You Have a Friend in Jordan Kimmel

Irwin Greenstein reports from Baltimore, 40 miles south of the Mason-Dixon line…

*** Hansen Natural Corp. really has juice. This small-cap peach, which we originally targeted in our issue of Nov. 9, 2004 (http://www.pennysleuth.com/alertholder/11.09.04), has fattened the wallets of investors who had the patience to wait for this stock to ripen. Since that fateful day, when Hansen closed at $27, it had grown an extraordinary 112%, to yesterday’s close of $57.23. In the process, Hansen became a media top banana.

Likewise for another Sleuth find, Ascential Software. I talked about Ascential on Feb.11, 2005 (http://www.pennysleuth.com/alertholder/02.11.05). I cautioned that independent software companies were getting crushed by global tech trends and industry giants like IBM. Sure enough, IBM just acquired Ascential, in a story that made Page One of The Wall Street Journal. It makes me all tingly thinking about how much money we can make our readers.

*** In pursuit of the best moneymaking ideas, I flew to West Palm Beach, Fla., for the ValueRich Small-Cap Financial Expo, from March 9-12. It brought together entrepreneurs and investors in a global lovefest of everything small cap. While many folks consider small caps quick-flip trades, others share our conviction that they make excellent long-term plays.

That was the topic of my conversation in the conference’s snazzy Bombay Sapphire lounge with Johan Lefwander, president of Lefwander Capital Management, in Stockholm, Sweden. Johan recalled that in 1993, he bought into a small-cap petroleum company called Sand, which later became Lundin Petroleum and now, 12 years later, has handed him a 370% profit. Great stuff!

*** Conferences provide an edge in information gathering. Pulling data off the Internet will never tell the entire story. For example, Johan and his colleague Lars Nilson-Dag of Stockholm-based Intelligo, joined me for a company presentation by a young, overweight CEO who was sweating like a grilled sausage. Afterward, I had asked them what they thought of the company, and both agreed that the CEO’s poor health could be an investment deterrent.

With that in mind, let me assure you that there will be no sweathogs presenting at Agora’s FREE Daily Reckoning Live conference to be held May 4, 2005, from 1-5 p.m., at the Harbor Court Hotel in Baltimore. Small-cap guru James Boric is a no-sweat kind of guy, as is our publisher, Addison Wiggin, who with Bill Bonner wrote the New York Times best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. And Fleet Street Letter editor Chris Mayer is the cool Alan Ladd of the investment world. If you’d like to attend, reserve a spot ASAP by calling the sparkling Jayla Watje at (888) 799-0483 or (410) 454-0413.

*** As promised, our coverage continues of the ValueRich Small-Cap Financial Expo. In a roomful of savvy investors, Jordan Kimmel reveals the secret that makes him a stock-picking champ…

You Have a Friend in Jordan Kimmel

If your mistrust of Wall Street runs deep as hell, then you have a friend in Jordan Kimmel. As a driving force behind a winning stock-picking system and investment group, Kimmel alleged as far back as the 1990s that earnings were being manipulated to the detriment of investors. So where does an honest investor like Kimmel find an honest investment?

In small-cap companies…because that’s where his MAGNET stock selection system usually steers him. MAGNET is an acronym for the proprietary set of measurements that effectively combines value, growth and momentum to find the best investment opportunities. It’s also the name of his company, Magnet Investment Group, and the title of his book, Magnet Investing. But no matter where you turn in Kimmel’s MAGNETosphere, you’ll find his utter disdain for earnings and P/E ratios as a stock-picker’s tools.

Why?

“Earnings can be legally manipulated,” he told a roomful of savvy investors at the ValueRich Small-Cap Financial Expo. Over and over again, Kimmel explained how corporate accountants can rely on any number of ledger-book ploys such as good will, head count and plant openings and closings to consistently beat the market’s expectations by exactly a penny.

Kimmel related that years ago. When he first started appearing on financial TV shows as a pundit, he would warn the hosts that he was going to bring up the tender subject of “engineered” earnings. Inevitably, they would ask him, “Are you sure you want to do that?”

Their response was a show-biz eye-opener for Kimmel. But it led him to the cold, hard observation that “The media has it all wrong. It’s all sensationalistic.”

And not only does the media have it all wrong, according to Kimmel, so does Wall Street — saying that in addition to the popular myth of earnings and EPS as successful investment guidelines, “The major indexes are only there to generate confidence.”

That’s why Kimmel strongly advises, “You have to be willing to buy companies that no one is talking about. You need to be a detective. You need to look for the clues.”

For Kimmel and his investors, the intrepid detective is called MAGNET — a software sleuth with a knack for tracking down elusive small-cap opportunities. MAGNET is market neutral, meaning that it profits from the current market direction (up or down). Rather than expose investors to the vagaries of earnings and EPS manipulation, MAGNET blends growth and momentum — in particular top-line revenue growth, price to sales and operating margin growth.

“We look for cash flow by market cap as a key indicator,” Kimmel explained at the conference. In addition, “We look at the income statement, balance sheet, relative valuation and investor sentiment.”

Overall, by crunching through some 16,000 investment candidates, MAGNET usually comes up with 20 or 30 companies — most of them small caps. In part, that’s because the lower the profile of the company, the better it scores with MAGNET. This component of the algorithm becomes a tad more complex when weighed against institutional ownership. Kimmel prefers a minimum institutional position of about 5%, with a ceiling of about 30%. Beyond 30%, the company becomes too visible in the investment community and risks becoming overvalued.

In closing, Kimmel tossed out the names of some small-cap companies of interest. They included Collegiate Pacific, UFP Technologies, Friedman Industries, Petrohawk Energy, GP Strategies, Sunair Electronics, PacificNet, PainCare Holdings and The Sands Regent.

When looking at these companies, it’s important to remember that while Kimmel is a man of convictions, it doesn’t mean that he’s going to bat 1.000. Still, a healthy dose of skepticism coupled with a great stock-picking system can be a magnet for top small-cap stocks.

Happy investing,

Irwin Greenstein

March 18, 2005

P.S. While the P/E ratio may not be the best way to judge value any more, there are two metrics that have stood the test of time — cash and tangible assets.

Companies that have cash to invest in themselves will grow even when the rest of the market sputters. And businesses with real, tangible assets (such as timber, steel and cement) will survive and thrive when most others fail.

To discover the most cash rich companies on the market today, check out Chris Mayer’s report on “Tangible Assets That Sweat.” You won’t go wrong with his advice…and you may just make a lot of money in the process.

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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