by William Smith
(San Rafael, CA USA)
One factor is looking at stocks trading below $5/share. Like playing blackjack in a casino, you know that in most cases thee odds are against you but there seem to be a few things that can even them out. My goal is to find situations where the axiom of "the current pps is always the correct valuation as it is a relection of all the news that exists being built into the price".
Institutions don't have the time, interest, and in many cases, the option of purchasing stocks under $5 a share. So stocks that trade below $5/share can sometimes be better opportunities for finding ideas that have been overlooked by the people with access to the most information.
This is a very double edged sword, however, as lack of information is rarely a good thing. When doing this, the minimum of due diligence I will uncover is the amount of debt the company has and the burn rate of whatever capital they claim to have. Debt, especially in these days is too heavy an albatross for small businesses. I paid dearly for that in Foothills Resources.
Another convergence of factors I like to see is if the pps is being kept artificially low by a lack of understanding of the what the company's real business consists of. An example of this is Solid state lighting. A few years ago, LEDs where confined to pretty lights on your electronic equipment. Then someone at either Cambridge or Sandia, I believe, came across a way to stablize the blue/green phosphor compound necessary for LEDs to put out white light that was far more attractive than flourescent light and far cheaper than both incandescent and flourescent-aside from the cost of the unit.
PHG and GE immediately recognized this. Philips bought Color Kinetics and GE has their own in house research around this. Nobody paid any attention to CREE. Whenever any analyst commented on this company it was lumped together with all the other semiconductor stocks. On top of that, the biggest factor working against the technology was the cost/unit of SSL. CREE is no longer unknown, when I started buying shares it was trading around $17/share and lower. Now its above $50 a share less than a year later. What I see as the real ace in the hole for CREE is this - the sales that are going to provide the revenue stream for this and similar companies is installing energy efficient lighting in residential and commercial buildings. In case readers of this link haven't noticed we have been in a residential building slump for over a year and the commercial building problems have yet to be full recognized. In five years when all of this building slump is behind us and homes and offices are being built at another furious pace, the price per unit of solid state lighting will have dropped way below what it is today and energy prices will have undoubtedly gone up. This creates a perfect opportunity for those companies who make white light LED fixtures to be in the catbird seat. Incandescent fixtures are becoming outlawed in many states now and flourescent light was never popular because of aesthetics. LEDs offer a cheaper alternative to both and with aesthetics better than either. Companies that have not yet had the run up that CREE has are LSCG, CHMXF and some great overseas opportunities like Seoul Semiconductor & OPTO-? in Germany.
Another stock in another industry that fits the criteria of cheap, benefiting from higher fuel prices and a proven technology is SUF, Sulphco. This equity has the distinction of one of the largest and most vocal group of haters I have seen. For a while, there was some good reason. The management was the same team that developed the technology and rarely does the same skill set that develops a technology co-exist with the skill set that can make the technology marketable (see Wordstar 1990). SUF is currently trading about $.90 but it has survived a lot of naked shorting, ranting, and the worst PR any company has ever paid for. Yet they are still quietly inking contacts on their sonocracking technology that will become very popular when the price of oil becomes an issue again.
Lastly, the biotech field in a minefield with more misinformed money running from one bad idea to another. All of that smokescreen helps obscure some stocks that, if debt doesn't become ab issue, should thrive. Oculus (OCLS) had a brief run from $2.00 to $5.00 a share earlier this year but is back down to $2.25. Their market, however, includes many contracts in countries with a few people living there, ie. China, India and Mexico. Best, the bulk of their product line is not anything that requires the do or die FDA approval. Another biotech that shouldn't have a difficult time with the FDA is MELA.
Lastly, I like non-metallic miners esp. Lithium miners. I don't like gold because it has few industrial applications so when fear isn't rampant gold pretty much sits there and looks shiny.
Lithium, however, is not only used in medications for people who are really depressed by this economy but it is also used in many of the batteries in the trillions of hand held electronic devices, a market that shows no sign of slowing. If electric vehicles seem like they are going to be the leader of the alternative fuel vehicles that will put a huge boost in the Li market. SQM in Chile, AMLM (?) is a much smaller miner in US and their is a Chinese dominant Li miner whose name/symbol escapes me at the moment but if anyone is interested, I'll be happy to look it up.
Though there have been plenty of unimpressive years in the past and to a great extent, a rising tide floated those boats left in the water, I have had an 87% ROI in 2009
Anyway, you asked for it and you got it.
wgs
Editor's Comment: Thank you William Smith for such detailed thoughts on a number of possible positions.
You are right on both counts that finding smaller companies can offer up opportunities that have either been missed by the fund managers, or they are too small yet to justify an investment, and that this can sometimes be a bad thing. Small stock market companies can often stay small simply because they never generate the kind of momentum that enables their price (and value) to truly rise.
As with everything in the stock market, where there is possible reward, there is also possible risk.
Here at StockExchangeSecrets.com we do not offer individual tips or selection advice, and we recommend that every investor conduct their own research before pursuing an investment purchase.
Thank you again Mr Smith.