*** The markets have shut down for Good Friday, making this short week quite interesting for us. In particular, the small-cap benchmark Russell 2000 Index proved its resiliency in the wake of the Fed’s quarter-point short-term rate increase on Tuesday –once again demonstrating to the rest of the world what we already knew: that small caps are among the best equity investments on the planet.

If you buy into common wisdom, the Russell 2000 should have tanked on the rate-hike news compared to other major indexes. That’s because small companies generally rely on borrowed funds more than their blue-chip counterparts. When the interest rate rises, that can take a bite out of a small-cap’s bottom line.

With that in mind, the Russell 2000 held up rather well compared to the large-cap Dow Jones Industrial Average and S&P 500. For the week, the Dow ended down 1.8% — its biggest weekly fall in six months. The S&P 500 slipped 1.5%. And the Russell 2000 closed out the week only 1% lower. Relatively speaking, that’s an impressive accomplishment within the context of the Fed announcement.

Honing in on Thursday, we see the Russell 2000 scoring big time, up 3.21% over the previous day. That’s in stark contrast to the Dow, which took a 13.15% hit, and the S&P 500′s one-day decline of 1.11%.

Super-heated oil prices and shrinking greenbacks against the euro have so far hammered all the major indexes. But for the greatest potential return, we’re still huge small-cap believers.

*** For those of you who like to think really small when it comes to stocks, I just wanted to give you a heads up that Russell Investment Group, the folks who brought us the Russell 2000, is launching a microcap index in June.

The median market cap for the new index is expected to be $175.8 million, versus $496.4 million for the Russell 2000. It will have a 17.3% tech-sector representation, compared with 13.7% for the Russell 2000. And the health sector will comprise 17.2% of the microcap index, against 12.6% for the Russell 2000. So with a higher share of volatile tech and biotech ventures, you adrenaline junkies may want to examine the new index this summer…

Or visit www.the-gripper.com for one of the most profitable microcap services anywhere. Carl (The GRIPPER) Waynberg has managed to tame the OTC Bulletin Board by adopting a contrarian blue chip, buy-and-hold strategy that has fattened the wallets of his subscribers with gains of 270.83%, 52.94% and 61.53%. So why wait till June?

In the meantime…

*** On Wednesday, we had our monthly editorial meeting in the company’s Victorian mansion headquarters. I always look forward to getting into that beautifully restored conference room with Carl, James Boric, Addison Wiggin, Kevin Kerr, Eric Fry, Dan Denning, Angela Roberts, Sala Kannan, Tom Dyson, Justice Litle, Byron King, Jonathan Kolber and other writers who fly in from all over the U.S. and Europe. It’s a total blast discussing the hottest topics in the financial world and pitching stories to each other.

Of course, also in attendance was Fleet Street Letter editor Chris Mayer. Chris just started a new service called CrisisPoint Trader. During a break, he was telling me how he wrapped up his first CrisisPoint trade for a 32% profit in only 14 days on Whirlpool calls. Chris’ system was spot on in finding the underlying strength in this company’s shares, even while the market was down.

I asked Chris to send me more information, and this morning I received an e-mail from him telling me what he had written CrisisPoint subscribers:

“The catalyst here will be price increases and the resulting better earnings. In a Reuters release on Monday, Maytag reported that profits would be up due to price increases. Whirlpool, too, is raising prices. ‘We are finding that we have pricing power,’ Whirlpool CEO Jeff Fettig said. Analysts have been raising Whirlpool’s estimates for the year, and currently, Whirlpool is projecting 2005 earnings to be between $5.90 and $6.10. Last year, Whirlpool paid down about $1 billion worth of debt, and its financial profile is improving with each passing quarter.

“Days later, Reuters carried the following about a new buy from Longbow Research: ‘In a research note, Longbow said a second round of price increases was likely to be announced in early April in the 5-10% range, with the increases to take effect in June. Whirlpool, Maytag and other appliance makers have already raised U.S. prices at least 5% this year to offset rising raw-material costs.’”

And one day after Longbow’s buy, CrisisPoint subscribers nabbed that 32% profit.

*** This week’s essay comes from Angela Roberts, who tells you the most profitable way to a girl’s heart…

Diamonds Are a Girl’s Best Friend

For half the world, it’s an eternal question. For the other half of the world, it’s a moot point. Why do women love diamonds so much? Men just can’t figure it out, and women — well, we don’t care. We just love them.

Having, in fact, never asked myself why, I pondered the question for the first time this past Sunday as I stood in front of a glass case, gazing into the brilliant blue depths of the triumphant, 45-carat Hope Diamond.

It’s in Washington, D.C., at the Museum of Natural History. Hordes of 10-year-olds pushed past display cases as their dads and granddads directed them along. But the women…they lingered and hesitated in front of each case. Their fingertips gently pressed against the glass that separates us, forever and completely, from those beautiful, glittering objects.

And I was one of them. I silently surveyed that big, brilliant blue diamond. I watched it sparkle under the small spotlight fixed above it. I held my breath as it slowly spun on its rotating pedestal. I was mesmerized. And I wondered why.

Let’s face it: It’s only a piece of concentrated carbon. It’s almost obscene in its size and audacity. But it sparkles. It shines. It transfixed me and every other woman standing motionless next to me. This single stone has hypnotized women for centuries, and I’m convinced it will continue to do so for many more.

And though they aren’t quite sure why, men will continue to drop large chunks of change on smaller, more attainable versions. Last month, U.S. online diamond sales totaled $1.6 million in the two weeks preceding Valentine’s Day. Two weeks. Online sales. $1.6 million.

I queried my male friends. Why do women love diamonds, or things that sparkle in general? Most just shook their heads with hopeless wonderment, their countenance taking on the look of a sad, despondent victim. The response was unanimous: “I don’t know. I just don’t know.” The most insightful, and honest, reply came from my good friend Jim, a research analyst at one of the top brokerage firms in town. He makes a lot of money, but is very particular with how he spends it. “That’s a good question,” he sighed. “They are ridiculously expensive and have very little value.”

Little value? What on earth…?

Jim’s mother just died. She left a 4-carat, pear-shaped diamond — which she paid $15,000 for — to Jim’s wife. Jim had the diamond appraised and was understandably happy when it scored a $25,000 price tag. And then he was mortified when he had it appraised for insurance purposes and the appraiser valued it at $6,000. And then Jim told me a joke: An ad for a diamond should say, “Because you thought an hour in a woman’s arms was worth $50 a minute.”

Very funny, indeed, but when I polled a few women, they weren’t as amused, or amusing. In fact, they took the question quite seriously. Eyes slowly glazed, and contemplative reverie set in. One woman compared it to looking at stars at night or the reflection of sunlight on a river. Another told me it’s calming. Maybe it’s genetic, she added. I think she’s right: We must have a diamond gene.

In any case, women love them, and men buy them. Does it matter that you’re spending thousands of dollars on a tiny chunk of polished-up compressed carbon molecules? Nope. What matters is that there is a demand and, as it happens, a very diverse supply. And thanks to our diamond gene, it will probably be like that forever.

And women’s eternal love for shiny objects bodes well for all the small-cap jewelry companies out there. Right now, the global market for jewelry is over $110 billion. Small-cap companies like last month’s Penny Stock Fortunes’ Special Report pick, LJ Intl., Inc. are set to profit from that demand. The Hong Kong retail jewelry company raked in over $70 million in jewelry sales in the last 12 months, with a positive net income.

Charles & Colvard, Ltd. is a small-cap American company that manufactures, markets and distributes jewels made out of moissanite — a rare, naturally occurring mineral found in meteorites. The company cuts the almost-colorless gems into round, princess, radiant, oval, marquise, heart, cushion, square-brilliant, pear and trillion shapes, in sizes ranging from 0.03 to 3.1 carats. The company brought in $20 million in sales in the past year, has a positive net profit margin and is growing sales year over year.

Movado Group, Inc., a small-cap U.S. watch maker, designs, manufactures and distributes watches in almost every price category in the watch industry. It also markets watches with Movado, Concord, ESQ, Coach and Tommy Hilfiger brand names. The company’s watches have Swiss movements made with solid 18-karat or 14-karat gold, stainless steel, titanium, 18-karat gold finish and quartz. Sales for the past year totaled over $390 million, with net profits of over $25 million.

A third small-cap jeweler, DGSE Cos., Inc., is one of the largest precious-metals and jewelry companies in the United States. It sells jewelry through online auctions, having launched its first online site back in 1995. It also provides consulting and liquidation services through its wholly owned subsidiary, Silverman Consultants, Inc. It even operates a pawnshop in Carrollton, Texas. Its sales topped $28 million in the past year, and it’s been growing revenues steadily for the past three years.

For the most part, these companies are tiny. But while market caps are small, revenue growth is huge, and thanks to women’s love of diamonds and all things shiny, their futures look bright. So while I never found an answer to the question of why we women love diamonds so much, I have discovered a small-cap sector that provides great investment opportunities.

And for all you fellows out there who still feel the need to understand our attraction before you can plunk down the bucks for your wife’s next set of solitaire studs, think of it this way: The sparkle of a diamond catches our eye, and our breath, the same way a gorgeous woman walking down the street might catch yours. For whatever reason, you just can’t take your eyes off her, and you don’t spend too much time trying to figure out why.

Best regards,

Angela Roberts

March 25, 2005

Diamonds Are a Girl’s Best Friend was originally featured in the Penny Sleuth.

*** In Tuesday’s issue, we told you that the smart money was flowing back into small-cap stocks. Small-cap exchange-traded funds received a $593 million infusionfrom institutional investors and hedge fund managers during the last three days of January – a reversal of fortune from earlier in the month.

Well, it looks like we’re on a roll. That’s because the leading small-cap indexes rose to 2.5% in the wake of the Fed’s quarter-percentage-point rate increase on Wednesday. The Russell 2000 closed up that day 3.84, or 0.61%, to 631.98 – while the S&P 600 finished the day at 326.02, an increase of 2.20, or 0.68%.

The news is actually better than it appears…

Since small-cap companies are generally considered a higher risk by lending institutions, they are forced to pay higher interest rates than large-cap borrowers. Naturally, higher interest payments mean lower profits. Still, Wall Street continued pumping money into the small-cap markets both before and after the widely anticipated
rate hike. Apparently, a sunny outlook on top-line revenue growth, hot IPOs and mergers-and-acquisitions consolidation is overshadowing the tedium of an incremental expense.

That makes me think that Punxsutawney Phil is wrong about six weeks more of winter …at least for small-cap investors.

*** Speaking of critters, the dragon may strike Nasdaq with a blockbuster Chinese IPO in the second half of the year. The company is Baidu.com, and it has everything going for it.

In terms of potential, it could be a mirror image of Google…simply because Baidu.com is the biggest search engine in China and the second biggest Web audience in the world – after the U.S. In fact, Google holds a minority stake in Baidu.com. Details of the impending IPO remain sketchy. But here’s what we have so far…

Baidu.com plans on selling about 25% of its capital, putting its valuation at some $800 million. The company has been profitable since 2004, with revenue growing about 150% annually. Revenues in 2003 were estimated at $12 million, but could dramatically accelerate with the estimated $200 million war chest it would get from the proposed IPO. That kind of money could buy a very serious marketing campaign to pull in advertising in an already superheated online market…as illustrated by Google’s recent fourth-quarter earnings.

Google reported that its ad sales hit $530 million, up 118% from the same quarter in 2003. The company’s profit was 71 cents a share. But since Wall Street excludes charges for stock option grants and other noncash items, Google actually raked in 92 cents a share. In any language, that’s huge.

The Baidu.com IPO will be a tough one to call. When Google went public at $85, skeptics cried that the company was overpriced. Now Google is north of $210, and the Street is euphoric over its dazzling fourth-quarter results. We’ll keep you posted on Baidu.com, but for those of you who missed my original story, “Chinese IPOs March on the Nasdaq,” click here: http://www.pennysleuth.com/alertholder/01.21.05

*** In the meantime, your ship may have just come in. At about noon yesterday, DRYSHIPS, Inc. started trading on Nasdaq. It was offered at $18, but opened at $19.28 and closed at $20.15 – an increase of 4.5% over the opening price in just a matter of hours. By day’s end, 10.2 million shares changed hands. Underwriters Cantor Fitzgerald originally intended to offer 7.1 million shares, but bumped it up to 13 million to satisfy demand. The $234 million from the IPO will go towards adding 11 new vessels to its fleet of six that carry coal, iron ore and grains.

As it turns out, I’d been talking with Kevin Kerr, editor of Resource Trader Alert, about the shipping industry. In his own words, “The shipping industry is red hot.I tend to focus on energy transport, but the same rules apply to all shipping. In my arena, companies like Teekay Shipping and OMI Corp. are perfect examples of stocks that are benefiting mightily from the growing demand for time charters and reliable, well-managed fleets that can live up to their commitments.”

Kevin explained that both Teekay and OMI were in his portfolio. Here, Kevin reports the latest on OMI…

“OMI rose 3.6% after the company said fourth-quarter earnings would come in above analysts’ estimates. The oil tanker operator expects earnings of $1.10 a share. Analysts were expecting earnings of 97 cents a share. OMI said that rates for its Suezmax vessels, which averaged about $84,500 a day for 80% of the days booked in
the quarter, are expected to fetch about $97,000 a day for the remaining unbooked portion of the quarter. Tanker companies are in a pretty good market right now. Oil demand is at its highest level since 1979.”

That’s one reason why Kevin is bullish on shipping in general.

“There is no doubt that all types of shipping are in the spotlight for investors these days,” he said. “No matter if it’s oil or petroleum products, foodstuffs, manufactured goods, etc. Cargo carriers, tankers…demand for all kinds of ships is surging. The shipping sector is ramping up for more and more profits from all directions. The astute investor will be sure to have some shipping stocks in his portfolio, as demand is far from shrinking.”

*** For many Sleuth readers, after-hours trading is like the Bermuda Triangle of Wall Street. Angela Roberts unravels this moneymaking mystery for you.

Shedding Light on After-Hours Trading

Sometimes, strange things happen. For instance, have you ever watched a stock close a mere 2 cents above your buy price with a strict plan to wait till the stock makes a little dip the next day to buy under your preferred buy price…But instead, you wake up to find that the stock is suddenly significantly higher in price at market
open than it was the day before at close?

Or the opposite happens. Overnight, the price of a stock you own drops. And for many small-cap investors, small price fluctuations can mean substantial percentage differences in gains. But don’t get confused, discouraged or angry if you see your profits evaporate overnight. Instead, what you can do is understand what’s going in the shadowy hours between 4:00 p.m. and 9:30 a.m. on Wall Street – and leverage the heck out of it.

The process itself is called after-hours trading. It isn’t a new phenomenon, but it’s constantly evolving and growing. After-hours trading is conducted by highly sophisticated electronic bulletin boards called electronic communications networks (ECNs). You may have heard of some of these ECNs: Archipelago, ATTAIN, INET, MarketXT and NexTrade.

These emerging networks are giving brokers and individuals more access to after-hours trading, boosting the frequency and volume of late-night trading. But as you know, this can end up becoming a nuisance.

Back in the days of Wall Street superstars like Benjamin Graham and Bill Tweedy, investors used the hours between 4 p.m. and 9:30 a.m. to contemplate companies, read the news, develop strategies and even sleep. In turn, companies used those hours to issue news alerts and update investors on corporate activities.

In those days, only stockbrokers could trade on the market, and the only trades going on in the after hours were big-block trades from professionals and institutions. In the 1990s, the stock market opened its doors to individual investors, and it wasn’t long until those investors wanted the same benefits as the large institutions and mutual funds, including equal access to after-hours trading. They got their wish in 2003.

Historically, all investors had a fair jump into the trading day when the bell rang at 9:30 a.m. With after-hours trading open to all investors, it is possible that a stock could experience a major price movement overnight. That means your stock might now open at a completely different price than the one you saw when you shut down your computer and headed home the day before.

But nighttime and daytime trading are as different as, well…night and day. Technically, after-hours trading isn’t so much trading as matchmaking. Shares swap on ECNs, but there is no human exchange of them. There is no verbal deal-making. So how are all those shares bought and sold in the middle of the night? Electronically. ECNs are like massive electronic bulletin boards that connect matching orders.

The major exchanges do have trades that go through for up to an hour after market close, and those trades are based on market close prices. And some NYSE-listed stocks are traded on foreign exchanges, in different time zones. But for the most part, post-4 p.m. and pre-9:30 a.m. orders go through an ECN. Even though they’ve been around for over 5 years, ECNs were off limits to individual investors until 2003. In simple terms, ECNs are subscription-based services that retail brokers can use to match buy and sell orders during the market day, and after hours.

One substantial risk in after-hours trading is limited volume. To avoid such a problem, the NYSE has specialists to control the trades between buyers and sellers. The Nasdaq is an electronic exchange, but it has market makers who are able to accept and give orders at slightly different prices between buyer and seller. That window of flexibility is called a spread, and the market maker will keep the profit or take the loss incurred by the spread. But ECNs have none of those built-in protections and can only match exact trades. Therefore, they can also only take limit orders.

Of course, the obvious problem with this system is that the ECN may not be able to match a buy or sell order. In that case, the order will remain unfilled until a matching trade materializes. If it doesn’t, the trade won’t happen. In regular market hours, this normally isn’t a problem, because there are specialists or market makers keeping track of everything. But when dealing with ECNs, your options for order execution are much more limited.

The obvious advantage to after-hours trading is that investors can respond immediately to news released after normal trading sessions end. But the resulting problem is that there are fewer buyers and sellers, and many trades are left uncompleted. And this limited liquidity is a greater issue for smaller-cap stocks, which don’t have as many shares in the open market to begin with.

Not to mention that after-hours trading is an unbalanced situation between the individual investor and largei nstitutions, with the individual investor in the weakest position. Individuals end up competing for limited liquidity with resource-laden institutions.

Compacting this weakness is the fact that individuals still depend on their broker’s relationship with the ECN. Some brokers don’t have the ability to trade on multiple ECNs and therefore can’t match orders across networks or even view quotes from other ECNs. As it stands now, there isn’t even a public ticker for after-hours trading.

Also, flexibility is sacrificed when it comes to the actual order itself. Most ECNs only accept limit orders, because the ECN is simply connecting matching buy and sell orders. If the stock you’re trading never reaches your limit buy or sell price, your transaction will not be executed. And because the order goes from brokerage to ECN and back, transaction times are much slower than what you find during normal market hours.

Already, we can see that as the world moves toward a truly global economy, after -hours trading is an integral element of the future. And there are initiatives to improve it, including talk of a public after-hours ticker.

For now, if you do trade on the ECNs, find a broker that has access to multiple ECNs. If you decide not to take your chances on the ECNs, you can still make after-hours trading beneficial for you. With the increasing participation of individual investors after hours, overnight price fluctuations will become more common. By simply monitoring the after-hours trading, you can pregauge the next regular trading session’s activity. Also, because there are stock markets all over the world, in dozens of time zones, after-hours trading can also serve as a way to monitor the effects of international markets.

By the way, INET has already applied to the SEC to be a new stock exchange. If that is approved, expect to see traditional exchanges like the NYSE suffer drops in activity. Along with the rest of the world, Wall Street is surging ahead toward a global, 24-hour market.

Best regards,

Angela Roberts

February 04, 2005

Shedding Light on After-Hours Trading was originally featured in the Penny Sleuth.

*** One of the most profitable investment ideas I ever had came about a year and a half ago. In the August 2003 issue of Penny Stock Fortunes, I recommended that my readers buy shares of China Yuchai (CYD:NYSE) — a Chinese diesel engine manufacturer — for under $7.50 a share. Sounded boring at the time. I mean, come on: We live in the age of TiVo, PDAs and robotic surgeons. Who wanted to own a diesel engine company?

Turned out quite a lot of people did. You see…

At the time, the Chinese engine market was growing about 20% a year — right along with the automobile market and tremendous growth in the Chinese middle class. It wasn’t hard to see what was happening. China was morphing from an agrarian country to a modern one. GDP was growing almost 10% year. And “boring” companies like China Yuchai were taking off. It was just a matter of time before CYD did too. And as it turned out, it didn’t take long.

I recommended shares of CYD on July 10, 2003. By Aug. 12 (one month later) the boring engine maker was trading for $16.35. One month after that, on Sept. 8, it was trading for a remarkable $19.87. In just under two months, investors had the chance to make 164.9% on this one stock. And anyone who decided to hold on longer could have made even more.

Before it was all over, shares of CYD reached as high as $37.24 — 396.5% higher than my entry price. Not too shabby.

So why was CYD such a successful investment idea? Two reasons. First, it was a fundamentally sound small-cap company with growing sales and net income. At the time, CYD was trading for less than 10 times earnings. Sales were growing at an incredible 97% annual rate. And net income was up an equally impressive 64.4%. And second, China was an emerging market with tons of room for opportunity and growth.

As I said, GDP was growing double digits a year in China. The amount of paved roads boomed from 38,000 kilometers in 1985 to over 160,000 kilometers in 2003. And with that boom, the demand for automobiles soared as well.

In 1985, there were only 45,000 transportation vehicles in all of China. In other words — there was one vehicle for every 10,000 people. By 2003, that number had increased exponentially. As a result, demand for diesel engines rose, too. From the early 1980s to 2002, demand for China Yuchai’s engines increased at a compounded annual rate of 28%.

China was a booming emerging market. There was a ton of money to be made. And as is the case in any emerging market, fundamentally sound and growing small-cap companies like China Yuchai give you the biggest bang for your buck as an investor.

Of course, the China story is old these days (although it has not run its course, trust me). But there are always emerging markets to make money in – especially as a small-cap investor. For instance…

*** India has been a fantastic place to make money in the last two years. The Sensex (India’s main stock index) is up 84% since the beginning of 2002. And small-cap stocks have been leading the charge — big time.

According to The Times of India, penny stocks have been rising at breathtaking rates. Narayan B. Bhatt, a reporter for the newspaper, noted that…”The share price of Indo Green Projects, a finance company, has shot up by a whopping 1,423%…”

He then said…

“A number of pharmaceutical/biotech penny stocks have risen by leaps and bounds. Zyden Gentec has risen by 1,097%, to 71 rupees, from 5.9 rupees, between July and November. Choksi Laboratories was up 851%, to 55 rupees, from 5.75 rupees…Hester Pharma shot up 707%, to 66 rupees, from 8 rupees, and Ahlcon Parenterals jumped 382%, from 5 rupees to 24 rupees.”

And as many of you know, I ventured to India this past June to see the opportunities for myself. I was both in awe and scared at the same time.

I was in awe of the tremendous “we can do it” attitude that almost all Indians I spoke to had. In fact, I remember the man who made my bed every day told me, “Mr. Boric, you come back in 10 years. You bring the family and any friends you want. You will see a different India. Just you wait.”

I believe him.

Of course, everything wasn’t rosy in India. There was tremendous poverty — evident by the beggars on every street…the trash that piled up on the Arabian Sea, creating the worst stench you could imagine…the rabid dogs roaming the sidewalks in search of any food scraps imaginable…and the little kids knocking on car windows for even the smallest handout. That was hard to take. But over the next few years, I expect the situation will improve. And I will return — to see if I am correct!

Until then, remember two things…

The best-performing emerging market each year ALWAYS outperforms the mature U.S. markets. And when a country takes off, small-cap stocks lead the way — just like we saw in China and in India.

By the way, my colleague Jonathan Kolber has an incredible opportunity for investors looking for emerging market-type gains. He is hot on company trading for LESS than $1. The brains behind this company is a Russian scientist who escaped from Russia about 20 years ago. His story is incredible. In fact there are actually movie rights pending. But his story isn’t as incredible as his track record.

This scientist has NEVER filed a patent that wasn’t brought to market. Everything this guys sets out to do is a success. It’s insane.

Right now, this company’s stock trades on the OTC Bulletin Board  market for under $1. Jonathan thinks it could easily hit $10 before all’s said and done. Find out more. Check out his free report…

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

*** Finally, our very own Angela Roberts just came back from Latin America — where she was checking out a country that could soon be the next great emerging market.

Angela, take it away…

Nicaragua and the Theory of Emerging Markets

Getting to Nicaragua wasn’t hard. It was a two-and-a-half hour plane ride from Miami to the country’s sole airport: a small breezy building with one airstrip, a handful of duty-free shops and a tropical air that wafts in through the open slatted windows.

As my friends and I exited the airport, a driver met us. In a beat-up Japanese SUV, we drove through Managua, the capital. One-room cinderblock shops, roadside vegetable stands and small open-air cafes lined the streets. The streets were filled with people casually milling around and listlessly leaning against walls, catching the shade of thatched or tin roofs.

I was curious: unemployment in Nicaragua has fallen by more than 15% during the past 19 months, yet at 3:00 p.m. on a Thursday, there were people just milling about everywhere. As we drove along, it also occurred to me that Managua is filled with empty cafes. Ten years ago, inflation was in the thousands. Today, it’s around 5%. Considering that Nicaragua’s economy has been strengthening at such a rapid pace, I wondered why no one seemed to be buying anything.

Our car sped along asphalt, then bumpy gravel and eventually dirt roads. Two hours later, I was gazing at the glimmering Pacific, under a warm sun and clear sky, with the rugged and wild landscape of Nicaragua’s hills and forests behind me.

We stayed on the west coast, at Rancho Santana — a dazzling resort complete with privately owned houses, a main clubhouse, pools, verandas, a horse stable and an exceptionally gracious staff. The resort is perched on the Pacific. It’s the same ocean as the one you see driving on Route 1 in Northern California, but amazingly, here you will never see an airplane or a ship. You will get a one-of-a-kind sunset every evening, replete with brilliant oranges, purples, reds and pinks as the sun drops into the ocean in front of you. You’ll also get fine dinners, lazy hammocks, horseback rides on the beach and swimming pools.

The contrast between the capital and the resort is stunning. Nicaragua doesn’t seem to have any money or business, yet it has luxury resorts all along its coasts. The country has a population of about 5 million, yet it receives over 450,000 visitors each year, which means that for every 11 people in Nicaragua, there is one tourist, making tourism the biggest national product. In fact, including the price of a rented car, it costs an average of $30-$50 a day to travel comfortably around the country. Meals range from $1.50-$4. The potential that represents made me begin to think of emerging markets and the potential they hold for rapid growth and quick returns.

Basically, you can split an emerging market into three stages: There is the accelerated growth market, like in China, which has already seen the largest part of its economic boom. There is the completely undiscovered, investment-starved market stage that hasn’t yet experienced the beginning of an economic boom and doesn’t have much hope to start one anytime soon. And then there is what lies in the middle: a market that is just about to take off, that is cheap now, but in a few years will be soaring. Countries like Nicaragua fall somewhere in that spectrum. The trick is to find one that isn’t as overvalued as China (having just experienced its boom) and to find instead one that is just starting to brew, just about to take off.

There are two things that economically depressed countries need to have in order to develop: government stability and foreign investment. When those two things happen, the result is an emerging market with substantial investment potential. And while investments in emerging economies have a high level of risk, they have an equal possibility of a high return. And that’s the exciting part. The volatility is balanced by the potential to get in on the early stages of a country’s economic growth.

Similar to the concept of small-cap stocks, emerging markets offer the largest growth potential. You can invest in a stock when it’s small and let your profits grow as the company grows. Likewise, you can invest in a country that is underdeveloped and follow the same upward path to profit.

Nicaragua is making major efforts to attract tourists and foreign investors. The government recently enacted the Foreign Investment Law, offering 100% foreign ownership in businesses and tax exemptions for up to 10 years, in some cases covering 100% of income taxes. With so much possible potential for growth and profits, I decided to find out where Nicaragua falls in that evolution of development.

But first, I soaked in some sun and lounged on the clubhouse veranda. That night, I danced the merengue, talked politics with local Nicaraguans and met Americans who have built vacation and retirement homes there. When you realize that the cost of building is approximately $100-$120 per square meter, while in Costa Rica it is between $250-$400 per square meter, you can see why many foreigners prefer Nicaragua over its more popular, and more expensive, neighbors.

All this fun brought me to learn something else about Nicaragua. For a country that is so often overlooked, it has a lot to offer, and the local business owners are promoting tourism, big time. Real estate is experiencing the beginning of a boom, but what about capital markets? I had to ask myself: What are the chances to make any money investing in Nicaragua’s economy?

Bordering Costa Rica and Honduras, Nicaragua is between the Caribbean Sea and the Pacific Ocean. The region is beautiful, but the lack of business and employment, a struggling political landscape and burgeoning economy add up to a heavy burden.

It wasn’t until 1990, in a free election, that a democratic and aggressively pro-business government was implemented. It transformed Nicaragua from a socialist, dirt-poor country to a democratic, aggressively pro-business, dirt-poor country. But at least now it has potential for economic growth.

So far, Nicaragua’s beauty is attracting foreigners as a vacation destination and retirement location. But as far as investment opportunities go, it just isn’t there yet. It is at the infancy of the emerging market evolution that China has already passed. Nicaragua is only in the infancy of that market evolution, but it will be another few years till it really gets going. Most recent statistics show that while Nicaragua’s revenues are $726 million, its expenditures surpass that, at over $900 million, with a total debt of over $5.8 billion. The government has just begun to stabilize, but the general economy has not yet begun to reap the
benefits.

At the moment, foreign investments are in real estate, but they aren’t yet in businesses or capital markets. Americans are buying property, not stocks. While Nicaragua isn’t fit for investors yet, when the economy starts growing and Nicaraguan investments start profiting, I’ll let you know.

Best regards,

Angela Roberts

December 10, 2004

P.S. By the way, I have found another Latin American country that does fit the emerging market profile with an economy that is about to take off. In fact, this country is at the perfect stage for investment — right between Nicaragua and China on the emerging market development timeline. Its market is booming as we speak and is about to further explode.

Its market index has been overshooting the S&P 500 by three times for the past two years. But what’s just around the corner is even better. I’ll have that for you in the January issue of Penny Stock Fortunes (www.psfortunes.com), along with a great small-cap company in that market that you can invest in right now. The company has growing revenues and is in an industry that directly benefits from the growing economy. It also has a stock price that has risen over 50% over the past three months and, as this market emerges, will have an even longer way to go up the chart. I can’t wait to tell you all about it.

Nicaragua and the Theory of Emerging Markets was originally featured in the Penny Sleuth.