By Marc Robins
After all these years, one would think a seasoned and professional analyst/money manager would know how to characterize his own investment style. Lo! I’m having my doubts these days. I know that I love the small- and micro-cap arena: I made that decision, for better or worse, in 1979. Beyond that, I appreciate that at the start of my career the greatest joy brought by stocks were those small, value stories that were meteoric performers during the early 1980’s “crush” and as the market broadened throughout the decade. Early LBO buy-out targets helped my returns, too.
During the mid-1990’s, I changed to being a G.A.R.P. investor… growth stories, but those still leaning toward the “reasonable price” end of the scale….Pseudo value names, if you will.
But now, I am metamorphosing once again toward an existence as a “contrarian.” I find myself being attracted to Chev Suburban’s and Detroit Boulevard Barges. I want help “bagging” my groceries and am determined to have a counter-boy carry out my packages, even if it’s a quart of milk. I’m reforming from my old ways…No more Mr. DIY. Creature comforts are shunned for campfires. Gad! I’m reading “hunting” magazines and fondled a fly rod just last weekend. I can’t over-power the forces pulling at me. It’s taking control of my psyche! Could it be the spirits of Halloween? Maybe the tropical depression brought-on by storm Sandy. Whatever it is, it’s a new ME.
Why the change now? Could it be the four years period of listless markets…an icky equity sentiment despite easing money policies that gush cash like Linda Blair’s green vomit in the movie, The Exorcist? Or, is it because the trends of so many new, great, hot stock ideas mostly turn into sputters? Where are my “drill bit hits” of old….Comdial ($0.33 to $31), Tosco (5/8s to $27), Seattle Filmworks ($2.00 to $35), Celgene ($7 to $143-presplit), Force Protection ($1.5 to $31). I feel abandoned by my friends. Perhaps I’m terribly tired of hearing of the same five names that have captured the imagination of the media and investors. This harkens back to the pre-crash months before 2000’s blow-off. (Remember the “new nifty twenty” that were similarly touted until they turned into the viginti catastrophes?) Possibly it’s due to the notable absence of new, branded consumer ideas, which means a lack of creativity and inventiveness similar to the period of “Blahs” that we experienced in the early 1970’s. Or, most probably, a dead small-cap marketplace that prevailed for last three decades (has it?)…a market phenomenon that prior to 1982 had never occurred.
Given my “new faith”, one of the biggest market reversals I’m anticipating in the near future is the new, “star” role micro-cap and small-cap stocks will play in the investment cosmos (Talk about having an unpopular and out-of-sync belief! But that is exactly why it makes so much sense at this point in time.). It’s the penultimate in contrarianism!
Before you fold-up your papers and sail them off towards the recycling bin, think about how patently out of favor the small-cap asset class is. This, compared to the wholly pivotal role “Up-and-comers”, “drill-bit” shares and penny stocks played in the stock market make-up in years of old….No, think about how these micro-caps played a role in the development of the USA.
Now, the market has become so bifurcated into the “haves” and the “have nothings” in the realm equity names that the chasm between them is as wide as the difference in wealth between royalty and peasants during the Middle Ages; Czar and serf; Medici and merchant. Investors are now so mesmerized by the current, positive trends or trading ETF’s versus investing they’ve grown unprepared to observe the ebb of what’s going on when replaced by a “novel” upswing or new secular trend.
Think about some of the major reversals of late that we as a nation of consumers, citizens or investors that have experienced that have changed our lives and were totally unexpected. One recent reversal that was wholly unexpected that must be mentioned is the startling and meteoric ramp of U.S. oil production. Not four years ago, we were told to believe that the USA would be desert-bone dry of reserves. Now, drive a dull stick into the earth and hydrocarbons start gushing out (with a little help from fracking and innovation.) Pundits are claiming we’re within a year-or-two of out-producing Saudi Arabia again. This, occurring against a backdrop of an anti-fossil fuel president, recalcitrant EPA and a “Green” movement that was going “sustainable” even if it was going to kill us with pneumonia or blight our country sides with windmills. Same thing is true with interest rates!
Another incredible reversal to note is interest rates. When I got into the business, inter-bank rates were 8% and on their way to 20%. High quality corporates (that’s an oxymoron if there ever was one!) were 15 to 20%. A 40-year, secular up-trend in rates that showed no sign of topping out let alone reversing itself. It was believed that rates would continue to the Moon! Then WHAM! For the last 30-years, it’s been almost a continuous, non-interrupted slide since 1982. Mortgage rates are now “lower than a snakes gut!” Every time I hear an ad about mortgage rates on the radio, it starts with “never in the history of (you fill-in the name of your most tiresome and annoying local advertiser here) Financial have rates been this low!”
And there are smaller but every bit as obvious reversals, like eggs and how healthy they are or are not for one’s diet. Whether coffee helps or hinders. The success or failure of Ford. Speed limits in Texas and the Dakotas. Lastly and this is a stretch of the term “recent”, remember when Apple was in real trouble back in the early 1990s. Steve Jobs had to beg Gates for financial assistance to stay alive?! Financially!
New trends can be established. Some of the strongest and longest trends (read: Opportunities) are due to reversals that no-one expects…true contrarian shifts of direction.
OK. So, what about small-caps? As mentioned above, I contend that we are about to see a major reversal in the pricing (and popularity) of micro-, small- and even to a point, Mid-cap equities. Can you imagine small and micro-cap stocks blasting into orbit like they did during the decade of the 1970s?! I can. It makes me salivate like a line-up of fat people staring at the display case at the Cinnabon counter.
Ah, yes! Remember the eleven-year stretch of the market where the combined returns for the small-cap index out-paced the S&P averages 35% per year versus 15% annually for the whole period (I remember it well because it was data from Satya Pradhuman at Merrill Lynch that I quoted at every school lesson, sales pitch and to myself to keep buoyed.)? Indeed prior to the 1980s, during every decade since the turn-of-the-century Up-and-comer stocks experienced a period of out-performance so that very long-term return numbers ALWAYS posted results where micro-caps out performed small-caps, small-caps did so to mid-caps and everything out-performed the S&P. At The Red Chip Review we got so used to out-performing big companies we use to say, “We Gain the Losers and Lose the Gainers!” Meaning that most of the biggest market favorites would return to the micro-cap or small-cap realm with time but always the successful mini-favorites would climb up out of our realm and into the mid- and large-cap stratosphere.
To better understand the swings (and what I really mean here is the long, progressive, swing down!!) and therefore why the pendulum has to be poised to reverse trends back to a 1970s-like experience, one needs to review the many negatives that are pressuring valuations. If this doesn’t sound like an asset class that’s being “kicked” while not only down but almost out, I don’t know what is.
First, let’s discuss some of the big picture factors that are hurting small businesses. And this list is a lot like “hanging faucets on a kites” given the added burden that weighs on companies. For instance:
- How about taxes? Whether or not the government halts the “Bush tax cuts” or not, a new problem on the horizon that frightens the jeepers out of almost every businessman and consumer are the more prevalent fees and incremental new expenses ladled on all sizes of operations across the country. The problem is that big corporations have tax departments and sometimes whole floors dedicated to tax experts working to “minimize” their tax burden. Not so at the small end. Guys like me think about the tax bill from about this time until March 15th. Whatever the resource dedicated, it cost more than it should and brings down returns.
- How about regulations? Just those guidelines, parameters, and directives that have been added in the last decade make it nearly-impossible for small companies to operate without added compliance, communications to shareholders, let alone raise money in the financial markets or support their story. The cost of regulation has easily doubled, if not tripled since 2000. Indeed, Lew Zirkle the founder and CEO of Keytronics, Inc. quoted to me in 1988 that the “cost of government” for his business in Spokane, WA was 30% of all his costs. Now, that was a very tight-operating manufacturer. Think about today and what the cost is for marginally efficient operators…and that most likely means restaurants, service providers and businesses that require a high labor component.
- How about avenues for getting a hot, new story out and the differences from the 1970’s? I think the most prevalent change is the effect of the internet and how it is supposedly a far better communications system compared to the ‘olden days.’ Au contraire mon ami!
I was a publisher of information for 10 years and it’s a subject I know well.
Yes, the web is a great delivery system for all kind of information but remember, it is a “pull” or demand-oriented source of information, not a push source. ValueLine, Walker’s Manual, the Red Chip Review, brokers, they all pushed information and new ideas to investors. How are you going to know about changes or successes at Galaxy Gaming or Aethlon Medical when the news about the former commercializing new games at an unprecedented rate or the latter pursuing a cure for Hepatitis C that is beating drug therapies hands down? This is particularly true if you don’t know their names. The web isn’t going to go, “Psst! Hey buddy! Galaxy has tripled the number of “21-plus-3” games in the last year. And, they’re getting $365 per month per table!” Nope, it’s tougher to broadcast a new story.
Oh incidentally, don’t think the magazines or business news media is going to help you “discover tomorrows blue chips today!” I can tell you about writing for Forbes and being on business TV!
Next, we should touch upon the many security industry negatives…an industry that is supposed to be a creator of capital for companies to use for growth and economic prosperity…that is practically shunning the micro growth businesses. No, it’s an industry that’s going the way of the buggy-whip….protecting its past market glory. It is an industry that has turned its back on capital formation where it’s needed.
Being a part of the industry for nearly 35 years, I also know it’s the worst managed industry on earth. That they “Zigg” when all the other “Ziggers” are about to “Zagg”, and vice versa. Leave it to the Securities Industry, and the US military, to be overly prepared and ready to fight the last great war. Wall Street is fully armed for attack, so we know that something has to be up (or down in their case.) It is also the very reason why when trend reversal that I keep mentioning occurs, it will come with real vengeance and the scramble will be long-legged and greatly profitable for those ready to participate. Here are some scandalous observations….
- First, try finding a stock broker that knows anything, let alone company fundamental specifics, about any small-cap or micro-cap stock. It starts with the fact that most major brokerage houses don’t even want the brokers themselves to own, let alone try to sell, any of these lesser known names. If they do, most have to get permission to buy a “drill-bit” name for their own account and no equity transaction gets past compliance with a lower than $5.00 a share price.
- Second, there is no such thing as a stockbroker (point #2)….they are all “Financial Advisors”. They are great at selling products, funds, insurance, annuities, but rarely is there a specialist that can “tell a story.”
- How about my situation?! The firms are moving from the small-cap arena and pushing true investors away so that those interested in investing for real growth can’t find an avenue to do so. The best example was my virtual dismissal from the ranks of UBS clients because of my affinity toward micro-caps. This leper/untouchable-class status occurred after being an account with Kidder-Peabody, then Paine Webber, and then UBS (an account with almost a 25-year history.) I’ve been, in essence, asked to leave.
- Let’s not forget the SEC. Over the last decade the governmental agency and their step-child (FINRA) have conjure up practically a Hatfield and McCoy vendetta against small companies. I’ve been told by members that the two agencies are literally telling broker-dealers to “get out!” of the small-end of the market-cap equity arena. Here we have an economy that is valiantly trying to stay above water and a President “oh so supportive of job growth,” yet securities regulatory agencies are trying to choke the very life out of prosperity by driving the financing conduits for small enterprises out of the business.
- Besides the government’s negative bias toward the asset class, the steady derision by the press, financial media, legislatures etc. are all doing their best to “make interesting contenders in the field all but go away.”
The last point, which I think sums up the scenario the very best, is from my good friend, Peter Sidoti, who runs a small-equity research shop. Verbatim, “Younger people (meaning equity analysts in particular) are so negative. None of them can envision a bright future.” I have to think it means a “bright” future as it regards their equity research list. Also, these same investors “are to short-term oriented. All of them are traders and not investors.” Perfect.
So this group of equities is all fighting both a stiff wind right on the nose from a variety of sources as well as “Bad Joss”. It’s pretty dismal. Seems (place the “F” bomb here for real emphasis)-ing obvious that we should collectively jump off the nearest financial bridge.
Hoo-ray, it can only be a signal that the tide is about to turn. That a new mega-trend in investing is about to occur and that those sufficiently independent of thought are going to do remarkably well.
Well, that’s it for this part. 2,500 words is certainly enough to relay how truly disastrous conditions are. In the next section, we’ll relay my story about the elevator ride and the change in the market for me personally, and for the nation.
About Marc Robins: Mr. Marc Robins is a Managing Partner and Founder of Catalyst Financial Resources, LLC. He is also employed as a Preisdent and Director of Research at The Robins Group, LLC. Prior to these positions, Mr. Robins was the Founder, Editor-in-Chief at the RedChip Companies, Inc.. Mr. Robins resigned from this other post as of November 22, 2002 and has since moved to full-time positions at Catalyst Financial Resources, Crown Capital, LLC, The Robins Group, LLC and Crown Point Group, Ltd. Prior to founding the RedChip Companies, he was co-manager of the WestCap Small-Cap Portfolio for Capital Consultants, Inc. in Portland Oregon. Mr. Robins has previously held positions of portfolio manager, and directors of research at several Portland, Oregon-based investment firms. Mr. Robins was the President of the Portland Society of Financial Analysts. He served as a Director of FreeRealTime.com Inc. since August 2000.
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