James Boric, high on his morning coffee, reports from his humble abode in chilly Baltimore…

*** Everyone loves a good secret. And I’ll admit, I’m terrible when it comes to keeping one. Once I know something juicy, I want to share it with everyone.

For years, I’ve known something that most investors will never know. Heck, even those that do know the secret don’t take advantage of it. And it drives me nuts. In fact, it’s the sole reason I decided to start writing Penny Sleuth in the first place.

The secret is how to make money when no one else is.

It’s not a new revelation that most investors don’t have a clue how to make money — let alone beat the market year in and year out. After all, they invest in the same large-cap stocks everyone else does. They invest in the same index funds every broker recommends. And they inevitably rake up damn near the same results as every other sucker in America. It baffles me, dear reader.

If you really want to beat the market, you have to look outside the stocks featured in the mainstream media. You can’t invest solely in index funds. And you have to be willing to venture out of your comfort zone. You have to invest in the stocks everyone else is too afraid to touch.

*** My colleague and friend Chris Mayer, editor of Fleet Street Letter, is one of the few people who understand how to make money on Wall Street. He’s spent years as a vice president in the banking industry. And he knows you have to invest the companies that don’t get covered on the front page of every major newspaper in America — but have the fundamentals to rise up. Chris knows the best way to beat the market is to look to the companies everyone isn’t looking at.

And as it turns out, some of the best-performing stocks are also absolute pariahs of Wall Street. Check out this note Chris sent me a few days ago…

‘James, I was reading a good piece by James Altucher in Financial Times today (’There’s Gold in Them Thar Microcaps’). He writes…

‘There is no stock more humiliated and degraded than the small-cap stock which gets so beaten down that it is thrown out of the S&P 600 index to make room for a company that has a larger capitalization.’

He then notes the performance of those stocks that have been dropped from the S&P index. On average, he writes, from 1997-2003, buying such a stock at the close on the day it is deleted and holding for five days results in an average return of 15% per trade.

For example…

A company my Penny Stock Fortunes readers are familiar with, Salton, Inc. (SFP:NYSE), rose from $3.12 to $4.07 in five days after it was deleted from the S&P 600. That’s a nice 30.5% gain for a stock NO one wanted to touch. And it highlights the true secret to making money on Wall Street.

It’s the small-cap companies no one has heard of, with solid businesses, that will make investors the most money in this market.

By the way, if you are interested in Chris’s newsletter, Fleet Street Letter, check out his free report. He’s found a company no one else is looking at right now. And it has the potential to make you steady gains no matter which way the market trades. Check it out.

http://www.agora-inc.com/reports/FST/catB39

*** It can be tough to venture outside your comfort zone when it comes to investing. No doubt about it. When all of your neighbors, friends and colleagues are talking about IBM, Intel, GE and Hewlett-Packard, you don’t have much to contribute to that conversation. In fact, I bet most people would sneer at you when you started rattling off smaller companies that no one knows about. But revel in this…

For the last five years, small-cap stocks have outperformed large caps by over 50 percentage points. The Russell 2000 is up 40.65% from November 1999 to November 2004. Meanwhile, the far more popular and “safer” S&P 500 is down 14.54%.

So I ask you…

Is it more important for you to have your peers validate what you are investing in…or would you rather just make more money?

If you want to make more money, you must be willing to invest in small-cap companies. And Penny Sleuth Irwin Greenstein has uncovered one such small-cap company that has risen big-time this year. It’s a perfect example of a stock that no one has heard of…but has made a few people very wealthy.

(By the way, we don’t recommend stocks in Penny Sleuth. Any company we highlight is purely to prove the point that small-cap stocks are worth investing in.)

Take it away, Irwin…

New Age Drinks Energize Beverage Market

It was 1965. The University of Florida Gators football team was caught in an epic battle. Not against an unbreakable defensive line or a star quarterback who could throw 70-yard bombs. Rather, their biggest enemy that year was the pounding heat of the Florida swamp…where a good morning started at 90 degrees with an equal measure of humidity.

Day after day, some of the best players staggered back to the locker room before practice was over. They literally couldn’t take the heat. And as a result, the team suffered.

During the 1965 season, the Gators racked up a miserable 7-4 record (which is OK for most schools, but NOT for the Florida Gators — a powerhouse in Division I college football. Something had to be done. And short of building an air-conditioned dome over the entire field, the Gator coaches were at a complete loss for how to save their team from the intense heat…and get a shot at the Orange Bowl.

That’s when university doctors Robert Cade and Dana Shires stepped in.

After performing several tests, the doctors determined that the Gators were not properly hydrated. Water alone wasn’t cutting it during practice. The players’ thirst may have been quenched, but their bodies still lacked vital nutrients to play in the extreme heat.

So the doctors came up with a drink rich in carbohydrates and electrolytes. Designed to rapidly overcome fatigue, the special formula stimulated quick fluid absorption, reduced dehydration, energized the muscles and encouraged the players to drink more of it.

The drink worked…far better than anyone expected. The team’s recovery was miraculous. With bottles of this potent drink in the locker room and on the sidelines, the Gators’ renewed stamina earned them the moniker “the Second-Half Team” in 1966. Their record improved from 7-4 to 9-2. And in 1967, they prevailed in the Orange Bowl 27-12.

By 1970, that same drink was being used by sports teams around the country. In fact, it was even credited with helping the Kansas City Chiefs beat the heavily favored Vikings in Super Bowl IV.

Today, this ‘Florida sports drink’ is sold all over the nation. It raked in $5 billion in sales last year. That’s billion — with a “B.” And if you’ve ever played a recreational sport, chances are you’ve guzzled down a few bottles yourself.

This little-known drink that was invented in 1965 to help the Florida Gators survive the heat was called Gatorade. And it gave birth to the growing alternative beverage market — which today is a huge industry.

Just how big?

According to the research firm Beverage Marketing Corp., sales in 2003 for “all-natural thirst quenchers” were about $14.1 billion at wholesale, up 5% from 2002 revenues of an estimated $13.3 billion. And much of that growth is credited to a new generation of alternative drinks…

Names like Mango Tango, RX Memory, Vitasoy and Skinny Water are starting to show up on grocery shelves across the nation — just like Gatorade did in the 1970s. And while none of them is as big as Gatorade – yet — their popularity is growing.

It’s easy to see why.

They all profess to make you healthier, stronger and more refreshed. These drinks, whether they’re fresh-squeezed, organic or all natural, are targeted to audiences ranging from women to baby boomers to Hispanics. Regardless of their target audience and health claims, there’s one thing that alternative beverages have in common…

Their businesses are growing very quickly.

In 2001, sales of enhanced water totaled $85 million — the market that year just getting off the ground. That segment of nutritionally supplemented bottled water, though, is expected to reach $5.6 billion by 2010. And why not? A liter bottle of oxygenated H2O can cost upwards of $2 — putting a nice status symbol in the cupholder of any BMW.

At the same time, soy milk revenues soared from $240 million in 1997 to $897 million in 2003…while sports and fitness nutrition drinks are expected to hit $4.5 billion by 2007, up from nearly $2 billion in 2000.

But the phenomenal growth of alternative beverages comes at the expense of good old-fashioned soda pop.

Coca-Cola shipments shrank from 1.9 billion cases in 2002 to 1.8 billion cases in 2003…representing a 3% loss of market share. And Pepsi fell even further. And in the same period, the Pepsi Generation drank only1.3 billion cases, compared to 1.2 billion cases…for a market share drop of 7.5%. Blame it on the baby boomers.

The generation that brought you The Electric Kool-Aid Acid Test has embraced the “food as medicine” craze…with alternative beverage makers taking it mainstream.

And this recent charge has really helped one small-cap alternative beverage company.

Hansen Natural Corp. (HANS: NASDAQ) is a leading provider of alternative beverages such as Monster Energy, Tropical Passion Smoothie and Energy Island Blast. Hansen is a holding company with wholly owned subsidiaries, Hansen Beverage Co. and Hard e Beverage Co. The company develops, markets and distributes natural sodas, fruit juices, energy drinks, energy sports drinks, soy smoothies, flavored iced teas, juice cocktails, energy waters and malt beverages under the Hansen brand name.

And as of late, business has been booming…

In 2004, Hansen won an exclusive contract from California’s Department of Health Services to supply apple juice and apple grape juice to its Women, Infants and Children’s Supplemental Nutritional Program (WIC).

And thanks to several key acquisitions, an aggressive marketing strategy and a growing inventory of best-selling drinks, Hansen has been one of the top-performing companies in the industry.

For the third quarter, ended Sept. 30, 2004, gross sales surged 59.9%, to $68.1 million, from $42.6 in the previous quarter. And net sales rose 58.1%, to $52.6 million, from $33.3 million a year ago. If you think those numbers are incredible, then get this: Operating income for the third quarter advanced 181.3%, to $9.9 million, from the year-ago results of $3.5 million.

This is just the kind of steady growth you want to look for in a small-cap company. Both top-line and bottom-line improvements show a well-managed operation. And as with any highly competitive segment, product innovation and the seamless integration of acquired companies are all critical to keeping the cash spigots open.

And while marketing is always important in the fight for brand recognition, I had an unusual alternative-beverage experience a few weeks ago in our office. There was a pizza birthday party here. As it turns out, I had gone to local market earlier in the day to buy a fruit juice, when I spotted a new brand of bottled iced tea. I bought it and saved it for lunch. Over pizza, at least two folks who saw me drinking the tea raved about how much they loved it.

To me, that speaks volumes about how fanatical consumers in this segment really are — and how a new company that hits the right formula could be the next Hansen.

Will Hansen keep rising? It may or it may not. But one thing is for sure…

The alternative beverage industry is still taking baby steps…and there’s plenty of room for the next small-cap mega-star to quench your thirst for big profits.

Happy investing,

Irwin Greenstein

November 09, 2004

James Boric

James Boric began his finance career by successfully picking winning stocks. With time and experience, James realized his goal- to figure out how an average, everyday investor with little capital could become wealthy. The trick, he discovered, was to look to the quickest moving, most exciting and lucrative group of stocks in Wall Street history — small-caps.

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