Penny Champion James Boric Ponders a Common Small-Cap Question in His Not-So-Plush Baltimore Office…

*** “Isn’t investing in penny stocks about the same as gambling in Vegas?” my longtime buddy John asked last night in a 45-minute phone conversation.

Poor John. He didn’t deserve what he got next. For 20 minutes straight, I ranted and raved about the misconceptions people have about small-cap, aka “penny,” stocks.

“It’s BS, man. Everyone grows up hearing about the same large blue chip companies – the Intels, the IBMs and the GMs of the world. Those are the companies your dad tells you about when you’re 10. Those are the companies you read about every damn day in the paper. And those are the companies you see on the Lou Dobbs TV show night in and night out. It pi#$es me off. But guess what…

“Intel is down 30% this year, IBM is down 2% and GM is down 25%,” I said as my face was turning a bright red and I was pumping my fists in the air. “Investing in those companies is like gambling. They are mature. They’ve been through their growth phase. And they aren’t likely to double your money anytime soon.”

To John’s absolute horror, I continued…

“People in general don’t know anything about small-cap stocks. They don’t read about them every morning. They don’t grow up hearing about them – except the one story of their crazy uncle that lost a fortune because he bet the farm on one startup company that went up in flames.”

And that’s too bad…

Because people fear what they don’t understand. And more often than not, they don’t understand a thing about small-cap companies. If only investors knew that…

– Upward of 80% of true value stocks on the market right now are small-cap stocks.
– The best investors of all time (including Buffett, Graham, Price and Templeton) all invested in small-cap stocks and built their fortunes on undiscovered gems of the day.
– And the majority of the best performers on the market right NOW are small-cap stocks.

Eventually, I calmed down. John (who lives in Massachusetts) and I talked about the Red Sox sweeping the Cardinals in the World Series. We both had a few good laughs about the Boston Curse and then hung up.

I get fired up, dear reader! But I can’t help it. Small-cap companies will eventually grow into large ones. Not all. But the ones that do will make a few investors (those who understand the small-cap argument) very wealthy. And I’m not the only one who knows this to be true…

*** On Wednesday, I got an e-mail from a friend and colleague, Chris Mayer. Chris is the editor of Fleet Street Letter – a true value-oriented letter. He looks for companies with what he calls “Tangible Assets That Sweat.” As Chris explains…

“Tangible assets are simply things we can touch and feel, things we can see and count. These investments include things like buildings, timber, cash, certain machinery, land, vineyards and other unique assets. Industries that are not going away and that are in no danger of the next generation of competitors making them obsolete.”

In good markets and bad, companies with real assets not only survive, but thrive. And Chris, like myself, believes very strongly in small-cap stocks. In fact, he is bullish on a small-cap Asian company right now. Check out Chris’ note to me…

“James, I recently recommended a real gem of a small-cap company to Fleet readers – a company that caters to the wealthiest crust of the world’s wealthiest people. Its earnings should increase by 30% this year. Best of all, the stock is cheap. You can get a 33% discount to net asset value by picking up shares in today’s market.”

Chris knows that the true growth and value companies tend to be small-caps. In fact, he recently wrote a free report about one company that could rise four to six times over in the next few years. Check it out: http://www.agora-inc.com/reports/FST/catB12

*** MSN Money once again published the top 10 performing stocks (trading for $5 or more) of the week. And seven of the 10 winners came from the ranks of the “unknown” small-cap market – with shares of CFC Intl. (CFCI:NASDAQ) leading the way, rising 54.5%. Here are the other nine for your researching pleasure…

– Interchange Corp. (INCX:NASDAQ), market cap of $70.12 million, rose 47.1%
– Laserscope (LSCP:NASDAQ), market cap of $529.9 million, rose 39.9%
– WMC Resources Ltd. (WMC:NYSE), market cap of $5.8 billion, rose 38.4%
– Intier Automotive, Inc. (IAIA:NASDAQ), market cap of $1.4 billion, rose 36.9%
– MicroStrategy, Inc. (MSTR:NASDAQ), market cap of $997.5 million, rose 36.9%
– Webco Industries, Inc. (WEB:AMEX), market cap of $45.5 million, rose 35.8%
– Competitive Technologies (CTT:AMEX), market cap of $35.1 million, rose 35.7%
– Decoma Intl. (DECA:NASDAQ), market cap of $897.7 million, rose 33.9%
– Tesma Intl., Inc. (TSMA:NASDAQ), market cap of $1.04 billion, rose 33.9%

The stats don’t lie, folks. Last week, nine of the top 10 performing stocks were small caps. This week, it’s seven. It’ll be a majority next week, too. I’m willing to bet on it. And who knows which one of these stocks will rise for weeks and weeks before stopping?

Maybe one will. Maybe two. Maybe none. We’ll have to see. But I do know one thing: There are tiny companies floating around the market right now that are about to take off. Some will rise for years and years on end – no matter what the rest of the market does. And to show you exactly the kind of profits that exists for patient small-cap investors, check out this case study of one unknown company that tipped from a local sensation to an international phenomenon…

The 21 Minutes That Sparked a 3,631% Run-Up

It was Dec. 17, 1997 – 6:30 p.m. Anxious school kids all over Japan were huddled around their TV sets to watch the 38th-ever Pokemon episode – “Computer Warrior Polygon.” It seemed harmless enough…

The main character, Pikachu, had a mission. He had to go inside a computer and stop a deadly “virus bomb” from being dropped by the evil Polygon.

The anticipated confrontation between good and evil came to a head 21 minutes into the show. Pikachu and Polygon met face to face to battle. Not wasting any time, Pikachu used his electric powers to destroy Polygon and stop the bomb from being detonated. It was an intense fight. And to heighten that intensity, the directors rapidly flashed a series of blue and red lights on the screen.

Within minutes of the battle airing on TV, hospitals were flooded with calls. Pokemon viewers were suddenly suffering from acute nausea, blackouts and epileptic fits. There were even kids who entered into trance-like states, similar to hypnosis. One little girl described her sudden illness like this: “As I was watching the blue and red lights flashing on the screen, I felt my body becoming tense. I do not remember what happened after that.”

It turns out the combination of the colors, the flashing effect on the screen and the duration of the fight scene created an optical stimulus that triggered instant attacks in thousands of Japanese viewers – leaving many temporarily helpless.

Within hours, the Japanese Ministry of Health, Labour and Welfare was investigating the Pokemon episode. TV Tokyo issued an apology and took the cartoon off the air. Even Japan’s Prime Minister Ryutaro Hashimoto weighed in with comments on the unfortunate situation.

Clearly, this marked the end of Pokemon, right? I mean, come on. This cartoon sent a wave of panic over all of Japan. Twelve thousand kids experienced some form of temporary illness. And 618 children were hospitalized – suffering from bouts of memory loss, stiffening limbs and epileptic-type fits.

Pokemon had its 15 minutes of fame. Now it was over?

WRONG!

Lovable Monsters

By April 1998, four months after the infamous fight scene, Japanese kids and parents demanded Pokemon re-air. They missed the lovable monsters.

Sure enough, Pokemon was brought back. And by year’s end, it was the third most watched show in Japan!

The obvious question that comes to mind is how could parents actually allow (let alone demand) Pokemon to re-air? The answer is simple.

Pokemon was an engaging show. It had children sitting on the edge of their seats wondering what would happen next. Plus, with its long list of characters, animation style and timely topics, Pokemon proved to be a tremendous learning tool for young kids. Seven-year-olds could rattle off more facts about Pokemon than they could about any other subject – period.

Pokemon had appeal. And in 1999, it tipped from a Japanese sensation to a worldwide phenomenon – it was introduced to the United States on Nov. 22. The rest is history.

Today, there are Pokemon video games, action figures, DVDs, CDs and, of course, the TV show. The company that owns the rights to Pokemon, 4Kids Entertainment, Inc., went from a $739,138 company in 1997 to a $38.8 million company in 2000. Its stock price shot up from $1 to a split-adjusted high of $37.31 in that three-year span. Investors who recognized the power of the Pokemon monsters made a killing. And you can too.

At $18.48 a share, it’s probably now too late to invest in 4Kids Entertainment. But there are hundreds of other stocks on the market today that are just like 4Kids was in 1998 – on the verge of tipping from a small business to an internationally recognized corporation. And historically, these are the most lucrative stocks to invest in – far better than even the biggest blue chip stocks.

Unknown small-cap companies like 4Kids Entertainment average about 12% returns year in and year out. By comparison, large blue chip companies will give you about a 10% return on your investment. Big deal, right? We’re talking about two points. Who cares?

Before you decide not to care, consider this…

Over an average five-year holding period, a basket of small-cap stocks will give you a nice 84% return on your money. A similar basket of large-cap stocks will give you only 47%. And the longer you are willing to hold, the bigger the difference between small- and large-cap returns.

Over a 10-year holding period, small-cap stocks have been good for a 197% return – compared to 119% for their large-cap counterparts. Hold for 20 years, and your unknown, never-talked-about small-cap stocks will average 762% returns – more than twice as much as the highly touted, often-publicized blue chip stocks.

And if you really have time on your side, you should know this…

Over a 35-year holding period, small-cap stocks have ALWAYS outperformed large-cap stocks. Always.

Of course, investing in small-cap stocks can be a risky business – especially in the short term. Some companies will go out of business – and their stocks will fall to nothing. But others will go on to make you 3,631% profits in three years – like 4Kids Entertainment did between 1997 and 2000. The question you need to ask yourself is…

Is short-term volatility worth it for the long-term profits?

Those investors who bailed on 4Kids Entertainment in December 1997 took a 17% loss when Pokemon was pulled off the air. But more importantly, they missed out on 3,631% profits over the next three years. That’s hard to swallow. In fact, I wouldn’t be surprised if those people experienced acute nausea, stiffening of the limbs and the occasional epileptic fit every time they happened to flip past the latest Pokemon episode. Only this time I guarantee it wasn’t from the flashing red and blue lights…

Regards,
James Boric

October 29, 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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