*** The IPO market is hot again…opening the spigot for a flood of small-cap
opportunities in 2005. But why now? Before I answer that question, let me recap 2004’s extraordinary action.

Last year, 205 IPOs raised some $41 billion — triple the volume of 2003…and shy of the 249 in the IPO mania of 1999. Unlike the bubble years, however, companies are more financially solid: 64% of companies that went public in 2004 were already profitable, compared to 2000, when only 26% were profitable. And the average 2004 IPO has risen 30% from its offering price — the best performance since 1999. That return beat the Dow, Nasdaq and S&P 500.

OK, so why now? I think that the increased IPO activity coincides with rising interest rates, which can really hurt small-cap companies. As lending institutions tighten their requirements for loans to companies with market caps of $1 billion or less, we’ll see more small caps turning to the public market for cash. Alan Greenspan signaled Wall Street far in advance of the first rate hike, giving the venture capitalists and investment bankers plenty of time to start filling the IPO pipeline…and the momentum is certainly there.

Is this a good thing? From my perspective, the answer is a resounding yes. Here’s why. In the 15 years I spent in Silicon Valley before moving to Baltimore, I saw just about every tech prophecy come true — eventually. All that nutty stuff we read about during the bubble, such as e-commerce, broadband to the home and streaming entertainment, are big hits now — long after Wall Street lost patience with many of those money-losing innovators. Well, I think everyone is wiser now. After all, hindsight is always 20/20.

But looking ahead, about 80 VC-backed companies have already registered with the SEC for IPOs in 2005. And we believe that this is going to be a great year for newly public companies. That’s why you can expect to see more coverage in Penny Sleuth of the IPO market as it pertains to small-cap opportunities. We’re all looking forward to the extra coverage here at Penny Sleuth central, and I hope that you are, too.

*** It’s 11:46 a.m. — almost midday. And as I write this, the big winner (relatively speaking) in this rabid bear market is the small-cap S&P 600.

The S&P 600 is down only 2.02%, to 310.98. Compare that to the S&P 500, which is down 4.73%, the Dow, which has taken a 41.03% tumble, or the Nasdaq’s decline of 10.94%. In fact, the S&P 600 is even beating the leading small-cap index, the Russell 2000, which so far has registered a decline of 5.26%, to 612.48.

One reason the S&P 600 is weathering this storm could be that compared to the Russell 2000, it has more stringent requirements. For example, S&P 600 criteria include financial viability, liquidity and an adequate number of shares available for trade — making it tougher to get on the index than on the Russell 2000.

While regular Penny Sleuth readers know that we love the Russell 2000, it’s times like this that remind us that the S&P 600 could be the small-cap index of choice when the bear comes knocking.

As James talks about in this issue, diversification is always important.  That’s why it would be wise to also spread out your investments across multiple small-cap indices (including the Wilshire 1750).  Each one has different standards for inclusion, and given the nature of stocking picking the best one can often depend on market conditions.

*** Speaking of James, he takes to task the chronic optimists of stock
commentators…everything’s good, everything’s great, never a bad year that ends in 5, blah, blah, blah.  Well, steely eyed James sees clouds on the horizon and provides us with sobering advice. James, pop open that umbrella of yours…

It Pays to Be Picky

Something just doesn’t seem right, my friends. I’ve spent the last week reading article after article on the small-cap market — getting people’s “professional” predictions for 2005. And most analysts are still calling for another bullish year for small-cap stocks. For instance…

Professionals from Mesirow Financial’s Investment Management and Real Estate divisions say, “In 2005, we expect to see high-single-digit returns from the S&P 500. Dividend income will, once again, be significant as payout ratios continue to rise. The outperformance of small-cap stocks and value stocks will continue in 2005.”

Diane Swonk, chief economist for Mesirow Financial, was even more optimistic, describing today’s economy as “virtuous” and primed for profit growth. And finally, Donald Luskin, writing for SmartMoney.com, titled his Dec. 31 article, “Get Ready for Another Strong Year.” He forecasts that (after a bumpy start to 2005), “By spring, stocks will have moved on to new highs.”

Jeez, you would think I’d be ecstatic about these predictions. But I’m not. In fact, I think they are all wrong. And you need to know that. You see, there are two reasons the small-cap rally, which began six years ago, started in the first place. And neither one of those reasons exists in today’s market.

Let me explain…

By the end of 1999, small-cap stocks were trading for a 30% discount to their larger peers. Throughout the 1990s, investors were dumping their money into companies like IBM, JDS Uniphase and Sun Microsystems. As a result, between 1995 and 1999, large caps enjoyed 20%-plus annual returns. Meanwhile, small caps lagged behind — big time. In August 1998, the small-cap market fell 18.3% — making it one of the worst plunges in over 70 years. Ouch! But that fiasco led the way for the start of a major buying spree that has lasted for six years now.

And the second reason the small-cap rally took off more than half a decade ago was the lowering of interest rates. Between July 2000 and June 2004, interest rates fell from 6.5% to 1%. As a result, smaller companies could borrow money much more cheaply. They had instant access to the capital markets that they didn’t have in the early 1990s (when all the money was being lent to the larger tech companies). And they could grow their own businesses through debt — which led to rapid earnings and sales for years to come. For example…

Earnings for small-cap companies grew a whopping 71% in 2003. That’s amazing, when you think about it. And because of the tremendous earnings growth, the Russell 2000 rose 46% in 2003 — beating every other major stock index in the United States.

Between 1999 and 2004, the equation for a small-cap rally was in place: value + low interest rates = small-cap rally. And what a rally it was. But that equation has changed now. And all the talking heads who proclaim 2005 is going to be another banner year for all small-cap stocks are out of their minds. (But that’s still not to say there won’t be a lot of great opportunities — there will. And I’ll explain in a second.)

Unlike in 1999, small-cap stocks aren’t cheap. In fact, they are more expensive than large caps now. The average company on the Russell 2000 trades for 21.5 times earnings. By comparison, the average large-cap company on the Russell 1000 trades for 19 times earnings.

And in case you haven’t noticed, interest rates (although still historically low at 2.25%) are on the rise. Alan Greenspan and his gang have raised rates in each of the last five Fed meetings. And general consensus is that rates will continue to rise in 2005 — eventually topping out between 3.5% and 4.25% by the end of December.

Sure, those rates are still low. But that’s not the point. The formula that was in place in 1999 has changed. Small-cap stocks aren’t cheaper than their large-cap peers anymore. And the interest rates are rising – slowly making it more expensive for smaller companies to borrow money and grow through debt.

The HUGE advantages that small-cap companies had a few years ago are gone.

So is it time to panic?

No. This rally isn’t going to come crashing down in the next month. It will correct a bit — which is happening now. So you should make sure you are properly diversified. You shouldn’t have more than 10-25% of your portfolio in small-cap stocks. And you need to consider what kinds of small-cap stocks you are holding onto. Obviously, the stocks that will crash the hardest are those with little in the way of cash, a ton of debt and weak fundamentals. Those are the kinds of companies that will need to borrow even more money in the future — just to stay afloat. Problem is, they won’t get that money as lenders become pickier and pickier about who gets their loans.

Still, let me remind you…

There are over 4,000 small-cap stocks to pick through today. I guarantee hundreds of them will rise in 2005. This isn’t a time to panic. Rather, it’s a time to be picky. And if you stick with Penny Stock Fortunes (www.psfortunes.com) and Penny Sleuth…we’ll help you find those companies worth owning.

Yours for Penny Sleuth,

James Boric

January 11, 2005

It Pays to Be Picky was originally featured in the Penny Sleuth.

Today’s Sleuth is a personal one. I have something very important to share with you about me.

As you may or may not know, I am Catholic. I believe very strongly in God. And faith is a large part of my life.

For years, I have longed for an outlet in which I could work hard, help people with their problems and continue to grow in my own Catholic faith. And about six months ago, I figured out how I could do it all.

After a lot of soul-searching, counseling and praying, I finally worked up the courage to pursue this dream of mine — to become a Catholic priest. So this past August, I started the long process of applying to the Catholic seminary. And when I say “long,” I mean long.

The application process involved filling out about 25 pages of questionnaires…writing a 15-page autobiography…getting a psychological examination…passing a background check…seeing several doctors…answering questions in front of a panel of 15 Catholics (laypeople, priests, nuns, etc.)…asking for letters of recommendation…meeting with the cardinal…and collecting more forms than you ever thought existed.

But at the end of the day, I was accepted into the formation program. So God willing, in seven years, I will be ordained a Catholic priest.

Of course, this means I will no longer be your faithful editor.

Craig Walters and Greg “Gunner” Guenthner will lead the Sleuth team from here on out. And you’ll continue to hear from Jonathan Kolber, Chris Hancock and Ian Cooper — all experts in their fields.

You are in great hands! But before I go, I have a treat for you…

Penny Stock Fortunes Is BACK!!

For the last three months, I have been working with Gunner on bringing back the popular Penny Stock Fortunes.

Gunner has been working day and night on revamping the CXS System — a five-point system that finds the fastest growing penny stocks in the universe. Unlike Small-Cap Strategy Report or any other penny stock letters on the market, Penny Stock Fortunes isn’t concerned about “value,” balance sheets or cash positions. This is all about pure greed. When one of these companies takes off, it could make you a fortune.

To introduce you to this exciting world of penny stocks, I asked Gunner to write several issues for you — at no cost. This way you can get a feel for his research as well as the kinds of stocks the CXS System finds on a regular basis. You can kick the tires for yourself. And you can find out if this service is right for you.

I am pleased to announce that Gunner’s first issue of Penny Stock Fortunes is now ready for your viewing pleasure. He has posted it under the “Small-Cap Reports” folder on the Sleuth Web site. For your convenience, here is a link to the first issue.

Please let us know what you think of this “beta” issue of Penny Stock Fortunes. Write to us at thesleuth@agorafinancial.com.

A Final Goodbye

On a personal note, I want to thank you for your support and business. For nearly six years, I have had the pleasure to write to you on a weekly basis. You let me into your lives. You trusted me enough to do a lot of the nitty-gritty research you used to manage your own portfolios. And you challenged me to be the best I could be.

You made my time here at Agora Financial more than enjoyable. So I thank you for everything.

I wish you Merry Christmas and a Happy New Year, dear reader. And for the last time, I say…

Happy investing,

James Boric
December 19, 2008

Pursuing a Dream was originally featured in the Penny Sleuth.

In other words, despite the fact that Mexico is still much poorer than the U.S., it also has a lot further to grow — especially when it comes to chicken production and consumption. And despite some bumps along the way, it is growing.

The Department of Agricultural and Applied Economics at Texas Tech University published a paper on Mexican chicken patterns. It is called 2025 Vision for Mexican Chicken Consumption. Based on extensive research, the school found that chicken consumption among the highest decile of Mexican consumers (i.e., the richest) increased more than 880% between 1984-2002. Meanwhile, for the fourth decile (the middle class), consumption increased 480%. And the tenth decile (the poorest) saw a 250% increase.

The two main reasons for the growth are the implementation of the North American Free Trade Agreement (which took effect in 1994 and limited the number of cheap U.S. hindquarters that could be imported into Mexico) and Mexico’s improving economy.

The International Monetary Fund recently reported that Mexico’s economy should grow 4.4% this year, thanks to a strong financial sector and a robust commodities market. And with the Mexican middle class larger than ever (40% of all Mexican families are middle class, compared with just 30% a few years ago), the market for chicken is at an all-time high. It will only get bigger from here.

According to the Texas Tech study, Mexico’s population is expected to grow over 1% a year between now and 2015. Per capita chicken consumption is projected to increase by at least 64% in the next 20 years. And if the country maintains only its average annual growth rate of 7% a year, it will become a net exporter of chicken in the next few years.

Add it all up and Mexico’s largest chicken producer, Industrias Bachoco SA (IBA:NYSE), is set to grow quite considerably in the years to come.

No. 1 in Mexico

The famous Bours family — which owns about 80% of the company’s stock — founded Industrias Bachoco in 1952. It started out as a small table egg operation in the Mexican state of Sonora. By 1971, the Bours opened their first poultry operation in Culiacan, Sin. And the rest is history.

Thanks to several key acquisitions over the last several years and significant organic growth, IBA is currently Mexico’s largest chicken producer — bar none. IBA is to Mexico as Tyson Foods is to the United States. And as longtime Small-Cap Strategy Report readers know, I love owning industry leaders. They tend to have better pricing power, brand recognition and visibility in the investment community.

IBA is certainly a visible company in Mexico. And it’s only a matter of time before America starts to pay attention.

Bachoco — as it is referred to in Mexico — has 700 production and distribution facilities in that country. In FY 2005, the company raked in $1.36 billion in sales — of which 80.1% stemmed from chicken sales. The rest came from table eggs, feed and swine.

To put that in perspective, the entire Mexican chicken market is worth only approximately $3.5 billion. So IBA has a dominating 32% share of the entire market. By comparison, Tyson has a 26% share of the U.S. chicken market.

And unlike Tyson, Bachoco is both cheap and financially strong.

Trading for Less Than Book Value

IBA currently trades for less than one times sales and book value. While it’s not uncommon for chicken producers to trade for less than one times sales, it is rare to find a large company that trades for less than book value. And on top of that, IBA has virtually no long-term debt and tons of cash. Take a look at this table comparing IBA with its major peers:

What I really like about IBA (in addition to the fact that it is cheap) is its cash position. If you factor out the mere $3 million in long-term debt, the company is sitting on $313 million in net cash. That’s a lot of money IBA can use to expand operations, endure some lean years or reward shareholders.

One way I think IBA could reward shareholders is by maintaining its attractive balance sheet and letting someone like Tyson or ConAgra buy it outright. If that happened, chances are IBA’s shareholders would be rewarded with a nice premium. For instance, Pilgrim’s Pride offered to buy Gold Kist for $20 per share this past August. The reason that is significant is because Gold Kist stock was trading for only $12.93 a pop at the time. The day the bid was placed, shares jumped 47%. (Luckily, my buddy Chris Mayer had the stock in his Capital & Crisis portfolio. So his readers made a fortune in almost no time.)

And I do expect this is a realistic scenario for IBA shareholders, as well.

I read Tyson’s latest annual report as part of my due diligence on the chicken sector. I was interested to see that Tyson considers Mexico one of the key areas to explore and expand in in the future. As management says, “We are looking for opportunities to expand the company’s chicken business in Mexico via joint ventures or acquisitions. Tyson is also examining the possibility of establishing a presence in Mexico with beef and pork.”

As I have already made clear, IBA has a massive network of chicken facilities in Mexico. And it also has some exposure to beef and pork. According to IBA’s third-quarter earnings release, 81.75% of its total sales comes from chicken, 8% comes from table eggs and 3.6% comes from swine and other meats.

It seems IBA is a perfect takeover target for Tyson.

Four Risks to Consider

Of course, no stock is without risks. And IBA is no exception. There are four main risks to its business…

The first is NAFTA. Right now, there is a limit to the amount of cheap chicken hindquarters that can be imported from the United States. That agreement ends in 2008. So there could be a dramatic increase in competition from companies like Tyson, Pilgrim’s Pride, Gold Kist, etc., when the agreement comes to a close.

The second risk is Bird Flu. Should another panic wave strike (and it will), chicken stocks will fall — just like we saw this past year.

The third risk for IBA shareholders is that the Bours family does something stupid with their massive controlling interest in IBA. With about an 80% stake, they hold all the power. (Of course, the other side of that argument is that their interests are aligned with shareholders.’ If they make solid business decisions, they make money right along with their minority owners.)

The final risk to IBA’s stock is liquidity — specifically, a lack of it. IBA’s average daily trading volume is just over 15,000 shares a day. That is VERY thin. If a few hundred people all tried to buy or sell at once, they could easily move the price of the stock.

For this reason, I am not recommending IBA as a Small-Cap Strategy Report holding. But I have been following this company for several months now. And I wanted to bring it to your attention.

Should IBA plunge on Bird Flu fears or come down with the overall market, this is a stock you might consider buying for your own portfolio. Over time, it should grow along with Mexico’s economy. And based on all the projections I can get my hands on, Mexico should grow quite a bit in the next decade.

Don’t be surprised if IBA makes investors double- or triple-digit profits in the coming years. But you’ll need to be patient. Buy on the dips.

Regards,

James Boric
December 13, 2006

P.S.: Here’s the only investment secret (and the only two stocks) you may ever need to know to become truly wealthy.

This report is so exclusive and powerful, only a few dozen people can get in at this time. You see, these stocks are very small…far too illiquid for thousands of people to jump in at once.

Investing in Chicken was originally featured in the Penny Sleuth.

They all got rich selling chicken.

Frank Perdue was the founder of Perdue Farms — now one of the largest poultry companies in the world. Starting from a small egg farm in the 1920s, Frank worked day and night until Perdue was one of the largest chicken processors in the United States. By 1997, he had an estimated net worth of $825 million.

Donald Tyson dropped out of college in the 1950s to work for his father’s company, Tyson Feed and Hatchery. After a tragic car/train wreck killed his dad and stepmother, Donald took over the family business. Under his guidance, the corporation grew from relative obscurity to a poultry powerhouse. And today, Tyson is worth $1 billion.

And Harland “Colonel” Sanders was the founder of Kentucky Fried Chicken. He started serving chicken dinners in his gas station to raise a little extra income. After some initial success, he opened his first restaurant across the street. By the age of 74, he had more than 600 restaurants across the country. When he sold his share in the business in 1964, Sanders made $2 million (the equivalent of $13.1 million today).

Today you have an opportunity to follow in these men’s footsteps — to make a lot of money in the poultry market. I found an up-and-coming chicken producer with a No. 1 share of a growing market. It is flying below Wall Street’s radar screen. And it’s dirt-cheap at today’s prices.

This company is trading for less than Pilgrim’s Pride, ConAgra Foods and Gold Kist. And it’s in better financial shape than every one of its peers — including the mammoth in the industry, Tyson Foods.

While no business (or stock) is guaranteed to rise, people have to eat. And no matter what happens to the economy, the housing market or the stock market, chicken is one food that will remain on almost everyone’s menus.

Chicken Is Cheap and Nutritious

Here in America, we eat more chicken than any other meat. Unlike beef and pork, chicken is low in calories, sodium and cholesterol. It is a fantastic source of protein, vitamins and minerals. Plus, it is relatively inexpensive. A pound of chicken costs 50% less than a pound of ground beef.

The balance between nutrition and price is the main reason chicken consumption has grown 2.3% a year in the U.S. since 1980, while beef and pork consumption have both declined:

Of course, chicken is not just popular in the States. Take it from someone who has traveled all over the world: If there is one food you can always get — whether in Asia, Europe or South America — it is chicken.

Worldwide, 30% of all meat produced is poultry. Since the late 1990s, chicken consumption has increased in every country from Saudi Arabia to Australia to Brazil. And the total global chicken population is up over 244% since 1960 — more than sheep, cows, goats and pigs. But, despite the nice growth statistics, I have seen the massive disparity in the amount of chicken consumed in rich and poor countries.

The average American consumes 48 kilograms of poultry a year — the most of any developed country. Meanwhile, the Chinese and Russians eat only 11-13 kg. of chicken a year. And our neighbors to the south in Mexico consume only 20 kg. a year:

If you study this chart, you’ll notice the countries that consume the most amount of meat per person are the United States, Germany and Italy. Of all the countries in the world, the U.S. ranks third in terms of the highest GDP per capita. Germany is 17th and Italy is 21st. Meanwhile, Egypt, India and Indonesia are among the lowest meat consumers in the world. Not surprisingly, they rank low on the GDP per capita list: 113th, 122nd and 110th, respectively.

Clearly, there is a relationship between meat and wealth. As people make more money, they can afford to eat more meat. And as they eat more meat, chicken and meat stocks rise. For instance, take these recent examples of emerging countries as proof:

• Brazil’s per capita GDP has increased 12% in the last five years. Meanwhile, its largest chicken producer, Sadia SA, is up 733% in that time
• South Africa’s per capita GDP is up 30% since 2001. Astral Foods (one of the country’s largest poultry producers) is up over fourfold in the last four years alone
• And Thailand’s per capita GDP has risen 16% since 2003 alone. Not surprisingly, Charoen Pokphand Group (the country’s largest agribusiness conglomerate) has made investors a cool 68% over the last three years.

Tomorrow, I will introduce you to a company that could make you equally as rich as these three. It is Mexico’s leading poultry producer. And it is a company you should put on your watch list immediately.

Until then, happy investing…

James Boric
December 12, 2006

Investing in Chicken was originally featured in the Penny Sleuth.

Unfortunately, most won’t until it is too late. But I don’t want you won’t fall into that trap. Let me explain…

For the first time since the British pulled out of India in 1947, the world’s largest democratic nation opened its virgin $300 billion retail sector up to a foreign mega-retailer. Namely: Wal-Mart.

Yesterday, Wal-Mart announced it formed an alliance with Bharti Enterprises Ltd. (a leading Indian telecommunications company) to open hundreds of stores in India over the next several years. According to an article on investor.com, “Under the deal, Wal-Mart and Bharti Enterprises will set up a joint venture to manage procurement, inventories and logistics, while stores will be set up under a franchise agreement, said Sunil Bharti Mittal, the chief executive of the Indian company.”

This is a massive story – although it didn’t make the headline of any mainstream news source that I saw. (It was buried under about 10 stories that came out that day). This sole event will lead to billions and billions in profits for investors (especially small-cap).

You see, until yesterday, 97% of India’s retail sector was made up of Indian mom and pop storeowners like the ones in this picture:

For the last 49 years, the Wal-Marts, Targets and Sam’s Clubs of the world were not granted access to India’s blossoming consumer class. The country’s leftist leaders wanted to protect the millions of small-time shopkeepers that dominate the retail sector. After all, the politicians need votes come election time. And this has been the major item on the Communist ticket for years now.

Screw the Communists!

To be a true super power you cannot close yourself off competition – whether foreign or domestic. By doing so you sacrifice your own people’s long-term prosperity for short-term mediocrity. By allowing major retail outfits like Wal-Mart into India you encourage billions of dollars to be spent on access roads, parking lots, water purification, infrastructure development, banking development, insurance writing and real-estate development. And on top of that, you encourage billions in foreign direct investment — money India can use to improve its living standard.

As a guy who has been to India twice in the last three years (and seen the problems with my own eyes), believe me: India has a lot of room for improvement. If you doubt that, here is a picture of an Indian slum my buddies Karim, Greg and I took this past February:

Of course, there will be some negatives that follow Wal-Mart and other massive retail outfits into India. Thousands of mom and pop shop owners will go out of business – just like they have here in the United State when Wal-Mart set up shop. Politicians (who are on the hook come election time) will scream bloody murder – just like they do here in the United States. And thousands of folks without a job will tell Wal-Mart and its supporters that they are the devil incarnate – just like they do here in the United States.

BOO-HOO. Get over it. All great economic nations are founded on a principle of competition – both domestic and from abroad. That’s how progress is made. That’s how improvements are encouraged. And that’s how ingenuity is promoted.

It’s also how investors make a lot of money.

The last time a major Asian country opened its retail sector to foreign direct investment was China. In 1992, it opened its then $75 billion cash cow to foreign investment for the first time ever. And what followed in China was a wildly lucrative series of events…

• The Hang Seng Stock Exchange rose as much as 314%
• The Shanghai Stock Exchange’s market value soared 44 times over
• And the Chinese retail market grew from $75 billion to $480 billion. That’s a 15.3% annual growth rate for 13 years.

Looking forward, there are going to be a lot of investment ideas that pop up in India. Many of them will be small-cap in nature. But it is going to take time to find the really good ones.

Right now, I am working with Kif Hancock – editor of The Bull Hunter — to find an Indian play that will directly benefit from India’s emerging retail sector. Kif is still in the due diligence stages right now. But as soon as he has something figured out, I’ll let you know.

For now, please know this…

India’s retail market is not headline news at this time. No one is talking about it. No one is thinking about how to make money when it opens up. But it will open up (it is just starting to now). And investors who follow this story early on could make a mint . As investor.com reported yesterday…

“India’s retail industry is estimated at about $300 billion, and is forecast to grow to $427 billion in 2010 and $637 billion in 2015, according to consultancy Technopak Advisors.”

If you are interested in getting some of the billions in profits, stay tuned to this space. We here at the Sleuth will fill you in – early on in the game.

Best regards,
James Boric
November 28, 2006

P.S.: The last time we reported on India our  winning plays quickly shot through projected profit targets and yielded a combined average gain of 70%.

P.P.S.: Let me know what you think about India opening up its retail sector. Do you care? Do you have an opinion about anything I said in this Sleuth? Give us your two-cents. If you have something good to say, I’ll publish it in an upcoming article.

Investing in India was originally featured in the Penny Sleuth.

Back in May 2005, company insiders at ViroPharma (VPHM:NASDAQ) bought 233,500 shares of their own stock. They were obviously banking that their novel drug, Vanocin (which treated acne and various skin conditions) would be accepted by the FDA.

It was. And the stock rose from $3 to $24! Now another biopharmaceutical company may be on the verge of similar profits.

NeoPharm, Inc. (NEOL:NASDAQ) is a biopharmaceutical company that researches, discovers and commercializes cancer drugs. Its lead drug therapy (which is currently in Phase III clinical trials) is something called cintredekin besudotox (CB). CB is a recombinant protein that targets deadly brain tumors in adults, known as glioblastoma multiformes (GBMs).

GBMs are terribly aggressive tumors. They essentially have tentacles that spread and mix with normal functional brain tissue, wreaking havoc on the body and growing uncontrollably. Most people diagnosed with this form of brain cancer die within one year, despite aggressive surgeries, radiation and chemotherapy.

Over the last 20 years, there has not been any significant treatment for GBM patients. In fact, there has only ever been one form of FDA-approved chemotherapy for this kind of cancer. And it only increases a patient’s survival by a few weeks.

NeoPharm is on the verge of a much better treatment.

Its lead drug therapy, CB, is made up of a single molecule composed of two parts. One part bonds to deadly tumor cells. The other part is absorbed into the cancer cell — killing it. And unlike radiation treatment, CB does not harm healthy brain cells. Healthy brain cells do not have the receptors that are necessary for the CB molecule to bind to them.

So far, in a series of blind trials, patients treated with CB lived for an average of 55.6 weeks versus 28 weeks with currently available treatments. While this may not seem like a massive breakthrough (i.e., a cure), it is twice as effective as the current treatment.

Because of the clinical trial results, CB has received orphan drug designation in Europe. It has been fast-tracked by the FDA. And it was selected to participate in a new FDA pilot program (which allows for more frequent interaction with the FDA during the drug development process).

In addition to the interest by the FDA, several other renowned groups have partnered up with NeoPharm, including the National Institute of Health and Nippon Kayaku (to market CB in Japan).

Of course, there is no guarantee that CB will be approved by the FDA or that NeoPharm stock will rise a la ViroPharma. If CB is rejected, NEOL’s stock price will crash and burn. That is for certain. But based on insider buying patterns, it seems this tiny company has a nice shot at success.

Since the beginning of this year, insiders (including the CEO, CFO, chairman of the board, a director and a couple vice presidents) have purchased 322,782 shares for prices ranging from $4.85-10.20. And in the last 30 days, insiders have spent $390,000 on NEOL stock for their own portfolios. This is the most amount of insider money invested in any 30-day period in the company’s history.

Think they are confident about CB’s future?

You bet they are. It seems the FDA is hell-bent on bringing CB to market. And with partnerships with the NIH and Nippon, management appears to be gearing up for potential licensing and marketing deals.

Keep an eye on NeoPharm, Inc. (NEOL:NASDAQ). This could be the next big story in biopharmaceuticals.

Here’s to big profits,

James Boric
October 12, 2006

P.S.: If you would like to learn about opportunities like NeoPharm more often, I just released a brand new, 9-page report, about two companies with massive insider buying. One is a small-cap gold company on the verge of increasing production by 150%. And the second could turn millions of pounds of useless coal into an efficient energy source worth billions. I expect both companies could double — or more — in the next 12 months.

Investing in Small-Cap Pharmaceuticals was originally featured in the Penny Sleuth.

At the time, I was also following two copper stocks: Northern Orion Resources (NTO:AMEX) and Taseko Mines (TGB:AMEX).These two copper stocks have hit a few bumps in the road recently. Northern Orion and Taseko Mines are down 20% and 21%, respectively, since I mentioned them in the August issue of Small-Cap Strategy Report.

As I said when I first mentioned these companies, they are extremely risky. In fact, I said they were a 10 on the risk scale (1 being risk free and 10 being the most risky). Both NTO and TGB rise and fall with the underlying price of copper. And since I first published my issue on copper, the reddish base metal is down 10 cents (or 3%):

Despite the general weakness in copper (and, really, in all commodities) over the last couple of months, I wouldn’t panic. Let’s consider the facts…

First of all, both Northern Orion and Taseko have major catalysts that could unlock explosive profits for patient shareholders. NTO is sitting on 21.8 billion pounds of copper that is not reflected in NTO’s current stock price. And TGB’s Prosperity Mine has 2.3 billion pounds of copper that is not reflected in its stock price. The reason these large amounts of copper are not being factored into these companies’ respective stock prices is simple: Neither NTO’s Agua Rica or TGB’s Prosperity mines are in production yet. Thus, Wall Street doesn’t have any fixed numbers or stats to go off of to properly value these companies. So they ignore this potential upside altogether.

That is ridiculous.

If we just assume that NTO’s Agua Rica and TGB’s Prosperity mines have only HALF as much copper as has been proven (based on preliminary tests), then NTO is still sitting on 10 billion pounds of copper and TGB is sitting on 1 billion. Now let’s assume copper prices fall to $2 a pound. And to be ultra-conservative, let’s assume it costs each company $1.50 to mine each pound of copper (though NTO’s current cost per pound is about 10 cents!). With these assumptions, TGB is worth an additional $500 million and NTO is worth an additional $5 billion.

Given this, TGB is currently undervalued by at LEAST 100% (its current market cap is only $261 million) and NTO is undervalued by about 800%!

When I wrote to you in August, I mentioned that there has not been a significant new copper mine discovery in nearly 100 years. And according to the Metals Economics Group, “Worldwide, significant copper discoveries between 1998-2004 have fallen well short of what is needed to replace the copper produced — a total of just 39.9 million metric tons of copper in reserves and resources has been discovered, while production totaled just about 93.6 metric tons — although the resources in these deposits have potential for further increases over time.”

As you know, due to significant demand worldwide, this base metal outpaced all of its higher-profile precious peers by a significant margin over the last five years. When I last wrote to you about copper, in August, spot copper prices were up 393% from their lows in 2001. Meanwhile, gold was up only 151%, silver was up 188%, platinum was up 202% and palladium was up 122%.

Also, thanks in part to rapid growth in India and China, worldwide copper demand is at an all-time high. Below is a table that shows the total amount of copper produced every year since 1998 compared with total consumption:

For the last three years, copper consumption has been greater than the total amount of copper produced. As a result, copper supplies and stockpiles have shrunk to five-year lows and copper prices have skyrocketed from 75 cents a pound to as high as almost $4.

At the end of the day, copper prices are super volatile. So if you own these stocks, you MUST be willing to endure the ups and downs. It’s as simple as that. You must also be willing to lose your money should copper prices plunge.

The flip side is that if either mining company is able to put Agua Rica or Prosperity into production, you are looking at almost certain triple-digit gains.

The risk is yours to take or not. But I like both stocks at current levels.

Good investing,

James Boric
October 5, 2006

P.S.: When I’m not following the bigger trends affecting the small-cap market, I’m tracking the smart money. One of the best (and most misunderstood) ways of making money in the stock market is by following the insiders. As one famous fund manager said: “Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise.”

Investing in Copper was originally featured in the Penny Sleuth.

It’s almost as if every five years or so investors lose their minds and go on a money-spending bender. How else can you explain why stocks like M-Wave, Inc. (MWAV:NASDAQ), GSE Systems, Inc. (GVP:AMEX) and AMDL, Inc. (ADL:AMEX) rose 143%, 177% and 142% between Jan. 1 and May 1?

M-Wave hasn’t made a dime in profits in five years. GSE Systems is a terrible company. Sales have fallen from $50 million to $22 million since 2001. And AMDL has not generated a dollar from operating activities as far back as I can see. Yet leading up to the recent Russell 2000 meltdown, these stocks were three of the best performers.

I wish I could tell you MWAV, GVP and ADL are statistical outliers — that the market isn’t full of these highflying, overvalued companies. I wish I could tell you that investors, for the most part, have been making sound investment decisions and have gone out of their way to avoid irrational speculation (like they swore they would do after the dot-com bubble). But unfortunately, that’s not the case.

Take a look at this chart John Hussman, a top-rated small-cap fund manager who has averaged a 16% annual return since June 2000, published in his April 3 weekly market commentary:

It shows the advance/decline ratios (leading up to the recent market meltdown) for:

*** S&P 500 stocks with the highest-quality rankings (in blue)

*** 60 largest S&P stocks (green)

*** Stocks on the NYSE (orange)

*** Lowest-quality stocks on market (red).

From April 2005-April 2006, the lowest-quality stocks on the market advanced at a higher rate than any other group of stocks — far outpacing their high-quality peers.

In fact, from the beginning of 2006 to early April, stocks with the weakest fundamentals (the most speculative stocks on Wall Street) gained 20.09%. Meanwhile, the stocks with the strongest fundamentals rose only 7.38%.

Irrational behavior like this cannot carry on forever. Hussman points out, “In general, bull markets have historically ended with investors showering their affection on speculative darlings that seemed to offer a ticket to sure money, fast money or preferably both.”

Certainly, small-cap “investors” have been smitten with their speculative darlings of late. But does that mean the bull run in the small-cap sector is over?

We don’t know.

Despite the Russell 2000’s recent 12% drop, it is possible that the irrational buying binge will pick up again and stocks like MWAV, GVP and ADL will continue to climb at a furious pace. Again, no one can know for sure what will happen.

What we do know is that the party must eventually end. Just as a child cannot grow into a healthy adult on a diet of candy bars and soda, the market cannot keep rising on weak fundamentals. It will have its day of reckoning. And when it does, the speculative stocks that have led the way in this bull market will come crashing down the hardest — just like they did during the last correction.

From March 15, 2000-March 15, 2003 (the three years after the last bull market), the most speculative stocks on the Russell 2000 and the S&P 500 fell an average of 71.05% and 63.96% each. Those kinds of losses are nearly impossible to recover from.

But you might be interested to know that the highest-ranked stocks (those with the strongest fundamentals) on the Russell 2000 and S&P 500 actually rose 6.88% and 16.08% during that same three-year stretch.

Makes you think, doesn’t it?

As we move into the second half of 2006, terms like “value,” “cash,” “earnings” and “sales growth” will start to re-enter investors’ vocabularies. Fundamentally sound stocks that have lagged the speculative darlings of the market will once again gain favor. And companies like MWAV, GVP and ADL will once again be left for dead.

I suggest you take some time this weekend and go through your own portfolio. If you are holding onto any speculative darlings that you can’t stomach to see fall 70% in the next three years, now is the time to get rid of them. Now may be your final chance.

Don’t say I didn’t warn you.

Regards,

James Boric
June 15, 2006

Speculative Darlings was originally featured in the Penny Sleuth.

Having just finished about five radio interviews in a row, Addison looked up and gave me the “make it quick” look. So I dove right in…

“I ran a stock screen to find potential candidates to feature in Penny Stock Fortunes. I wanted the names of all the small-cap companies trading for $10 or less on the major exchanges with a market cap of $1.5 billion or less, sales growth of at least 10% year over year and quarter over quarter, earnings growth of at least 10% year over year and net profit margins of 10% or more. Also, the stocks had to be liquid — trading at least 100,000 shares a day. What I found was kind of weird.”

“I ranked the companies by net profit margin first — to see which ones had the most profitable business models. The top four companies (of the 23 that showed up on my screen) were…

1. China Finance Online Co. (JRJC:NASDAQ), net profit margin of 70.7%
2. Ninetowns Digital World Trade Holdings (NINE:NASDAQ), net profit margin of 67%
3. VAALCO Energy, Inc. (EGY:AMEX), net profit margin of 33.8%
4. Hurray! Holding Co. Ltd. (HRAY:NASDAQ), net profit margin of 31.9%.

“Notice anything weird about that short list of companies?”

Before Addison could answer, I told him…

“Three of them are Chinese. And if you look at the other companies that popped up on this screen (that didn’t make the top four), a lot of those are Chinese as well.”

I boldly stated (knowing that almost every Chinese stock is down 50% or more from its 2004 highs), “I think it is time to buy China again. For instance, look at Ninetowns (the second-ranked company on my screen). It boasts a net profit margin of 67%. Its sales and earnings are up more than 30%. It’s liquid. The stock is down 51% from its high in 2004. And with a market cap of $190 million, it has over $100 million in CASH!!

“The numbers look spectacular.”

Addison replied in a skeptical voice, “I don’t know. This is China we’re talking about. Something seems fishy to me. But who knows? Find out and let me know. You could be onto something.”

So I went to work…

I read Ninetowns’ latest annual report and a presentation it put together for investors in November. I was blown away.

Ninetowns is a software company that helps clients streamline the import/export process in China. Talk about a much-needed business.

If you are a logistics manager trying to sell your company’s products in China, the declaration process is a long and potentially painful one. You have to fill out lots and lots of paperwork. Then, you have to physically take those forms down to a branch office, stand in line to pre-register and then stand in another line to have your work inspected. After standing for hours, it’s not uncommon for the inspections officer to find mistakes in your forms and ask you to fill them out again and come back later.

Doing business in China is like dealing with our Motor Vehicle Association — times 1,000. It’s frustrating, time-consuming, inconvenient, error prone and costly.

That’s where Ninetowns comes into play – or so I thought.

It’s flagship software product, iDeclare, is like TurboTax for the Chinese import/export business. Instead of filling out all the paperwork (blindly) and dealing with the lines and the inspections officers, you simply install iDeclare on your PC. It automatically updates you about new laws, rules and regulations that may affect your business. It checks for errors on your declaration statement. And when you are all done, you simply send your completed forms to the correct government office — electronically. With in an hour, you get a note back telling you about errors you need to correct…or that your form has been accepted and you can now do business in China.

Ninetowns makes doing business in China easier. And with a 90% share of this niche market, a powerhouse customer base that includes Sanyo, Honda, Ericsson, Pfizer, Gillette, DuPont, Energizer, Kimberly-Clark, Kodak and others…and a balance sheet that is cleaner looking than a germophobe in the shower, this is exactly the kind of small-cap company you want to invest in — right?

So why isn’t everyone buying this under-$6 stock? Why is it down over 50% since it IPO’d in late 2004?

I kept digging around and quickly found my answer buried in a past earnings announcement.

Ninetowns’ business model was SO good the Chinese government couldn’t resist getting into the action. In Ninetowns’ second-quarter earnings announcement (titled, “Company Lowers Full Year 2005 Guidance”) it stated…

“On July 29, 2005, the company received an invitation as part of an open bid process from the State Administration for Quality Supervision and Inspection and Quarantine of the People’s Republic of China to submit a proposal for development of software products that have basic functionalities similar to those of the company’s existing software products — iDeclare and iProcess. As a result, the company believes that software products with functionalities similar to those of iDeclare and iProcess, developed at the request of the PRC Inspections Administration by the company or another software developer, will likely enter the marketplace in the near future and be competitive with iDeclare and iProcess. Further, the company believes the PRC Inspections Administration may distribute the software products…free of charge to end users.”

Classic. The Chinese government just cold-cocked NINE like it was a drunk guy hitting his wife. Not only did the government ask the company to submit a proposal to develop software it could use to speed up the import/export process for companies wanting to do business in China, it then implied it would take that software and give it away for free!

WHAM! HULK! SMASH! CRASH!

There goes Ninetowns’ business model. There goes its moat. And there goes its stock price.

On that news, shares of NINE fell 33%. And despite all the cash in the world, Ninetowns’ solid-looking balance sheet and its past growth numbers, I wouldn’t invest in this company with my worst enemy’s money. If it can’t change the way it does business, the company won’t be in business much longer. The stock could easily go to $0.

So why I am I telling you this story?

Investing is tough. Sometimes things aren’t as they appear. On the surface, NINE was about as intriguing as it gets. This tiny company has $100 million in cash, tremendous growth numbers and a 90% share of what looked to be a great niche market.

I’m sure a lot of people bought this stock over the past 12 months based on the numbers alone. I mean, when I first saw them, I was beside myself — so much that I made Addison stop what he was doing and listen to my so-called great find.

But only fools invest on numbers alone. To really understand a business, you have to do a lot of digging. You have to read boring annual reports, quarterly reports and earnings statements. You have to pore through Web sites, product lines, analyst reports, balance sheets and income statements. You have to look for the information that isn’t obvious.

In NINE’s case, I had to do a lot of back work to find one tiny paragraph that told the entire story. In this case, the Chinese government ripped off NINE’s business model for its own. And in the process, it ripped off what could have been a great opportunity for my small-cap investors.

Oh, well. I was reminded of a very useful lesson…

If something seems too good to be true — it is. And my goal as the editor of Penny Stock Fortunes and Penny Sleuth is to filter out the companies that are fluff and feature the ones that have legitimate growth potential.

NINE turned out to be fluff. But that’s OK. I am working on another idea now.

I found an American company that has a 50% stake in a growing market. It also has a great looking balance sheet. And so far, I haven’t found any reason not to believe it will rise a lot higher in the months and years to come.

Stay tuned…

Best regards,

James Boric
March 2, 2006

China’s Government Hulk Smashes This Small-Cap Contender was originally featured in the Penny Sleuth.

Imagine if every time you bought a stock, you knew exactly what the company’s CEO, CFO, board of directors and even its legal team thought about its future. Maybe the CEO would pull you aside and say, “Listen, next quarter is going to be a big one. We just landed a multi-million dollar contract with a brand new client. When Wall Street finds out about it, our stock will double.” If you had this kind of “insider information” you’d be rich, right? You’d always know what to invest in and when. There is no limit to the money you could make.

The only problem is, you don’t have access to a company’s top management on a daily basis. And even if you do, they SEC prohibits them from doling out such crucial information.

Stinks doesn’t it?

Well, there is a way to know what the insiders are thinking before you ever buy another stock.

Thanks to Section 16 of the Securities Exchange Act of 1934, insiders are obligated to reveal any trading of company shares by the 10th day of the month after they bought or sold their company stock by filling out something called a “Form 4.”

On these Form 4s, the insider is required to disclose how much stock he bought, at what price and when he bought it. This is all crucial information. And you have access to it all.

By scouring the market’s Form 4s everyday, you can know exactly what stocks the insiders are bullish on. You can know exactly where the so-called “smart money” is betting the highest returns will be. And you can put yourself in the best position for outstanding returns.

By the way, financial sites like Yahoo! Finance, investor.com and morningstar.com all have an “insider transaction” link you can click on to see if insiders in any given company are buying or selling stock. These sites simply download information from the Form 4s and publish it for their readers.

So it sounds simple. Everyone with access to the Internet can be on top of what stocks the insiders are loading up on thanks to these Form 4s and financial Web sites. That’s the good news.

The bad news is, it’s not as easy as it may seem to decipher the insider transactions you see on the Form 4s or the financial Web sites.

Knowing a Good Signal From a Bad

For starters, there are hundreds (if not thousands) of insider transactions reported in a given day. So it would literally take you ALL day to go through them. And even then, you have to know what to look for. Unfortunately, not all insider activity is useful — even the reported “buys.”

Many times an officer or manager in a company receives stock options as part of his compensation package. These options can total in the millions of dollars. And every time a CEO cashes in on an option, he must file with the

SEC using a Form 4.

With that in mind, you may pull up a Form 4 and see what looks like a whole lot of insider buying by a CEO or CFO in a company. But in reality, he isn’t using his own money to buy stock in his company. He is simply using his options he was given by the board of directors to “cash in.”

This is not the kind of insider buying you want to look for. You want to look for the stocks that the insiders are loading up on with their own money — and enough of it that they would feel the pain if they lost out.

Another mistake many novice investors make is they bite at the first hint of insider buying. For instance…

If one insider buys a few shares of stock in his company, the last thing you want to do is blindly buy that stock as well — especially if the insider only put a small amount of money down and several other insiders are selling when he is buying.

Between 1958 and 1976 five prominent insider-buying studies were published by Rogoff, Glass, Devere, Jaffe and Zweig. They all wanted to show how much money you could make by buying the same stocks the insiders bought – shortly after they laid their money down.

In each study these gentlemen followed two hard and fast rules. First, there had to be more than one insider buying stock in the company – known as “cluster buying”. And second, the number of purchases had to significantly exceed the number of sell transactions. By following these rules, they were able to beat the market by a 2:1 margin.

And there’s another rule you need to follow as well…

Three Rules to Always Follow

Here are three rules you should remember if you’re looking at insider buying:

Rule No. 1: There must be a cluster of buying by the insiders. That means at least two different insiders must be buying at about the same time. And it should not just be directors (who tend to be paid in company stock in addition to a salary). We’re looking for top management putting up their own money.

Rule No. 2: The total number of buy transactions must significantly outnumber the total sell transactions.

Rule No. 3: The insiders must lay down a significant amount of their own money in the stock. And actually, there is a fourth rule that should seem glaringly obvious to you…

The Power of Small-Cap Stocks

Everyone knows that small-cap stocks have dominated the market — outpacing the large caps in each of the last seven years. But what many investors may not realize is that this is NOT a fluke. Historically, small-cap stocks have always led the market.

In a famous study conducted by Ibbotson Associates in the 1990s, they found that small-cap stocks outperformed all other stocks 56% of the time — including the blue chip stocks that get all the media’s attention — between 1926 and 1996. The average return in any given year was 14% for small-cap stocks. It was just 9% for large caps. And the longer you held your small-cap stocks, the better off you were.

Since 1926, there has NEVER been a period of 25 years or more where investing in large-cap stocks has proven more lucrative than investing in small-cap stocks. Of course, there are many reasons for the large small-cap returns.

1) There are a lot more small-cap companies on the market. About two-thirds of all the companies on Wall Street have a market cap of $1.5 billion or less. So as a small-cap investor, you have a much wider universe to find moneymaking opportunities.

2) Because there are so many small-cap companies, the major brokerage firms and institutions don’t have enough analysts to cover them all. So they simply ignore some of the fastest-growing companies on Earth. As a result, there are some tremendous companies trading for virtually nothing. And over time, all good bargains get discovered. We look for them before that discovery happens.

3) Good small-cap companies can adapt to the changing marketplace and react quicker than their larger, stodgier large-cap peers. They are nimble.

4) Simple math tells you that it is a lot easier for a $200 million company to double than it is for a $255 billion company to do the same.

Knowing most of the true bargains on Wall Street are in the small-cap universe is a huge advantage over your large-cap peers. And when you combine the explosive small-cap market with the insider buying strategies I talked about earlier, you give yourself a great chance to make some tremendous gains.

– James Boric
February 27, 2006

Your Secret Connection to the Insiders was originally featured in the Penny Sleuth.