The Poor Investor

Investigatory Value Investing

Bottom Digging During Market Tops

The S&P 500 has nearly tripled from a 2009 low of 735 to 2113 currently.  Just as a rising tide lifts all ships, so too does a rising stock market lift all stocks.  At greedy times like these, investors should be fearful and reexamine their portfolios.

…if [investors] insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.  -Warren Buffett

Now, I’m not saying the market has reached its peak (though some do make compelling arguments).  I am not a market timer and I’ve written about the folly of forecasting in the past; I’m merely saying a prudent investor should not let greed get the better of him.  The following strategy is one that is more likely to be applicable during market highs as investors are more likely to have a preponderance of stocks trading at prices much higher than their actual values (aka, the rising tide theory mentioned above).

So what to do?  Well, I believe the prudent investor should lock in gains on stocks pushing well beyond their valuations (close to 52-week or all-time highs) and replace them with stocks trading at reasonable valuations.  Mr. Market is offering attractive prices for your stocks, let him have them.

But then we’re left with the problem of finding alternative investments.  As markets keep pushing higher and higher, investors are often left scratching their heads wondering where to find value.  Admittedly, this can be challenging, however, opportunities do still exist.

One place to look as stocks reach all-time highs are stocks reaching new 52-week lows.  Some noteworthy examples include PriceSmart, SodaStream, Turtle Beach Corp., and Fossil.  PriceSmart is the Sam’s Club of Central America and the Caribbean.  It’s trading at a small discount to its sales, has high insider ownership, and has consistently grown sales, 15% on average, over the past ten years.  At its current price of $17.07 after-market, SodaStream trades at a large discount to sales (72% of sales) and is nearly trading at its book value of $16.59.  Turtle Beach has near-total domination in the gaming headphone market with 50% of both the UK and US markets.  It trades at 60% of sales (which it looks to nearly double sales this year) and is led by smart management with a solid near-term plan, and patents, to enter industries such as health, automotive, TV and mobile.   I’ve already written my take on Fossil, you can read it here.

The next place to look is at overlooked stocks (often smaller capitalization, less than $100m) in industries where there is a low supply of investment opportunities.  One such industry is the coffee industry.

Now, before going into individual companies, let me preface this discussion by first noting some interesting dynamics at place in this market.  For one, coffee consumption is not nearly what it used to be.  In fact, in 1946 consumers drank 46.4 gallons of coffee per person (Figure 1).  Today, even with a coffee shop on every corner, consumers drink less than half as much at only 20-25 gallons of coffee per year as coffee was replaced predominantly by soda.  As consumers become more health-conscious, pop consumption should decrease and coffee, as a viable, healthy alternative, should have an increased level of consumption.  Secondly, there is a shift taking place where high-quality shade-grown coffee (high cost to grow) is being overtaken by the rise of poorer quality shade-free coffee (cheaper to grow).  This makes coffee plants much more susceptible to climate change and topsoil erosion.  As climate change concerns begin to grow, the downfall we’ve seen in coffee prices from $300 in 2011 to a current 52-week low of $140 is not likely to last.

Figure 1

Figure 1

Now, opportunities in this market surely exist in the form of large companies.  There is, of course, Green Mountain Coffee Roasters and Starbucks, but investors in those companies will soon bail when they see these companies for what they are—overvalued.  Starbucks trades at an all-time high ($94.30) and the highest price-to-sales ratio it has ever seen in the last ten years of 4.12.  Starbucks also trades inversely to coffee prices.  Green Mountain Coffee Roasters ($124.10) shares trade even higher at a price-to-sales of 4.31 and, like Starbucks, it is also inversely correlated to coffee prices.  As coffee prices rise investors will bail on these two companies (and valuations will come back down to earth).

So when investors bail, where will they look?  On the conservative end is Coffee Holding Co., trading at 28% of its total sales.  This company is well-managed by its owners, experienced coffee industry veterans, who have a 10% stake in the company’s shares.  They also support and believe in sustainable practices.  These beliefs lead to production of higher quality coffee (shade grown) that is not as susceptible to soil erosion and climate change.  Furthermore, as experienced coffee experts, they are well-hedged against fluctuating prices.  On the risky end is Jammin Java, better known by its Marley Coffee, which is trying to force itself to turn things around before it does a complete nose-dive.  If company-estimated year-end sales are to be believed, the company trades at a 10% discount to expected year-end sales.  However, this company is only for high-risk-oriented individuals who don’t mind getting cleaned out if things turn south.

Then, there’s the oil industry.  I don’t think I need to go into this a whole lot as many have already witnessed the price collapse at the pumps, so suffice it to say that there are many opportunities to be had in this sector, both large cap and small, and everything in between.  (Check out Cale Smith’s recent notes about the oil price phenomenon).  I’m pretty sure you could throw 10 darts at oil stocks right now and make at least 8 solid investments.

Another interesting idea is James O’Shaughnessy’s strategy of looking for stocks that he calls Reasonable Runaways.  These are stocks that have a high relative strength, greater than $150m in market cap and trade at a price-to-sales ratio less than 1.  I’ve modified this strategy a little bit by including companies that have large amounts of cash in excess of debt.  Some notable examples include FreightCar America Inc., BeBe Stores, Men’s Wearhouse, LSI Industries and FujiFilm Holdings.  While I have not had time to look into each of these companies it doesn’t matter— the theory of the Reasonable Runaways strategy is one of investor agnosticism.  The theory says that you are buying $1 worth of sales for less than a dollar (low P/S) just as investors are realizing the company is undervalued (high relative strength).  You simply run the screen, buy agnostically, and diversify your portfolio by giving equal weight to the top 20 or so companies with the highest price appreciations.  Sell after a year then repeat the process.  Since 1951 this strategy had a compound annual growth rate of over 18%.

While the S&P 500 may have reached its top, your portfolio doesn’t have to top-out.  You can simply shift your current best performers to companies that offer greater opportunity and more attractive valuations.  Employing several different search techniques, such as those mentioned above, can get you on the right track to optimizing your portfolio towards value and thus reducing your overall risk by increasing your margin of safety.  But don’t forget to hold on to a fair amount of just in case cash for when the market does plummet.  You’ll want to have that cash in your back pocket to snatch up undervalued companies when the falling tide lowers all the ships again and more opportunities abound.

Disclosure: Long Coffee Holding Company (JVA) and Fossil (FOSL)

Fossil: A Diamond in the Rough

Fossil recently reported earnings that “The Street” did not expect. Forward guidance was not as optimistic as expected either. Investors reacted by a massive sell-off, resulting in the stock dropping over 19%, from $99 to $80. I believe this was an extreme overreaction.

While there are worries that a company like Fossil will go the way of Kodak (fear that traditional watch companies will be replaced by Apple), these worries are inconsequential to the company as it stands today. Even if the company takes a hit to sales (which is expected), the stock is still attractive at today’s price as a short-term holding (although it should be noted that I generally recommend long-term holdings).

While I don’t see Fossil to be in the same category as what Warren Buffet might deem the “forever category,” I’m sure someone could make the argument for Fossil as a long-term holding.  Obviously though, there is much to be said about the impact new technologies have on long-standing companies.  For instance, a forward-thinking company like Tesla could easily replace the entrenched automakers such as Ford, GM, Toyota and Honda, just as Netflix replaced Blockbuster. Not to mention, since the 50’s, the average lifespan of a Fortune 500 company has dropped from 61 years to 15 years.  But, the long-term argument is an argument for a different post.  My argument, however, is merely a valuation argument.

So back to brass tacks…

The company stated in its latest earnings report that it expects the following for fiscal 2015:

• Net sales to be in the range of a 3% decrease to a 1% increase
• Operating margin in a range of 12% to 13%

Current net sales sit at $3.51 billion. Being conservative, let’s assume a 5% drop in net sales. Conservatively, let’s say only 8% of that translates to net margin, so $266.40m. At the level of current shares outstanding, 51.3m (diluted), this translates into an EPS of $5.19 per share. At this extremely conservative level, assuming the company buys back no shares, this puts the PPS at $62 at the current P/E of 12.

But this is not the full story. The company has $1.1 billion in its coffers earmarked for share repurchases. Assuming the company will “strike while the iron is hot,” and use the full amount to buy shares aggressively after the recent drop, this allows for 12.0m shares to be repurchased, even if the company buys them for $92 per share on average ($7 per share more than the current market price). This would put the share count at 39.3m. Thus, using the previous assumptions, the EPS translates into $6.78 and a PPS of $81.36.

However, this is an extremely conservative scenario. I would go as far to say that this is the “extreme worst case.”

A much more plausible scenario would be a slight decrease in net sales, say 1%, and net margins near 9%. Also, P/E would revert more in-line to what the company traditionally trades for, for conservative investors’ sake let’s say around 15 (actual five-year average P/E is 18.8). Using these assumptions, and assuming no share repurchases, this translates into a PPS of $73.15. Now, no repurchases is extremely unlikely. Assuming repurchases at the $92 level (same as above) the PPS would translate to $119.37.

Moderately optimistic and optimistic scenarios need-not be included in this evaluation. The main thing is figuring out what the downside risk is. For those that missed the point, it is virtually nil. Assuming the reality lies somewhere in the middle of the “moderately optimistic” and “pessimistic” view, this would bring us back to the “plausible” scenario. Hence, I’m arguing the stock will easily trade within the range of $100-120 in the near-term future (less than 1 year).

If the company does not aggressively repurchase shares, and say, only repurchases half of the above assumed amount, a $100 PPS is still easily obtained at 15 times earnings. The most realistic pessimistic assumption translates to $80 in PPS. This translates into a $5 per share loss at the current market price of $85, or a decrease of approximately 6% (though, if this lower PPS level is reached then the company is more likely to repurchase shares, thus putting upward pressure on the stock price). The potential upside, conservatively speaking, is around 17-41%.  Thus, the risk-reward seems incredibly favorable at the current PPS.

Disclosure: Long FOSL

Forecasting for Dummies

I recently attended the New Orleans Investment Conference and although I do not invest in mining companies and I’m not a “gold bug,” or a gold investor at all for that matter, I did take away a lot of useful information.

Though, perhaps the most useful piece of information was this:

Never forecast.

Now, admittedly, this was something I always knew, but the conference did help to solidify this thought some more in my mind. Watching people make big assertions about the price of gold going up, predicting stock valuations and movements in commodities only to see them be dead wrong two years later just made people look foolish. The people who made these forecasts and the people who followed them. All foolish. Imagine the hard-earned capital that was probably lost as well.

I worked at an investing research company for a short while and watched a seasoned analyst, who had been working there since the company’s inception, miss one of the most important calls in his industry.  One of the dozen or so companies he was following was bought out and he missed it completely.  It totally side-swiped him.  He even went as far as to say the company would never be bought out when another analyst brought up the prospect of the company being sold.  Talk about egg on the face.

Still not convinced? Well, think about this, do you even know what’s going to happen to you tomorrow? You know your life, your schedule, how many hours are in a day, etc. and I’ll bet you can’t accurately predict most of what happens to you tomorrow. You don’t know what your boss is going to say to you. You don’t know if you’ll get in a car wreck on the way to work. You don’t know if you’ll even wake up tomorrow. Test yourself. Try to predict a dozen or so things and see how many work out as planned.

So, if you can’t predict what’s going to happen to you, the person, or thing, you probably know the most about, how can you accurately predict what millions of investors are going to do? The bottom line is that you can’t. The best we can do as investors is look at the trees and forget about the forest. Will the market crash this week? I don’t know. Will it be down next year? No clue. However, I do have confidence that solid, well-managed companies trading for less than they are worth will most likely be trading at values higher than they are now. That’s the best we can do as investors. We take bets on stocks where the odds are in our favor and don’t when they’re not. And then we spread these bets out so we don’t bet the farm on one company because if there’s anything about this “not being able to forecast” thing it’s the whole “not being able to forecast” part.  You don’t know if “company X” will go to zero tomorrow. If “X” does go to zero, you want to have companies A, B, C, D, etc. to fall back on. Maybe it’s 20 companies, maybe it’s 100. That’s for you to decide. The point is to build your portfolio structure so that it won’t fall over if one brick crumbles. Keep the odds in your favor.

Examples of the “odds being in our favor” are things like companies trading at a discount to book value, or even cash value. Maybe it’s a company like BDCA Venture, Inc. trading below its NAV of $6.89 per share at $5.00 per share. Or maybe it’s a company like Electronic Systems Technology, Inc. trading at or near cash. Maybe it’s a management team that lowers the risk; management that’s honest about the direction of their company and can back up what they say with an excellent track record. People like Apple’s Tim Cook or Tibco Software’s Vivek Ranadivé. Perhaps it’s a catalyst on the horizon like a patent approval or a drug approval. Whatever it is, you put the odds in your favor in some way. If there’s nothing putting the odds in your favor, you’re no longer investing. You’re speculating; you’re gambling; you’re forecasting.

Never forecast.

Who You Know or What You Know?

I’ve recently finished my MBA and am now searching for employment opportunities. In this search I’m reminded, quite starkly, of the oft-quoted phrase, “It’s not what you know, it’s who you know.” The great thing about the stock market is that it works in exactly the opposite way. In the stock market, it’s not who you know that matters but what you know. The market, as Ken Fisher puts it, is “The Great Humiliator” and does not care who you are or who you know, “it wants to humiliate everyone.” In fact, who you know often works against you and may even entice investors towards illegal activities, as exemplified recently by a few well-known individuals.

The “what you know” I’m referring to here is your own analysis of individual companies and the markets in general. In fact, if you would have listened to common wisdom (the “who”) you might have sold in May, went away and missed out on a 2.1% gain in the S&P 500. You might have missed the boat on Apple at around $427 a share when everyone was claiming the sky was falling only to watch it rise to $633 a share, a lost opportunity of $206 per share. Once, when I was new to investing, I told a friend not to invest in Sirius XM when it was trading around $0.30 per share and he missed out on a potential 10-bagger. Or, you might have listened to friends who told you to buy Facebook when it first went public at $38 per share only to watch it drop to $18 in the first three months.

Nothing works better in investing than coming up with your own conclusions. For one, you won’t have the conviction in the company you are buying if you go based off of someone else’s recommendation. Even if someone is spot on about a company’s valuation and tells you that company X will go from $5 a share to $15 a share—even if this person is absolutely right and has a compelling enough reason— are you going to be able to hold the company’s stock when it goes from $5 a share to $1 a share before it goes up to $15 a share? Will you really have that level of discipline and, more importantly, trust in someone else’s judgment? Only by doing your own analysis, coming up with your own valuation and buying a company that you have strong conviction in because you put in the hard work will you be able to hold through the downs (or buy more) and not sell too early during the ups. This person’s recommendation may be 100% accurate but you might be enticed to sell at $7 for a $2 gain because you just won’t have the commitment you would have had if you came up with the idea in the first place.

Secondly, if your investment is in a company someone else recommends, you probably won’t have any idea of what to look for when things are going south. Are insiders selling? Did a member of management leave? Is this good or bad? How do you know if you didn’t investigate the company thoroughly? Now, say, the company has to raise funds by issuing stock— is this good? Was this part of the company’s plan all along? If you weren’t following the company, if you didn’t do your homework, you wouldn’t have any idea on these questions or any others. There won’t be any tip-offs to tell you when things are going well or if the management is running the company into the ground when you don’t put in the long hours of work it takes to investigate a company thoroughly enough to have conviction in it.

These are just a few of the reasons why you need to think for yourself when it comes to investing. This is why I don’t like recommending companies, it takes away from a core part of what will make someone a successful investor. I like to use companies as examples to illustrate ideas and how to think about companies, not as advice for what to buy. And with that, I will leave you with a quote from the Oracle of Omaha himself:

“You have to think for yourself. It always amazes me how high-IQ people mindlessly imitate. I never get good ideas talking to other people.”  -Warren Buffett

Track Record is Everything

In a book by Peter Krass called The Book of Investing Wisdom, there is an essay by Warren Buffett entitled Track Record is Everything.  The crux of this essay is that past performance history, aka track record, is one of the best single guides as far as judging businesses and investments go.  With that in mind, I thought it’d be useful to show readers of this website what my track record has been thus far for recommendations made on this site.  This should help new readers judge whether the information they obtain from this site is useful.  Though, I should note, as most of my regular readers know, I do not often mention stock “picks.”  However, I do recommend some stocks from time to time to help illuminate some idea or point out glaring inefficiencies in the market (see my post on Apple).  Although, these recommendations come with the caveat that every investor should do his or her own research before coming to a conclusion.

So, let’s get right down to it.  Here is how my “picks” have performed:

Stocks Recommended Recommended
Date Symbol PPS at Date Current PPS Sell PPS Sell Date % Change
9/13/12 dell $10.63 N/A $13.85 2/24/13 30.29%
9/13/12 nvda $13.68 $15.21 N/A N/A 11.18%
9/13/12 atri $218.87 $269.40 N/A N/A 23.09%
3/11/13 aapl $431.72 $515.00 N/A N/A 19.29%
4/22/13 ntcxf $0.81 $1.07 N/A N/A 32.10%
Average= 23.19%
S&P Return (since 9/13/12)= 22.01%
Difference= 1.18%

So far, my “picks” have out-performed the S&P 500 by 1.18% (used the first pick start date for simplification purposes).  Only one sell recommendation, Dell, was given so far.  Now, as Warren Buffett clearly notes in his essay, a 5 – 10 year track record is much more important in making judgments.  However, this site has not been around that long to establish such a track record.   At that time, I will revisit this topic.

Natcore’s Latest PR- Black Silicon to Slash Solar Cell Production Costs by 23.5%

Reprint of Latest Press Release:

“Making plans to take our technology to market” -Provini

 Red Bank, N.J. — (October 30, 2013) — An independent study has concluded that Natcore Technology’s (NXT.V; NTCXF.PK; 8NT) black silicon technology could reduce silicon solar cell production costs by up to 23.5%.

The savings derive from a streamlining of the production process whereby a silicon wafer is processed into a black silicon solar cell.

To make solar cells, manufacturers typically acquire silicon wafers from an outside source. Since these wafers are cut from a large ingot, they usually have saw damage, which must be removed. To make a conventional solar cell, manufacturers must first remove the saw damage, then texturize the wafer surface, and then apply an antireflective coating.

To make a black silicon cell using Natcore’s proprietary process, manufacturers would be able to replace the texture etch with a black silicon etch which in itself would create a highly effective antireflective coating.

Thus the most expensive part of the solar cell process – the equipment and material costs associated with high-temperature chemical vapor deposition of a silicon nitride antireflective coating – is completely eliminated.

Natcore asked analysts at the country’s leading black silicon research facility to quantify the cost saving to be realized from omitting these steps. Using a “bottom up” manufacturing cost estimating methodology, the analysts calculate the production cost of a conventional silicon solar cell to be 17¢ per watt. In comparison, the study projected that cells made using Natcore’s black silicon process would cost about 13¢ per watt.

The resulting savings of 3¢/watt – 4¢/watt represent a production cost reduction of up to 23.5%. “When solar companies are scrambling to save fractions of a cent, a saving of 3¢ – 4¢ per watt is momentous,” says Dr. Dennis Flood, Natcore’s co-founder and Chief Technology Officer.

In addition to the dramatic cost reduction, Natcore’s test, which was conducted using monocrystalline silicon, had an important environmental benefit: it eliminated the need for silane, a highly toxic gas that combusts upon exposure to air. Natcore may plan a similar test using polycrystalline silicon at a later date.

“We knew there would be a cost saving,” says Chuck Provini, Natcore’s president and CEO. “We were surprised that it was so large. In fact, production-cost savings of this magnitude will likely overshadow any power gains of black silicon and will make Natcore’s technology a must-have for the world’s solar cell manufacturers.

“To put it into perspective,” he notes, “a recent article by Shyam Mehta, senior solar analyst of GTM Research (‘Technology not materials to drive down Chinese solar costs,’ August 2013), predicts that Chinese manufacturers will be able to cut prices by only one cent in the next year or so. We could quadruple those savings in one fell swoop. We feel so optimistic about this development that we’ve begun making plans to take our technology to market.”

“The full cost of a solar cell is the sum of two parts: the cost of the silicon wafer and the cost of the processing steps required to turn the wafer into a working solar cell,” says Flood. “Cell manufacturers have no control over the cost of the silicon wafers they buy. As a result they are always looking for ways to control their production costs, but with a very important caveat:  cost cutting must not lower cell performance in any way.  Natcore’s black silicon processing technology results in solar cells that meet or exceed the industry’s requirement and at the same time provide a spectacular reduction in finished cell cost. Natcore’s technology can easily be retrofitted into existing solar cell production lines and can just as easily be incorporated into a new line. Black silicon seems poised to become the industry’s standard approach.”

Would You Invest in Yourself?

First off, no, I am not talking about saving for retirement. I am asking, would you literally invest in yourself?

This may appear to be a rather silly question, although, I think it is an important one, whether you’re an investor or not. However, in essence it boils down to the oft-heard Plato quote, attributed to Socrates, “the life which is unexamined is not worth living.” And to take it one step further, if you would invest in yourself, how much? Are there people you know you’d rather invest more in? Why? Lastly, if you wouldn’t invest in yourself, why not?

A few reasons you might want to invest in yourself are: you have a good job, you have a good income, you’re a person of integrity, you’re healthy and you’re wise beyond your years. If you wouldn’t want to invest in yourself, maybe it is because: you’re an alcoholic, you spend all your free time watching TV, you have a low income, you have too much debt, you’re in poor health or you’re not that smart.

The good news is, whether you would invest in yourself or not, you can still increase your personal brand equity. And why not? Why wouldn’t you want to be a good investment? You can increase your knowledge and educate yourself, strengthen your integrity and start becoming a better person, get off the couch and start exercising more. Whatever it is, you can improve it. Even if you already consider yourself a great investment, as a human, there is always room for improvement. You can always be a better person, more friendly, more knowledgeable, more wise. Think bigger.

Odds are, there is probably someone you’d invest in more than yourself. So why is this? You’re the one in control of your life, yet you’d rather put your hard-earned money in another person? This, logically, seems absurd. Your investment is out of your control. Yet, I bet there are many people who would rather invest in others than themselves. Are these people more generous? Are they more friendly? More virtuous? Have more integrity? Are they smarter? What is it that they have that you admire so much? Take that person, subtract yourself, and what are you left with? Become those things you find you’re missing.

Reverse engineer your life. What is it you want to be and how do you plan on getting there? No one knows how many days they have, but on average, there are about 30,000 days to make this life into something great. How many of those days have you already wasted? Do the math. How many of those days do you have left to turn yourself into the greatest investment on the planet? Calculate it out. Plan. Use each of those days you have left wisely.

Are you content with mediocrity?

You only get one trip around this Earth. You should be the kind of person you, as well as others, would want to invest in.

Become that person.

Notes: Growing your wealth is a great thing but means nothing if you don’t grow your internal wealth. Like your external investments, internal investments grow exponentially. As more and more external success comes to you, there is greater and greater need for internal enrichment. The internal and external must be balanced or the external will slip away. There’s a good chance that externally you aren’t where you expected to be because internally you weren’t ready. By investing in your internal self you can ensure that your external success doesn’t slip through your fingers or go wasted.

Great Speech by Former PNC CEO

Jim Rohr speaks at CMU

Few Highlights:

On success:
-Showing up, working hard is a key to success
-Luck is also a big part of success
-Innovation and forward-thinking is key to any business succeeding

On banking/finance:
-Dodd-Frank has WalMart clause
-Money, virtually none is physically at banks
-“Too big to fail” or not big enough to protect itself?
-Deficit is a huge problem, the US dollar could no longer be the global currency soon

On society:
-Uses the internet the most: less than 30 and greater than 70 year-olds
-Every $1 spent on early childhood education gives society back $17-$27
-Biggest predictor of ending up in jail, 3rd grade literacy level
-Next “Pearl Harbor” will be a cyber attack

Message from Natcore’s CEO

Last post I wrote about Natcore Technology. The president wrote a message to shareholders on the website that I thought was important enough to share considering my previous post. Here it is below:

I think it was the 1970s when I first realized that it was no longer possible to buy a television set that was made in America.
As time went on, I began to notice other products that had suffered a similar fate: stereo equipment, digital cameras, and small appliances immediately come to mind. I’m sure you could add to the list.
And I realized this: Whoever owns the technology owns the industry.
We at Natcore are determined that the solar industry will not go the way of the transistor radio. For that reason, much of our time is spent in developing and protecting our solar technology. We are determined that the solar industry will be based on our home soil.
We’ll soon convene a series of meetings with our scientific brain trust, whom we believe are the greatest solar scientists in the world today. This distinguished cadre includes:
Dr. Dennis Flood, Natcore co-founder and Chief Technology Officer. A NASA veteran, with more than 30 years’ experience in developing solar cell and array technology for both space and terrestrial applications.
Dr. Andy Barron, Natcore co-founder. The Charles W. Duncan, Jr.-Welch Chair of Chemistry and Professor of Materials Science at Rice University, as well as a visiting Professor at the University of Wales.
Dr. David Levy, Natcore Director of Research & Technology. A Chemical Engineering PhD, with a minor in Electrical Engineering, from MIT, then 20 years as a research scientist at Eastman Kodak.
Dr. Daniele Margadonna, Chairman, Natcore advisory board. Chief Technology Officer of MX Group SpA in Villasanta, Italy. An international expert in the solar photovoltaic industry with extensive experience in the planning and construction of turnkey photovoltaic plants.
Dr. David Carlson, Natcore advisory board. Until his recent retirement, the chief scientist of BP Solar, for whom he managed future technology programs and the intellectual property system. He invented the amorphous silicon solar cell at RCA Laboratories
Our multitalented technicians—Ted Zubil, Rich Topel and Wendy Ahearn– will participate, too. They’re an impressive bunch: they have 26 patents among them.
The meetings will be held at our Research and Development Center in Rochester, NY. Their purpose can be expressed in these questions: What are the strengths of our technology? What are the weaknesses? How can we maximize the strengths and fix the weaknesses? How can we most quickly move our technology from the lab to the production line?
Incidentally, we’ve finally consolidated all of our R&D work in Rochester. So there will be no more need for routine travel to university labs in Ohio, Arizona, and Texas. (Just to let you know how much money this will save us, we’re paying for Dr. Margadonna’s flight from Italy with airline miles accumulated from our past travel.)
In my next President’s message, I’ll report on the results of these meetings.
Sincerely,
Chuck Provini, President, CEO & Director


Disclosure: Long NXT.V

The Paradox of Penny Stock Investing

A lot of investors keep a portion of their portfolios for speculating in the stock market, often referred to as “fun money” by many.  This percentage generally ranges from 1-5% of an investor’s portfolio.  This is the portion of a portfolio that you’d use to bet on stocks that usually have more potential than actual substance; this often times means betting on penny stocks or stocks trading on the OTC market or pink sheets.  Keeping a portion of your portfolio dedicated to this endeavor is like having a release valve for your portfolio.  Many investors may find it to be quite cathartic.  It should be noted, however, that this is not for everyone.  You still have to remain extremely disciplined and, in a sense, compartmentalize the speculative portion of your portfolio to some extent.

Now, you’re not going to read about how to invest speculatively in “The Intelligent Investor” or “One Up on Wall Street,” two of my favorite books, as you might recall from this post.  However, this does not mean that speculative investing shouldn’t be part of your portfolio and shouldn’t be taken just as seriously as your overall investing philosophy.  A sound philosophy should be developed for the “fun money” portion as well.  The goal, just as with the larger portion of the portfolio, should be to minimize risk.  Just because you are speculating with this small part of your portfolio doesn’t mean you want to lose the money any more than you normally would.

There are many types of ways to speculate in the stock market but generally I tend to think of this as focusing on stocks at the low range of the micro cap world, or penny stocks (those interested in options trading, commodities, currency speculation, and other activities such as these should look elsewhere).  These are companies usually trading for a market cap less than $100 million.  Although these stocks should be analyzed just like other stocks in your portfolio there are several particular areas you really need to go over using a fine-toothed comb:

  • Legitimacy
  • Management
  • Growth

The first portion is business legitimacy.  This means that you should be scouring the SEC (or other) filings of the company and looking for any red flags.  It means that you should be evaluating the company as if you were going to start working there the next day.  If you wouldn’t work there, you wouldn’t want to buy the company, surely.  This means you should be asking questions like:

  • Has this company been around for at least 3 years?
  • Does the product/technology/business make sense?
  • Does the company keep issuing shares only to line executives’ pockets and dilute existing shareholders?
  • Is there an inordinate amount of outstanding shares?
  • How is the company financing itself?
  • Does the company carry too much debt?
  • Do insiders own a large portion of the company?
  • How does the company treat its employees?
  • Is the company hiring a lot of new employees?
  • Does the company have reputable partners or do business with those of high repute?
  • Does the company provide sufficient information/transparency to its shareholders?
  • Are the small shareholders valued?

This is by no means an exhaustive list.  But questions along these lines should be asked and the answers you get to them should make you feel comfortable.  If you don’t find an answer you like, find out why and see if it makes sense.  If you find too many red flags in this portion of the process, don’t even move on to next examination step, just move on to the next company.

The next portion is management.  Many times with small companies it’s good to see management that has been around since the company’s inception.  It’s not necessarily a red flag if they haven’t, or the green light if they have, but as a general rule of thumb this should be the case.  Lots of times, with small companies, you can actually call the management and ask questions that concern you.  When speaking to the management try to get a sense of whether or not these are people you can trust.  You should ask yourself several questions after speaking to management:

  • Are they open to honest inquiry?
  • Do they evade or avoid certain questions?
  • Do the answers they give make sense?
  • Do the answers correlate with what you’ve read about the company?
  • Does what they say actually pan out? (wait a bit and see if what is said comes to fruition)

Other factors to consider when looking into the management of such companies are:

  • Have they invested their time, money, blood, sweat, and tears into the company?
  • Do they own a lot of the stock so that they eat their own cooking?
  • What are their credentials?
  • Are they accountable to anyone?
  • What is the track record of management, especially the CEO?
  • Is there sufficient diversity on the management team and BOD?

Again, this is not an exhaustive list, but gets you thinking along the lines you need to be thinking when looking into more speculative companies.  Act like you are a detective looking for any signs or hints of fraud and steer clear when things start to smell funny.

In the back of your head, you should have already considered the growth prospects of the company in question or it wouldn’t have even be worth looking into in the first place.  However, it should be noted that many micro cap or penny stock companies might look like good growth opportunities but the growth could actually be very limited.  For instance, the company could be in an extremely high growth market such as biotech or pharmaceuticals, but markets such as these mean that competition is going to make it very difficult for the company to actually succeed.  This means that the growth prospects should be tremendous (if you’re going to speculate, don’t speculate with a company that’s going to hit a home-run,  instead, think multiple grand slams).  Some aspects of growth you might want to look into are:

  • What are the odds of market penetration?
  • Are the competitive advantages big enough and sustainable?
  • Does the company have multiple patents? How solid are the patents?
  • Are there large partners aiding the company’s growth/penetration?
  • Does the company operate in a niche market within the growing market?
  • How does the company plan on funding growth?
  • Does the company have an expansion plan in place so that it can grow successfully?
  • If growth/market penetration has been proven already, how likely is it to continue?

Once again, this is not an exhaustive list, but how you should be thinking about the growth of the company.  Also, you should be comfortable with the answers to these questions and any other questions you decide are pertinent.  Above all, don’t make excuses for the company!  If you get answers that don’t jive with you, move on.

Last but not least, try to attend at least one shareholder meeting of the company.  This will give you a chance to get up-close and personal with management as well as bounce questions off of other shareholders.

A good example of an interesting speculation from my portfolio is Natcore Technology, a solar company headquartered in New Jersey.  While I won’t go into laborious detail about the company and how it fits the criteria mentioned above, I will mention some highlights.   The company was founded in 2009 when it bought out a company of the same name— thus clearing my 3-year hurdle.  The company trades on the TSX Venture exchange, a very well-regulated exchange, in Canada and the company reports regularly.  The company is headed by Chuck Provini, a former US Marine and graduate from the US Naval Academy.  He has at least 19 military decorations, was a captain in the Vietnam War, and has lived his whole life in the United States.  The rest of his bio can be found here.  The CEO has been very forthright with shareholders and encourages shareholders to call him if they have any questions.  He even issues regular statements via the Natcore website.  And, although he is surrounded by several other individuals with pretty extended resumes, the one that stands out the most is Dennis Flood.  Dennis Flood is the CTO of the company and has worked in the solar industry for over 30 years.  He worked at NASA where he developed photovoltaic power systems for space and planetary missions.  A more extensive bio is seen below:

“He received two Special Act or Service Awards from NASA for his pioneering work on advanced solar cells for space applications and for research that established the feasibility of powering a human outpost on the surface of Mars with solar energy.

Flood also served as chair of the IEEE Electron Device Society’s (EDS) photovoltaic device technical committee for seven years and as a member of the IEEE EDS education committee. He also participated in the EDS’s Distinguished Lecturer Series, a position he held for more than a decade.
He is a member of the international advisory committees of the European, the U.S, the Japan/Asia and the World Photovoltaic Conference organizing committees.

He is an inventor or co-inventor on several patents or patent applications in photovoltaics and nanotechnology and has over 100 peer-reviewed publications and presentations in solar energy, electron devices and materials science.”

Source: PV-Tech.org

Natcore has several patents.  It has also been granted a license to use the Department of Energy’s black silicon technology.  This allows more light to be absorbed so that solar cells are more efficient.  However, the patent which holds the most promise is the company’s Liquid Phase Deposition technology.  You can read more about this technology and the benefits here, but in a nutshell, this technology allows the company to manufacture solar cells at a much lower cost than they are currently being manufactured.  Combine that with the company’s latest selective emitter technology and the cost is further reduced.

The CEO explains the company’s technology here.

The company’s technology is breakthrough, to say the least.  It could completely change the solar industry.  If you research the company some more you’ll see a myriad of great accomplishments.  So, you might be wondering, with so many “great things” going on, why is this company speculative?   Well, the company has yet to generate any revenue.  It is still working on commercializing the technology and proving the cost benefits of the technology.  The company has reached several milestones and has been making forward progress but it has nothing to sell as of yet.  Although it is working on what it calls the “AR-BOX” as its first commercialization effort, it is not ready for commercialization yet.  So questions remain.  Will the company prove that its product is commercially viable?  When will it be ready?  Will the company produce significant enough revenue with large enough margins if/when the product is ready?  Will the market adopt the product even if the company does prove it?  Several more questions like this remain.  That’s why this is speculative.  There is nothing to go off of except for future hopes and dreams of revenue.  Although the company has been marching towards that territory, there is nothing to sink your teeth into as an investor to figure out what the margin of safety is here.  This is why a small percentage of my portfolio is dedicated to this type of investing.

At the end of the day, many investors should avoid speculating.  It can be tempting to get carried away and not keep the speculative portion of the portfolio below 1-5% and sell when the speculate portion rises well above this point (assuming you adopt the 1-5% strategy).  Investors often ride a speculative investment up just to ride it back down again.  There is often times more discipline involved in speculation than there is with regular investing and many investors have enough trouble maintaining discipline with their regular strategies.  So, this is only for the bold, disciplined, and cautious investor.  It almost sounds like a paradox, being disciplined to be speculative, but it’s impossible to be successful at speculation without the discipline.  Otherwise, your “fun money” will be “dumb money,” which defeats the whole purpose of allocating a portion of your portfolio to speculation in the first place.  You might as well just cash out 1-5% of your portfolio a year and burn the money if you aren’t going to follow a disciplined approach.

Disclosure: Long NXT.V

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