest choice isn’t price or function, but fashion. I’ve seen other people’s phones, and as long as I’m getting a new one, I want the coolest. One that flips open, fits into my back pocket, is a cute color and has a fancy ring and maybe even photo capability. Perhaps I’m more vain than practical, but you know what? I take comfort in the knowledge that I’m not alone in my priorities.

I recently read a snippet by a senior analyst at high-tech research group Canalys. I believed him when I read that “a mobile phone is a fashion statement, not just a functional piece of telecoms equipment.” Well, that’s good to know as I join the masses, who, according to J.D. Power and Associates, base about 20% of their decision on which cell phone to buy on physical design.

And it’s not just the major providers that take advantage of that willingness of the consumer to buy, buy, buy. That’s where small-cap companies step in. Just like Boston Communications, the cell phone billing service company recommended in our March Penny Stock Fortunes issue, small companies providing auxiliary services and products are well positioned to jump on the cell phone consumer bandwagon.

Our April CXS pick is at the top of that company list. It is a small company that makes a specialized product that cell phone buyers eagerly snap up at time of purchase. But it isn’t just its product that make this company appealing. It has been successful for decades, has a great reputation, has scored multiyear sales deals with major providers and boasts solid fundamentals. And it’s taking full advantage of the increasing popularity of cell phones. This small company just grew by over 90%, has almost doubled its product sales and upped its net income from under $200,000 to a sparkling seven figures.

You’ll read all about this zooming industry and this fast-growing small-cap company in our April issue, which should be in your inbox in a few days. And I’ll let you know ahead of time when it’s on its way.

By the way, I finally made it to The Phillips Collection on Sunday. The paintings were beautiful, and the colors on the canvas shone in a way that just doesn’t come through in photographed reproductions. Despite the stress and mileage it took to get there, the visit was worth it, and as I walked back out onto the bustling avenues of D.C., I borrowed my buddy’s cell phone to call a girlfriend and tell her all about it.

Best regards,

Angela Roberts

March 8, 2005

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

Special Report: HOW YOU COULD TURN $200 INTO $1.2 MILLION!