Irwin Greenstein reports from a bone-chilling Baltimore…

*** While the temperature dips into the 20s here, it’s a good time to dig under the covers to find out what’s really going on with the small-cap indexes relative to their large-cap scoreboards.

For February, the blue chip S&P 500 closed the month up 1.89%, underperforming the small-cap S&P 600, which gained 2.77%. While Wall Street’s chickens in pinstripes keep crying that the small-cap sky is falling, the S&P 600 set a 52-week high yesterday by closing at 332.53 — the previous high during that period being 331.82. And chances are if it weren’t for the inflated prices of the oil and energy stocks that dominate the large-cap universe, small caps would have absolutely trounced the large-caps with style.

At least that’s the sentiment of Steve Swartley, a senior research analyst for Frank Russell Co. Swartley noted that although February was the third straight month that the large-cap Russell 1000 beat the Russell 2000 small-cap index, he did, in fact, attribute the large-cap dominance to the energy sector. Last month, the Russell 1000 delivered a modest gain of 2.2%, compared with 1.7% for the Russell 2000. As long as the United States depends on the Middle East for energy, it looks like small caps’ relative performance will seem weak. But that’s great news for us…

*** Because the Reuters Investor update that hit my inbox this morning had an extremely interesting stat buried in a section called “Sentiment Screens.” At the very bottom of the section is a heading called “Lesser-Known Stocks”…companies that are listed in the Multex database that have no discernable analyst coverage. What does this mean for small-cap aficionados?

Of the 8,746 stocks listed on the Multex, 6,692, or 30.7%, have a market cap of $1 billion or less — our definitive cutoff for small caps. So in Multex, “Lesser Known Stocks” is practically synonymous with small-caps. We’ve already written about the lack of Wall Street coverage for small-cap stocks, creating incredible opportunities for investors who want to dig deep for big profits. Anyway, since Jan. 28, 2005, “Lesser-Known Stocks” have beat the S&P 500 by 289.21%. So forget about anxiously looking up at the sky.  It’s time for heads-down trading.

*** Penny Sleuth regulars have been following our coverage of shipping company IPOs, starting with the DryShips IPO in our Feb. 4 issue (http://www.pennysleuth.com/alertholder/02.04.05). Since Dry Ships went public, on Feb. 3, its stock has soared 24.9% as of 10:47 a.m. today. Well, we have another shipping company on the IPO horizon, and yes, its name is Horizon Lines.

Kevin Kerr, editor of the Resource Trader Alert and frequent commentator on Dow Jones’ MarketWatch, has been providing us with his invaluable insights. Of course, this makes tons of sense, since these ships generally carry commodities such as steel, grain and oil — the very stuff that Kevin lives and breathes. Here’s Kevin on the Horizon Lines shipping IPO…

“Once again, we are seeing more activity heating up in the shipping sector, which is near and dear to my heart. The major $288 million initial public offering by Horizon is just the latest shipping company to set sail on the seas of profits… OK, enough of the tongue in cheek. The truth is if you added the OMI Corp. shipping shares back when I spoke to James Boric and Irwin, then you already know how hot this sector is. Well, I think Horizon is going to do well. As well as old standbys General Maritime Corp., Teekay Shipping, and, of course, OMI. Even though many of these stocks have had good runs, it is my belief that they have a lot more potential to the upside.

“Make no mistake: There is a lot of volatility in these stocks, and I expect them to bounce around. However, the long-term benefit is going to be demand, demand, demand. There is going to be no lack of demand in this sector, and there are still relatively few players. The Horizon IPO is solid evidence that this sector is hot, and will heat up even more in the coming years.

“All of this activity is being fueled by major macroeconomic trends, such as the United States’ hunger for foreign goods, especially from China. Just yesterday, for example, I was down on the New York Mercantile Exchange with some editors from Agora. As we stood near the gift shop, there were boxes full of souvenirs and bobble-head trader dolls, all marked — you guessed it — ‘Made in China.’ I predict only an increase in shipping firms carving out a niche in the IPO market in the coming months.

“I will be seeing James and Irwin again soon and will tell them about more shipping companies I like after we see more IPOs. Then, they can pass the info along to you.”

Thanks, Kevin. Folks, he’s really been on a roll. Since mid-2004, Kevin is 17 for 17 — or batting 100% on his commodity trades. Around here, we call him the Maniac Trader.

*** As your humble and diligent Penny Sleuth, I must in good conscience bring you up to date on what’s happening with Fleet Street editor Chris Mayer’s rumored trading service. Chris has finally nailed down a date for the launch of his new CrisisPoint Trader — inspired by the old Dow Theory masters. He’ll be open for business starting the week of March 14. Watch your inbox for a special offer.

For those of you who want to see Chris live, he’ll be presenting at the Daily Reckoning Live conference at Baltimore’s Harbor Court Hotel on May 4 along with James Boric of Penny Stock Fortunes (www.psfortunes.com) fame and Addison Wiggin, the editorial director of The Daily Reckoning (www.dailyreckoning.com) and author (along with Bill Bonner) of the best-seller Financial Reckoning Day. If you’re interested in attending, contact Jayla Watje at 888-799-0463 or 410-454-0413, and she can reserve you a spot. The event is free for Fleet Street subscribers.

Chris is also working on a new Special Report that will contain six new stock ideas, some of which are too small or illiquid to recommend as the featured stock in his monthly letter (and perfect for Penny Sleuth readers). The report will be available free to Fleet readers and offered to the general public with a subscription. I’ll let you know as soon as it is available.

*** Speaking of conferences, I’ll be attending the ValueRich Small Cap Investor Conference next month in Palm Beach, Fla. And noted stock commentator Jim Cramer is involved through the theory of six degrees of separation.  Read on…

The Media Mandate

Prime-time investing guru Jim Cramer would have loved what happened when the CEO of a small-cap tech company called me…

At the time, I had been in PR, and the CEO was my client. He was on a breathtaking acquisition binge, and Wall Street was extremely skeptical of his latest buyout. In fact, the analysts reviled it so much that the stock tanked 15% — just when a lockup period was ending for insiders to unload. Millions of dollars were at stake, and the CEO needed my help…again.

That’s because I had already booked him on popular financial TV shows, and after each appearance, the stock spiked…before retreating to its latest resistance level. This time, though, he really wanted to goose up the price in anticipation of an analyst presentation — trying to generate Wall Street coverage that the deal had legs. Could I possibly perform another PR miracle?

I pitched my heart out to a reporter at Reuters. It took several interviews with the CEO before a glowing story crossed the wires — producing the desired effect on the stock price. And it was just those dynamics between media exposure and a media-savvy small-cap CEO that Cramer highlighted in a recent magazine interview.

For those of you who aren’t quite familiar with Cramer, he was one half of the Kudlow & Cramer (now Kudlow & Company) business and news TV show on CNBC. He made his own news when he co-founded one of the original dot-com stars, TheStreet.com. Whether on TV, the Internet or his radio show, RealMoney, Cramer has shown a penchant for small-cap companies — and for attracting controversy about his hedge fund, manic tirades and alleged stock pumping.

So given his celebrity and small-cap draw, it made perfect sense that Cramer would be invited to keynote the ValueRich Small-Cap Financial Expo in Palm Beach, Fla., March 9-12. In this playground for the rich and beautiful, there are going to be 250 small-cap executives performing their best songs and dances before thousands of venture capitalists, institutional investors and analysts — everyone chasing big ideas, big bucks and other big things. (Check out my coverage in upcoming issues of Penny Sleuth.)

Personally, I was looking forward to seeing Cramer in action, as I scoped out the formal presentations, industry gossip and fine print in search of the best stories coming out of the Palm Beach County Convention Center. But just as he was about to accept ValueRich’s offer, CNBC gave him a new live daily show. That meant, instead of talking into a microphone before an auditorium full of fans, Cramer agreed to talk into a tape recorder…the result a great four-page interview with ValueRich magazine.

In the interview segments that focused on small-cap stocks, Cramer was emphatic about the importance of PR as a competitive edge. Having been in the PR trenches, I understood what he meant when he advised that a small-company CEO should have a publicist. Why?

Because it’s vital that small-cap CEOs exploit every venue to tell their stories, according to Cramer. And as he astutely observed, there just aren’t as many media outlets for small-cap companies as there used to be during the dot-com feeding frenzy, when any geek with a Razor scooter could find his face plastered in a cheery article. So to overcome the higher barrier to entry these days, a PR pro can be a valuable asset to the company and its investors.

In the interview, Cramer likes to distinguish between small-cap companies that need cash and those that need ink (meaning media coverage). While many small-cap companies that get cash shouldn’t, there are also a lot of excellent small-cap companies that are shunned by the media. And that, he says, is where you, as an investor, have to dig deep to find them.

With the traditional media still stinging from the dot-com explosion that left an abundance of egg on their faces, it’s been years seen we’ve seen John Markoff write about a hot tech startup on Page One of The New York Times. On the other hand, over the past few years, screening software, broadband and search engines have filled the breach for small-cap Sleuthers in quiet pursuit of big profits.

The Penny Sleuth team has always advocated due diligence as integral to a successful investment strategy. When I’m looking into a company, one of the first places I hit on its Web site is the “news” section. Here’s why…

Press releases are a great way to find out how frequently a company introduces new products…and creates new revenue opportunities. In addition to the press releases, see if the company has posted related news coverage. In effect, published articles accomplish a few things: They give the company and its product credibility, raise visibility for potential customers and help convey a sense of industry leadership.

When I see a company that hasn’t issued a press release in several months, that’s a signal for me to move on. It means that ingenuity, marketing and visibility are languishing…along with investors’ money.

I also find that media coverage can provide insights into a company’s executives. If a CEO says something stupid that shows up in print, chances are he’s doing the same thing with Wall Street analysts — undermining the success of the company and its investors.

Take my word for it: I’ve been to plenty of conferences like the one in Palm Beach, and executive showmanship can make a huge difference between the success or failure of a small-cap company. And it certainly is one of my criteria in passing along the best investment opportunities to you from my front-row seat.

Stay tuned…

Happy investing,
Irwin Greenstein

March 04, 2005

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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