Author: Gehman Capital
Covestor model: Undervalued Growth Companies
Disclosure: Long all stocks mentioned
Small cap stocks tend to be higher risk than large caps, and we’re seeing that in my portfolio. My Covestor performance chart shows that since inception, my portfolio significantly outperformed the Russell 2000 Index (RUT) from late November 2010 to early March, 2011. But from that point, the value of my portfolio turned lower, underperforming its benchmarks.
As of 9/1/11, my portfolio owns 11 stocks of lesser known small cap companies that have proven to be more volatile than the RUT Index. If the market recovers, as I expect it to do by the end of this year, I strategize that my portfolio will deliver stronger returns than the RUT Index, as it did from late November to early March, 2011. I’m hopeful that these positive returns will reward the pain that has been suffered in this severe market decline.
This report is written before the President’s 9/8 speech that will propose policies to improve job growth and the economy. Also, it is written before the Federal Reserve Board meetings that will discuss their options to deal with the surprisingly weak economy.
Many factors enter into my investment decisions, but primarily, more than any other factor, is the amount of liquidity in the US and world economies. Record amounts of liquidity are now available, and I expect significant amounts of capital to be deployed by governments and businesses to restore employment, growth and confidence in the world economies. When consumer confidence is restored, I expect stock markets to generate significantly higher stock prices.
I repeat my statement of last month: The stocks in the Gehman Undervalued Growth Companies portfolio are extremely volatile. They have been battered and beaten – but I believe the stories are still intact.
EZChip Semiconductor Ltd. (NASDAQ:EZCH)
In August, 2011, EZCH stock held pretty firm in a very uncertain market environment. The company is reporting excellent results and is now in position to be recognized as a special company.
The exciting news is that EZCH is making a number (7 at last count) of presentations at major upcoming technology conferences: Citi Technology, Deutsche Bank Securities, Linley Tech Processing, 9th Int’l SoC, Goldman Sachs and Kaufman Bros.
EZCH has produced results and is now large enough to generate some major brokerage reports. In my opinion, EZCH is on the launch pad for significantly higher stock prices.
Anadigics, Inc (NASDAQ: ANAD)
The company has developed sophisticated chips that occupy an important niche in the marketplace. They made some mistakes, but are now developing new chips and rebuilding customer relationships. The stock has suffered with the market, but I believe is in position to recover this fall.
DragonWave, Inc (NASDAQ: DRWI)
Greg Friesen, VP Product Development (DRWI) said that “DragonWave is committed to delivering unmatched backhaul solutions that provide the capacity, flexibility and cost efficiency needed for a smooth transition to high-bandwidth packet networks.” (Company press release, 9/7/11 https://www.businesswire.com/news/home/20110907007115/en/BATS-DragonWave-Developing-Massive-Capacity-Auto-Aiming-Tracking)
Of greatest importance, Sprint announced they are discussing increasing their investment in Clearwire. That would provide financing for Clearwire’s national network that has used, and is projected to use, a large percentage of DRW equipment. I expect that DRWI will see a significant flow of business in the second half of 2011.
Finisar Corporation (NASDAQ: FNSR)
In early September, FNSR reported strong Q1 2011 revenue and earnings. Of greater importance, they forecast earnings ahead of forecast for the current quarter. The stock has been rallying in response.
The company has relatively high fixed costs, but has been very successful in reducing those costs. As volume picks up, with the demand for fiber optic products, FNSR is in position to leverage sales to profits significantly. I believe the stock could go up significantly.
Lattice Semiconductor Corp (NASDAQ:LSCC)
LSCC is a niche player in the chip market, under the radar of some of the larger companies. They now work closely with specific customers to develop chips for special purposes. This strategy should allow them to make significant profits. We wait for positive announcements.
Microvision Inc (NASDAQ: MVIS)
Surprisingly, there have been no new announcements in August. Unfortunately, it has taken so long to develop their superior Pico Projector that MVIS must continue selling equity to raise money to “stay in the game.”
Last month, the company announced that Intel will distribute and re-sell their SHOWWX+. This is the only pico projector that will slip in a shirt pocket and offer big screen, focus free display. SHOWWX easily connects with most electronic components, including most Apple products.
Last month, MVIS also announced an agreement with a major auto manufacturer to develop a projector that will display dashboard information on the car windshield.
If MVIS is able to sign a contract installing the Pico Projector on cell phones, the revenue could be significant. Hopefully, announcements on product sales will come very quickly.
Quicklogic Corp (NASDAQ: QUIK)
QUIK reported earnings on Aug. 2, 2011. Q2 2011 revenues were decent, but the company projected Q3 to be flat on new products. This was a little disappointing because last month QUIK had announced some commercial traction on its VEE/DPO technology. This technology reduces power consumption and also enhances the ability to read mobile and wireless devices in the sun and shade.
The first VEE/DPO product is a “tablet-phone” called the Pantech Vega 5, which has significantly increased battery life and is being marketed in South Korea. Hopefully customer acceptance will encourage them to make the product available worldwide.
Quick is establishing a unique position in the market by completing the programming on programmable chips, rather than have the customer do that work. Final product chips are sent to the customer, but they are programmable, so QUIK can quickly make any changes the customer needs. The customer does not need to develop program expertise to use the chips. Also, QUIK announced that they are working with a manufacturer of a smartphone that could reach the market in Q4, 2011. Product reviews are very positive.
QUIK is usually cautious in its projections, so hopefully the “summer doldrums” caused the company to be conservative when they projected flat revenues for new products. The stock price declined in August.
Tower Semiconductor Ltd (NASDAQ: TSEM)
TSEM reported earnings from their June quarter. Revenue grew strongly last year’s quarter and management projected that the year ending September, 2011 would see significant growth. The company did have an acquisition that impacted earnings, but even with that, the company is executing very well.
TSEM fabricates chips. There is a trend for developers to outsource the manufacture of chips because new chip manufacturing facilities are extremely expensive. The major problem with the stock is the Capital Notes that were sold to keep the company out of bankruptcy years ago. These notes will probably be retired with some stock dilution, but that amount of dilution is still uncertain. In the meantime, we wait with what we consider a very cheap stock.
Towerstream Corp (NASDAQ: TWER)
TWER reported Q2 2011 earnings . The company is doing well, but the exciting story is their potential. TWER has accumulated the wherewithal (money, licenses, contacts, infrastructure, etc.) to build on their three business models – Wireless Enterprise Broadband Networks, WiFi Offload System and buying up small Wireless Enterprise Networks.
In July, 2011, TWER did a capital raise through an equity offering. The stock fell in August. The company now has extra capital and they are continually in negotiations to build and buy cheap additional capacity. Hopefully we will get an important announcement soon.
Wave Systems Corp (NASDAQ: WAVX)
On August 9th, WAVX announced Q2 2011 (June 30, 2011) earnings. Revenue was up sharply year over year, primarily because of increases in enterprise server software licensing revenues.
After many years of education and training, Wavx’s business of providing “Trusted Computing Software” to corporations and governments is now growing faster. WAVX has made the decision to invest aggressively in both sales and marketing and R & D initiatives to develop its business further. SG & A expenses rose significantly over Q2 2010.
Cash has increased quite a bit on its balance sheet, but WAVX reported another net loss in Q2 2011, as it did in Q1 2011. As their business grows, the company will probably continue to build their cash position, but report losses for a while as they are building their infrastructure.
Computer security is a priority for all computer users. WAVX has major competitors such as Infireon and Lenovo, but also a large number of companies, including Intel and Microsoft, that are addressing computer security problems. WAVX has worked exceptionally hard to establish their position in the industry.
For a small company, WAVX has made tremendous progress developing products that have been selected by large corporations (e.g., GM, PricewaterhouseCoopers and BASF) and developing important relationships (including the U.S. government) around the world. I expect the company to gain traction in coming quarters.
XOMA Ltd. (NASDAQ: XOMA)
I don’t own many biotech stocks anymore. The rewards of success can be significant, but the waiting and success rates can be very painful.
Steve Engle, CEO since 2007, resigned on August 31, 2011. That cannot be good news. XOMA has a number of drugs in development, and has signed some licensing agreements. Their key drug, XOMA 052 just received a new patent for coronary conditions, but it did fail a Phase 2 diabetes study.
I don’t own many shares, and am not ready to bail out yet, but am watching closely.
SUMMARY
The Russell 2000 Index fell hard in August, and went further down in early September. My stocks went down even more. That is not unusual. I own 11 stocks, versus this index of 2000 stocks. My stocks are relatively unknown and therefore vulnerable to decline in a down market.
The good news is that the companies have all (except possibly XOMA) made progress in developing their business. If the market recovers, as I expect it to later this year, I’m hopeful for the prospects of my portfolio.
