James Boric reports from Baltimore…

*** This is a good time to be a small-cap investor. For the year, the S&P 600 and the Russell 2000 are up 18.6% and 14.7%, respectively. That’s pretty impressive when you consider the Dow Jones and the S&P 500 are only up 1.8% and 7.8% each. What it says is pretty simple…

Small-cap stocks are still dominating the rest of the market. And based on historical evidence, you can expect that dominance to continue for the rest of 2004.

“Since 1950, November, December and January have constituted the best three-month span for stocks,” Adam Shell reported in USA TODAY.

Quoting Ken Tower, chief market strategist at CyberTrader, Shell goes on to explain why: “Hedge fund and mutual fund managers pile into stocks at year’s end to keep pace in the performance derby and position their portfolios for the new year.” And right now, the small-cap market is where large institutions and hedge funds are dumping their money to get the biggest return before the end of the year.

*** In the Dec. 3 issue of Sleuth, I reported (courtesy of my colleague Dan Denning) that small-cap funds that track the Russell 2000 and S&P 600 were being flooded with millions of dollars. Well, that trend is still continuing.

Last week, institutions dumped $252 million more into IWM, the exchange-traded fund that tracks the Russell 2000 index — including $189 million on Dec. 10 alone. By comparison, those same institutions and hedge fund managers only spent about half that much ($126 million) on the IVV fund — which tracks the S&P 500.

Hmmm…

It’s obvious where the so-called smart money thinks the best returns will be found. And folks, it ain’t in the large-cap universe. The major Wall Street firms are still betting on the smaller stocks to lead the way into 2005.

Your Penny Sleuth editor agrees small-cap stocks will finish out the year strong. In fact, now is typically when small-cap stocks really kick it into high gear.

*** Every year, around the middle of December, retail investors start dumping money into the stock market — for the same reasons the larger hedge funds do. They want to take advantage of the “January Effect” — the idea that small-caps stocks outperform the market heading into the new year.

Merrill Lynch reports, “The January Effect has occurred 70% of the time since 1926.” And it certainly appears to be in full effect right now (although, I would contend the rise actually starts in November, instead of late December or even January).

If you look at a chart of the Russell 2000 index, you’ll notice that from Nov. 3 to now, small-cap stocks have risen 9% — from 585 to 638.

Who knows if that torrid pace can be maintained? (Quite frankly, I think it can’t!) But I do know this…

As long as this rally remains intact, I’m gonna love every second of it. I hope you do, too!

*** By the way, I spoke to Jonathan Kolber — editor of Vantage Point Investment Advisory — on the phone this morning. He was telling me about his newest emerging technology pick, which will be featured next month in his newsletter. Of course, it’s a small-cap stock (microcap, in fact) with a ton of potential. And as Kolber put it…

“This stock has ‘wet your pants’ capability.”

Your Penny Sleuth editor wasn’t sure how to respond to that. But I’m going to assume he thinks it will be a moneymaker. (I sure as heck hope so!)

Anyway, if you are interested in learning more about his service, Vantage Point
Investment Advisory, please check out his latest report:

http://www.agora-inc.com/reports/VPI/nuclearC00

***This issue marks the three-month anniversary of Penny Sleuth. We launched it with the intent of taking a broad view of the small-cap market to make our readers the best-informed investors.

The Sleuth team aims to bring you news and ideas about the small-cap market that other media outlets don’t cover. We believe that small-cap stocks are overlooked and underappreciated in the investment community. And if we can help other people discover how exciting and profitable small-cap stocks really can be, we’ve done our jobs.

*** Irwin, it’s your turn. I know you are excited about the opportunity you discovered for small-cap investors. But please do me a favor: Don’t wet your pants!

Snowbirds Give RV Makers Wings

Being a snowbird isn’t what it used to be. The yearly interstate migration from the bone-chilling climes of the Northeast, Midwest and Canada to balmy Florida, Texas and Arizona is now being taken in $1 million land yachts — the flagships of the fast-growing RV industry. And along with the winter seasonal purchases and rentals of RVs comes a timely opening to pocket a handsome profit from the small-cap companies that build the rigs.

With peak snowbird season just around the corner, more RVs than ever will be sold and rented to baby boomers and young families making the excursion south. Undeterred by high gas prices, the shocking tragedy of Sept. 11 has altered the snowbird’s instinctive pursuit of the sun. Instead of the airports’ endless lines, luggage inspections and body scans, snowbirds are turning to RVs in droves — boosting the stock prices of the RV makers and their suppliers.

Of the 16 major publicly held RV manufacturers and the related vendors that provide necessities such as furniture, appliances and the underlying chassis, all but two boast a market cap of $1 billion or less — making them bona fide small-cap opportunities. And the granddaddy of RVing, Winnebago Industries (WGO:NYSE) just missed the small-cap cutoff at $1.36 billion. So a varied small-cap inventory of solid performers makes it easy to warm up to this $12 billion industry.

Especially since the time to do so has never been better…

For the first half of 2004, factory-to-dealer shipments of RVs were up 20% over the same period the year before, according to the Recreation Vehicle Industry Association. That translates into shipments of 196,000 units versus 163,500 units. Bear in mind, though, that we’re talking everything from a $3,500 tent on wheels to a $1 million 45-foot cruiser featuring a ritzy Sub-Zero refrigerator, infrared thermal imaging for improved night vision and a mini home theater.

In fact, the luxury segment has seen the fastest growth of all RV categories. Industry statistics dating back to 1991 show only 100 RVs sold that year for $200,000 or more. By 2003, that figure had surged 11,900%, to 12,000 units.

So who is buying (and renting) these rolling hotels anyway?

As baby boomers approach retirement, their RV ownership is expected to rise 15% between 2001 and 2010, said a University of Michigan study. But the same study found that the fastest growing age group is 35-54. The rapid adoption by both generations has been fueled in part by an aggressive ad campaign that’s costing the RV industry $50 million per year.

In addition to getting people on the road, the campaign cleverly educates consumers on the virtues of upgrading. If you loved waking up under the redwoods in a tent on wheels with your newborn, then imagine the ecstasy of a 37-footer priced at $67,000 when years later you have three restless kids and a yapping dog as your traveling companions.

Getting into small-cap RV companies now presents a similar growth path. We all know that the big RV season is the summer, when schools are closed for vacation. But what’s less familiar terrain is the snowbird exodus that begins in October and continues through spring.

For example…

The huge Florida influx means big money for the RV industry. As the perennial favorite of snowbirds, the Sunshine State attracts 850,000 of the species every year with the average trip lasting anywhere from a few weeks to six months.

While many snowbirds own, rentals are increasingly popular. RVIA expects a 34% improvement in rentals in 2004, with fat-margin motor homes the most popular models. An incredible facet of that growth is that 13% of the rentals will be by foreign visitors.

Although the snowbird effect on the RV industry has already kicked in, it’s not too late for small-cap investors. Freedonia Research predicts sales in 2005 to be 7.2% higher than in 2004.

Among the top RV small-cap performers are Skyline Corp. (SKY:NYSE) and Fleetwood Industries (FLE:NYSE). But for good measure, I’ll throw in Winnebago Industries.

At Skyline, for the three months ended Aug. 31, sales rose 7%, to $117.1 million. However, net income fell 60%, to $806,000, because of higher lumber and steel costs that seem to hit the company particularly hard. Still, increased volume points toward a strong demand, and if the company can either raise its prices or reduce material costs, a higher profit is at hand. Despite the financial squeeze, its year-to-date stock performance has been 13.9%, up from $35.06, to $39.92.

On Dec. 3, Fleetwood reported second-quarter results for the period ending Oct. 24. Revenues of $712.7 million were a 6% gain over last year’s second quarter, while net income more than doubled, to $8.1 million versus $3.8 million during the comparable period. In reviewing the second half, $1.44 billion in revenues were a 9% improvement from the $1.32 billion of 2004’s first half. Fleetwood’s stock has been on the rise, too. Its year-to-date price has increased 26.8%, from $10.26 to $13.01. Pretty impressive.

Now let’s look at Winnebago. As I mentioned, in the strict definition of a small-cap stock, Winnebago is just barely out of reach. Still, it’s worth examining…

Winnebago’s fourth-quarter revenues for fiscal 2004 were a record $283 million, 25% higher than the $225.7 million of the fourth quarter 2003. This year’s fourth-quarter net income skyrocketed 58% over last year’s fourth quarter, hitting $19 million, compared to $12 million. And by the way, so-called Class A motor homes (high-end models) grew 14.3% through August 2004, compared to 8.9% for the same period in 2003. That means bigger margins and revenues.

Overall, fiscal 2004 was a great year for the company. It generated $1.1 billion in revenues, or 32% better than the $845 million of the previous year. And of course, net income for 2004 set a record at $70.6 million, 41% more than the $49.9 million of fiscal 2003.

And how’s Winnebago’s stock doing? Year-to-date performance rose from $33.97 to $39.16 — or 15.3% higher. Not impressed? Then get this: The company had announced a 2-for-1 stock split on Jan. 14.

With the holidays upon us, if you’re like me, you’ll have some spare time to research hot stocks. Think of all those snowbirds heading south, driving up the profitability of some of the best small-cap companies in America. And then get behind the wheel of one of them.

Happy investing,
Irwin Greenstein

December 14, 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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