Josh, your newsletter is unique in that you cover microcap stocks, which most investors associate with day trading -- but you research the space to look for long term wins. Can you tell investors why you look within the microcap space for those opportunities?
A: Josh Levine, MicroCap Investor
I view microcap investing as a long-term process that entails holding stocks one, three, five years and longer. It is endlessly fascinating and rewarding to invest in small companies developing new technologies and innovations, but it does require lots of patience and discipline. Jumping in and out of stocks only creates short term capital gains -- a tax consequence we try to avoid.
Successful microcap investing, above all else, relies on fundamental analysis and not market timing or seasonal variations. As long as investors focus on the market's inefficiencies at this level -- and capitalize on them -- they'll do very well in the long run.
This point about inefficiencies is extremely important. The gaps between the market's perspective and the fundamental realities of a company are vastly wider in smaller stocks than larger ones -- and that's why I‘ve uncovered so many enticing opportunities.
Like the old song goes, "You say potato and I say po-tah-to, you say tomato and I say to-mah-to ..." Similarly, investors in the microsphere seldom agree on the inherent values of these fledgling companies and, more specifically, their potential earnings power several years out.
Of course, that's what makes for a market and that's why there are usually buyers and sellers at almost every price. As they say, one man's trash is another man's treasure. In microcap land, where there are thousands of penny stocks and solid fundamentals are at a premium, there is lots of trash to sift through. Fortunately, I've been around the block enough times to know which neighborhoods hold the real treasures.
You have a focus on biotech, cleantech, and other emerging technologies. Can you tell us why those key areas?
A: Josh Levine, MicroCap Investor
Small firms are able to concentrate on high-value-added functions where cutting-edge knowledge and technology are paramount. As a result, the microcaps that execute deliver amazingly high-growth margins and profits -- and fantastic returns to their investors.
By participating in transformational changes in the highest-growth industries, any microcap that successfully navigates the path from R&D to commercialization and beyond will emerge a big winner. There are no better sectors to find these companies than in biotechnology and medical technologies, cleantech and renewable
The life sciences is a particularly rich group to explore for exciting microcap opportunities. One reason is that big pharma companies are expected to lose as much as $140 billion in annual sales by 2016, as some of their key product patents expire. These drug giants are desperate for new innovations to revitalize their pipelines and small biotechs are an excellent source.
A surprisingly large number of the best microcap prospects reside in the biopharma and biotech sectors. I have always sought out and discovered bio companies with certain valuable attributes. Indeed, compared to the vast majority of sub-$100-million-market-value firms, the biotechs in our portfolio have seasoned management, big-league experienced boards, sane capital structures, enough cash to operate for more than 12 months, and solid partnerships with big pharmas.
In the energy world, for example, the shift to electric transportation will have far-reaching impact on nearly every industry and sector, from energy producers and suppliers to electrical equipment manufacturers and utilities to developers of the smart grid and numerous other advanced IT and energy technologies. Many small companies are building pieces of the emerging infrastructure and smart grids.
It's notable that one of the big boys in global electric infrastructure equipment, ABB, Inc. recently made a $10 million investment in a tiny company that supplies EV charging systems. Mergers and acquisitions will be happening more frequently among companies developing technologies for the smart grid. What's more, the anticipated IPOs this year for cleantech rising stars like Silver Spring Networks and BrightSource Energy will attract new investors.
Electric networks are the largest, most complex systems around, and it will take massive investments in technology over the next couple of decades to get them into shape to meet soaring demand for ever more efficient and ubiquitous electric power. As a consequence, a multitude of opportunities exist for small, innovative firms to capture lucrative market niches.
You have just added a new stock to your watch list I understand. Can you tell us the criteria you have in place when you add a new stock and what you typically look for?
A: Josh Levine, MicroCap Investor
First, I want to point out there are variations in my decision-making process between, for instance, a nanocap listed on the OTC Bulletin Board and an established microcap with a $250 million market cap that's profitable with an institutional following.
For the smallest microcaps, it's essential to spend time with management and look at everything with a magnifying glass. For more seasoned companies, there is already a track record as well as more information available, which makes the due diligence process less of a maze.
Obviously, fundamental stock analysis is central, but I've learned that investing in small advanced-tech firms is as much art as science. It comes down to certain basics that apply across the board, and they are:
- People - starting with the founders and top management, nothing counts more than the quality, experience, track record, and credibility of those running the company.
- Technology - technologies need to perform well but they also must represent a transformational shift or add significant value by improving current products or systems.
- Markets - technologies must address a sizable market, or it's simply not worth the effort. Also, it's essential to monitor market trends and being clued in to what industry leaders are doing. As senior analyst for ChangeWave Research, I am able to track the pace of change across many industries.
- Intangibles - this covers everything under the intellectual property umbrella, from patents to trade secrets, including everything inside the heads of employees. There's nothing tougher to quantify, but it's vital to get as much understanding as you can about these assets.
- Capital Structure - this reveals a whole lot about a company's history and the ability of executives to manage growth and build for the future. Problems in the capital structure often cripple microcaps, so investors need to be very critical in their analysis.
I remember hearing old time investors talking about making their big wins in the market by finding the next big thing and holding on for years. In the past few years that mentality has been dismantled by what transpired in 2008. Do you still see that kind of opportunity in the market - and what kind of wins are you seeing in your portfolio?
A: Josh Levine, MicroCap Investor
Yes, the opportunities for returns of 200%, 500%, 1,000% and higher continue to be out there. But to earn the truly life-altering profits, you need to be fully invested in the best microcap stocks prior to any major bull cycle. A big portion of gains are often made in the early phase of a bull market for microcaps, so you've got to be positioned early. Otherwise, by the time the trend takes shape, it's usually too late to build the kind of low-cost positions that ultimately deliver those ten-bagger profits.
Today I believe we're in the early stages of a microcap bull market, but it's difficult to predict the exact timing. Still, ever since the end of 2008 - even before the general market bottomed - the stocks in the MicroCap Investor portfolio have been trending higher.
We ended 2010 on a high note by capturing a 138% profit by selling one-half of our position in a company that's leading the charge, so to speak, in energy solutions for transportation.
Another microcap in our portfolio, a developer of a new class of cancer therapeutics, is up 240% since I first recommended it to subscribers. When I added this stock to our portfolio it was within pennies of its six-year low. The value of this biotech, which has a long-standing partnership with a leading biopharma and a healthy cash hoard, lies in the ability of its drugs to be used in combination therapies and its excellent prospects for attracting licensees. While its gains so far have been good, this stock could soar five to ten times its current price depending on the success of clinical trials for its various drugs.
In general, our biotech positions are looking very, very good. In less than six months, we're up 43% with a stem cell developer which already has two revenue-generating businesses. And a number of others have been regularly hitting new milestones, which eventually will be translated into much higher market valuations.
While all of the stocks in our portfolio are positioned for tremendous upside ahead, the most consistent performers have been what I call the “Mature Microcaps.” For instance, within this group we've got a gain of 109% with a supplier of advanced equipment for large-scale solar projects, and we're up 76% with a designer of 3G/4G wireless chips.
Finally, one of my favorite microcaps today is a company which has developed and is selling advanced mobile services to multi-billion dollar markets worldwide in dire need of its cost-effective and efficient solutions. We've already got a 120% gain, but I believe this one has all the characteristics of rapidly becoming one of the great microcap winners of the decade.
The recent activity in our micros, nice as it's been, hardly measures up to the bonanzas of past microcap bull runs. A big reason is that this bull market lacks the full participation of the public which has remained enormously risk-adverse after the blow-ups, busts and downturns of the past decade.
Depending on the breadth and length of this upturn, individual investors will increasingly come back into the game, and eventually in large numbers. By then, however, the biggest profits will have been registered by those investors positioned far ahead of the herd.
Josh Levine's MicroCap Investorhttp://www.levinesmicrocapinvestor.com
Levine's MicroCap Investor delves deep into the world of small stocks to identify big winners, targeting innovative companies on the path of the new and revolutionary.
About Josh Levine
Levine has 25 years of senior-level experience in analyzing technology trends and investing in top-performing micro- and small-cap stocks. He excels at assessing management teams and evaluating new innovations and their impact on corporate valuations.
More on Levine's bio: http://www.levinesmicrocapinvestor.com/aboutus/
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