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Accredited Members Spring Conference -
note location change!
Our Spring 2011 Micro Cap Conference will take place at the gorgeous historic Hilton Antlers Hotel in Colorado Springs, NOT in Tucson as previously advertised. We are putting together a dynamic lineup of issuing companies and in addition we are very excited to host Ben Stein as our keynote speaker.
Please make a note of the dates - March 7th and 8th, 2011 (which have not changed) - and mark your calendar! We will let you know by email as soon as registration opens, and we anticipate a full house.
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Featured Company ...
CUI Global Inc.
Over the past 20 years, CUI Global, Inc. (formerly Waytronx, Inc.), OTC: CUGI has become a recognized name in electronic components worldwide in the areas of power, interconnect, motion control, and sound. In that time, the company has been able to leverage many long-standing relationships in Asia to create a flexible, responsive business model that ultimately benefits CUI customers.
The impact of a recent total restructuring on both the balance sheet and the operating statement is considerable. Along with the restructuring, the Company is also beginning to reflect marked improvement on the operating side of the business. CUI Global's view is that reaching an annual revenue run rate approaching $100 million over the next 2 years is within reason. In AMI's view, they may actually have a shot at that goal, and here is why.... |
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Featured Company...
Pro-Pharmaceuticals, Inc.
Pro-Pharmaceuticals, OTC: PRWP, is a leader in the field of Galectin therapeutics and is engaged in the discovery, development and commercialization of therapeutics that target Galectin receptors for advanced treatment of cancer and fibrosis. Initially, the product pipeline is focused on increasing the efficacy and decreasing the toxicity of chemotherapy drugs.
Several recent developments in this company's story, including the closing of a capital round that netted around $2M; a new research collaberation with Mount Sinai School of Medicine; and the very positive results from a recent range of clinical trials, all contribute to an exciting picture of multiple developments which could significantly enhance the stock price. Read more about why AMI is taking a closer look...
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Great Things to Know...
While the liquidity of any particular investment has always been an important part of most seasoned investors' analysis, the role that variable plays in their decisions is not universal. Conceptually, logic would dictate that those who tend to trade the market should look for issues that are more liquid while conversely, those interested in buying and holding positions might be less concerned with the prevailing liquidity. As I said, "conceptually", that is the logic, although I am not sure that is always the way decisions get made. From the trading side of the equation, the requirement for liquidity is easy enough to understand; but the demand for liquidity by those on the "buy-and-hold" side of the ledger requires a bit more consideration. That notion is augmented by some recent studies aimed at trying to identify the premium paid for liquidity.
In the first half of the 1970's two University of Chicago Business School alumni collaborated to provide a body of research aimed at quantifying the long term returns of particular asset classes relative to one another. These two individuals, Roger Ibbotson and Rex Sinquefield, would become financial theory icons as a result of that body of work, the manifestation of which was/is a publication called "Stocks, Bonds, Bills, and Inflation" which addresses those relative returns. Each of these individuals parlayed their "theories" into formidable ventures, as Sinquefield co-founded Dimensional Funds, and Ibbotson, Ibbotson and Associates. Each of those enterprises has played significant roles in the formation and development of today's index fund industry, as well as other aspects of the investment/finance business. The synopsis of their work is that riskier investments, equities versus long term government bonds for example, provide measurably better rates of return over the long run, and the additional return amounts to a risk premium, i.e. the more risk one assumes, the greater return one should expect. When coupled with things like Efficient Markets Theory, their work supported the idea of passive investing, which is the essence of indexing.
More recently, Roger Ibbotson and fellow Yale Professor Zhiwu Chen authored a paper called "Liquidity as an Investment Style" in which they argue that, much like the premiums demanded by investors to purchase/own more risky assets, premiums are also demanded by investors purchasing assets that are less liquid. Put another way, a stock with a low trading volume should be intrinsically cheaper on the face than a similar stock with higher trading volumes. I would note, Chen and Ibbotson, through their company Zebra Capital Management, have recently launched funds based on their liquidity premium theory. Here is an excerpt and partial conclusion from their work on the subject:
"...For the top 3500 stock universe based on market capitalization and for the period from 1972 to 2005, our backtest results demonstrate that such a liquidity portfolio strategy outperforms the earnings weighted, market-capitalization weighted, and volume weighted portfolio strategies as well as standard benchmark indices, even on a risk-adjusted basis. This liquidity strategy offers similar capacity as market-capitalization weighted and earnings weighted strategies, and yet it adds value over such traditional investment styles. Our research also shows that the liquidity investment style goes beyond, and is different from, the size, the value/growth, and the momentum investment styles. Our liquidity strategy represents a particular profitable, large-capacity way to implement the liquidity style...".
In my view, Chen and Ibbotson's work provide some interesting food for thought, especially for those of us who spend our professional lives wading through the largely illiquid world of micro cap and small cap issues. If I understand it correctly, they are not suggesting that liquidity premiums are some adjunct notion that deserves consideration in final investment decisions, but rather that the breadth of the premiums is distinct enough that liquidity warrants its own investment style. Put another way, an investment's liquidity profile may be as important or perhaps even more important, than its prevailing asset classification in terms of the long term returns one might expect from that asset. Moreover, it provides a basis to at least assume that if the market overstates the value of liquidity, then extraordinary returns may be predicated on the acquisition of more illiquid assets.
As I said, the idea of liquidity premiums may be particularly topical to micro cap issues and their resulting returns, and may in fact shed some light on the better relative performance of the asset class as demonstrated by Ibbotson and Sinquefield's original work. The implications clearly deserve some attention. Specifically, those looking to capitalize on the historically better long term returns demonstrated by smaller companies, should approach that endeavor with the above information in tow. Exploiting the long term performance of the space while at the same time utilizing criteria that insist on purchasing only stocks with high trading volumes may prove elusive and/or even misguided.
Dave Lavigne Co-Founder & Co-Chairman Accredited Members |
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The Big Picture
As many readers of my past research and newsletters can attest, macro analysis is not exactly my forte. I am not a market timer, technical charts make my head spin, and frankly - right, wrong or indifferent - while I recognize the importance of the prevailing "environment" both technical and fundamental, I also happen to believe that individual stocks can go up even if everything else is going down. Consequently, I spend most of my time trying to find those types of opportunities (individual stocks that I think will appreciate) rather than trying to figure out where the dollar is headed or if inflation is on the horizon. Don't get me wrong, I understand the issues that drive the macro world, and I am certainly not discounting their importance to just about everything. It's just that dissecting that minutia is not what I do, and like most people, I don't have enough time to do what I do much less trying to do what I don't, AND, at least in my simple mind, someone needs to do what I do so it might as well be me.
Obviously, since we actually devote an entire column of this newsletter to the "big picture," not only do I recognize the importance of macroeconomic issues, I even enjoy mulling them over (when time permits). However, I have to admit, when it comes to this column my preparation often involves spending time trolling other financial articles to find an angle or two that is topical but perhaps a bit less sterile than a review of the trajectory of housing starts, interest rates, trade imbalances and so forth. From that perspective, I always like providing the big picture analysis for the start of a new year because it is always apropos to start the new year by reviewing the old year, which requires a bit less creativity than other points in the year. That said, I will start this brief recap of 2010 by reiterating a view that I came across while doing my research. That view is "These are interesting times we live in." There are many things to argue about in the macro world, but that phrase is not one of them...
Since we have also ended an entire decade, maybe a look at that would be topical as well. In short, the performance of some domestic asset classes for the first decade of the 21st century (as measured by starting January 1, 2001) was dismal. As an example, the S&P 500 posted a 5% loss for the decade, while the DOW was up only 7%. According to a recent USA Today article, "Of the 10 largest stocks in the S&P 500 on Dec. 31, 2000, only three of those stocks have posted gains since then. On average, they're down 20%, including reinvested dividends." It also notes, "Technology stocks are still 15% from their highs for the decade...Telecom stocks are down 34%." Thank goodness for commodity stocks.
In retrospect, the details of the period provide all the backdrop one needs to understand the poor results. Recall, we started the decade in a recession on the heels of the tech market meltdown, and 9/11 quickly followed which set the tone for many of the period's challenges and complexities. The decade was also marred by scandal. While they seem eons ago, Enron and Worldcom were part of this dubious period, as were Bernie Madoff and the Fannie and Freddie disasters, the latter of which extended into the real estate crisis and likely the U.S. financial crises as well. Financial crisis across the globe, (currently playing in the Eurozone) remains topical, while unemployment and real estate malaise provide continued drag for the US economy, also lending themselves to the U.S. Government's acute budget problems. That is, people can't pay taxes if they don't have jobs. On another level, the decade also saw the continued emergence of China as a clear economic and political power, which by the way during 2010 surpassed Japan as the world's second largest economy. Many of the implications of that dynamic are yet to even be contemplated, but the impact on commodity prices, oil for example, is front and center, with both short term and long term implications for virtually every market in the world. Again, the first decade of the 21st Century is a good one to put behind us.
Interestingly enough, 2010 started with several of the above problems in full swing. Stubborn unemployment, continued struggles for the housing industry, and an unfolding worldwide financial crisis were all in the headlines as the year began. Further, while healthcare reform looked dead in the water, the first half of 2010 included the enactment of comprehensive reform and the genesis of the public cost debate that has raged since. In spite of polls suggesting a majority of Americans were against the reforms and concerned about their ultimate costs, the markets seemed to shrug that off and continue to advance after its enactment in March 2010, at least until May 6th when the "flash crash" reminded everyone just how abrupt the "brave new world" of equities can be. I am not sure we have ever really figured out the basis of the flash crash, but we have figured out the reality of its possibility. It's hard to argue that it won't or at least can't happen again. By the way, it took the entire summer...including the Indian summer... to recover from that little hiccup. Actually, maybe I overstated that. The BP oil spill disaster blew up in late April, and I suspect impacted the markets through its plugging in mid-July. I also suspect that the second half rally, which started in the fall and continued through the balance of the year may have been driven in part by the anticipated legislative rollover of November. I would support that notion with the correction that followed the elections. In short, I don't think the outcome surprised anyone, as I think it was building into the market from the start of the rally, and the reality of the expectation was met with an appropriate correction.
Given the above, it's hard to believe that many assets, especially many domestic classes, performed as well as they did. The table below is a (partial) global tale of the tape:
As I said, given the turmoil around the globe, it's almost hard to believe that many asset classes performed quite well. On the other hand, with the backdrop of the miserable decade that 2010 wrapped up, especially the poor performances of many of the above assets in 2008 and 2009, perhaps 2010 was as simple as reversion to the mean. Put another way, everything can't go down forever...(can it?)
Looking ahead, to revisit the reversion to the mean theme, one might surmise that the markets may need a bit of correction, given the trajectory of the last 6 months or so. Market technicals aside, there may also be some reason for optimism. It appears for example that we may have avoided the double dip and the economy may in fact be in a position to post some progress on economic growth, jobs and eventually maybe even the housing market. Moreover, political gridlock has insured at least a stay of tax increases which I think most of us consider positive for economic growth, and it may also have insured some much needed scrutiny over spending, which in the end may provide a catalyst for more optimism or perhaps at least less pessimism with respect to our own solvency. Of course, while I think these are all reasonable expectations, as we have learned from the past few years, it's the unexpected that kicks us around in the dirt, especially when it is so unexpectedly awful. To that notion, while again things seem at least less bad, there are still plenty of things to worry about: rising oil prices could dampen recovery prospects, global conflicts emanating from Iran and/or North Korea could be considerably negative, inflation or more succinctly stagflation is in the realm of possibilities, and the revelation of additional scandal via Wikileaks et al carries (in my view) considerable potential for downside market pressure. Here again, these are just a few things that are obvious, while the greater likelihood may be that if we do encounter some bad news that throws cold water on the rally, it will probably be something we don't see coming. So here we are once again, climbing that wall of worry...been here...done this.
Dave Lavigne
Co-Founder and Co-Chairman
Accredited Members
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| The information contained in these reports has been prepared by David Lavigne of Accredited Members Inc. ("AMI") and has been derived from sources considered reliable, but cannot be guaranteed by us. AMI and Lavigne are not aware of any material conflicts of interest known at the time of the publication of this report. Financial projections and estimates herein represent our independent analysis based upon information in conjunction with the Company's publicly available financial statements. AMI and Lavigne may maintain positions in the securities referenced, which may change at any time without notice. AMI does not receive fees, warrants or any other compensation from issuers in connection with its research. This report is for informational purposes only and is not to be construed as specific investment advice or recommendations, or as an offer to sell or a solicitation of an offer to buy any securities. The securities referenced are speculative in nature and may not be suitable for your specific investment objective. For specific investment advice or recommendations, please consult with your investment representative. For additional information regarding our rating system and valuation approach see our website, |
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