The Microcap Speculator

A few items:

• BAB Holdings (BABB.OB) announced another $.02 quarterly dividend. Shares have recently traded in a price range of $.85-$.95. Though the trading is thin, the yield is fat. Just counting the regular dividends — not last quarter’s special dividend — BAB Holdings gives shareholders $.08 per year. At the bottom end of BAB’s price range, that amounts to a 9.4% yield, and at the top end, an 8.4% yield. Not too shabby!
• I’m still long the junior/mid-tier gold miner field bet posted Feb. 20. So far, the results are mixed: Gold Fields [[GFI]] is up about 10.6% since then, and Gammon Resources [[GRS]] is up a solid 26.4%. On the flip side, Golden Star Resources [[GSS]] is down 3.2% and U.S. Gold [[UXG]] is down 2.6%. My takeaway? The disparate results show the need to play this one as a field bet. That’s why when I decided to increase the bet yesterday, I added another stock, Tan Range Exploration [[TRE]], instead of adding to existing positions. Next add will probably be Western Goldfields [[WGW]]. The stocks still don’t reflect the recent rally in the underlying metal, or potential earnings power. As long as gold holds $900 over the next three months, I expect a slingshot move in the juniors and mid-miners.
• Microcap nursing-home stock Advocat, Inc. [[AVCA]] reports earnings next Wednesday. Though the stock is under pressure on light volume this week, I like it at these levels and may boost my holdings in advance of the quarterly report.
• Littlefield (LTFD.OB), the bingo hall operator frequently mentioned here as a play on aging baby boomers, was a little light on earnings. I’m out of the stock and have no plans to reenter until financial results improve.
• China 3C Group (CHCG.OB) continues to hit new lows, though it reaffirmed fiscal 2007 earnings projections of $.43 to $.47. At today’s price of $2.23, I think that the Chinese electronics retailer offers a pretty good risk/reward in front of the 2008 Olympics. I’m a buyer.

DISCLOSURE: Long BABB.OB, GRS, UXG, GFI, TRE, AVCA, CHCG.OB. No position in WGW (yet) or LTFD.OB.

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A few news items worth mentioning:

• Advocat, Inc. [[AVCA]] received a letter from activist shareholder Paul Kessler of Bristol Investment Fund pressuring it, among other things, to let shareholders vote on whether to de-stagger the board of directors and to hire an advisor to weigh strategic alternatives.  Similar demands from Kessler, who controls about 5% of shares, have been disregarded by the company.  I expect no action here even though Kessler’s demands would probably increase shareholder value.
• China OTC Player has an interesting post on three companies that could benefit from China’s devastating snowstorms [via Seeking Alpha].  He names China Solar (CSOL.OB) (formerly Deli Solar), China Pharma Holdings (CPHI.OB), and Sino Gas (SGAS.OB)
• Air Industries (AIRI.OB) announced that its Welding Metallurgy subsidiary has won $1.07 million of new contracts during the month of January 2008. The company says that this is the largest aggregate amount of new contract awards in a single month for Welding Metallurgy since its inception in 1979.
• Bagel-maker BAB Holdings (BABB.OB) announced $.10 earnings for 2007, virtually identical to 2006 results.  That’s fine with me as long as they keep paying $.08 or more in annual dividends.

DISCLOSURE:  Long AVCA, AIRI.OB, BABB.OB.  No position in other stocks mentioned.

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From my family to yours… wishing you a Merry Christmas, Happy Holidays, and Peaceful and Prosperous New Year.

At a holiday party, I was asked what five stocks I would buy if I had to hold them for a year (no trading in and out). Most would fill that charge with a portfolio full of low volatility, low risk, low reward stocks. I would go the opposite direction — take a combination of fairly volatile but potentially very rewarding stocks. Sure, the portfolio would be weighed down by a few losers, but hopefully the home runs would more than make up the difference.

With that aim, and limiting myself to only microcaps, here is my holiday portfolio:

1. Advocat, Inc. [[AVCA]]: With a market cap. of approximately $65M, this nursing home provider trades at roughly a quarter of its trailing revenues. Earnings have fluctuated, but last quarter it earned $.32 per share. At this run rate, Advocat should see modest upside. Operational improvements could drive much stronger advances, and with M&A activity rampant in the sector, a buyout is certainly possible over the next twelve months.
2. Air Industries Group (AIRI.OB): As I have written previously, Air Industries has laid the groundwork for a strong push into the new year. The company plans on rolling up small, fragmented aerospace equipment manufacturers. Its a bit early to tell, but it looks like the company is executing well. At these prices, I like my odds.
3. Arrythmia Technology[[HRT]]: In the past four years, Arrythmia Technology has made three moves from sub-$10 to over $30. Is another in store for 2008? I have no idea, but with the stock trading less than 11 times its annualized last quarter earnings, and about $1 per share in cash, HRT is very cheap for a medical device company.
4. Paragon Technologies [[PTG]]: With a share price of $6.90, over half of which is covered by cash on the balance sheet, earnings of $.24 last quarter, and a strong backlog, PTG offers a very high risk/reward setup. If I had to pick just one, this would probably be it.
5. Synalloy [[SYNL]]: One glance at the chart leaves no doubt that Synalloy is a volatile stock. Shares took a hit recently as Synalloy, a producer of specialty chemicals and fabricated metal products, lost the benefit of nickel pricing surcharges. But Synalloy remains solidly profitable, and should benefit from secular growth in energy and water infrastructure projects.

I have entered this portfolio into Stockpickr, so you can track its performance throughout the year.
DISCLOSURE: I am long all of the stocks mentioned here.

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Air Industries (AIRI.OB) announced another long-term agreement with Sikorsky, valued at $15M.  “This brings the total value of all contracts from Sikorsky announced this year to over $75 million,” said Peter Rettaliata, CEO.  “Through both organic initiatives and acquisitions, we expect continued growth in all facets of Air Industries Group.”   Last quarter, Retalliata spoke of “a return to profitability in the second half of the year.”  While I think that was a reference to the fourth quarter, the company nonetheless offers a compelling risk-reward setup ahead of earnings.  Barring any catastrophes, it should see no more than a few cents to the downside, while a strong report could break it out of the $.26-$.32 range it has (for the most part) traded in over the past year.

Western Goldfields (WGDFF.OB) hit new highs along with gold itself today after announcing that it is moving from the OTC BB to the Amex.  Shares are expected to begin trading on the Amex on Thursday, November 8, 2007, under the symbol “WGW”. Until then, it will continue to trade under the symbol WGDFF.OB on the OTC Bulletin Board.  The move is an incremental positive for a stock that already has a lot of promise.

Paragon Technologies [[PTG]] announced a $2.9 million order, adding to its considerable backlog.  Remember, Paragon has an enterprise value under $10 million.  I expect that these recent orders will soon begin to drop to the bottom line.

Advocat Inc. [[AVCA]] announced third quarter earnings of $.32 per share after hours, and has authorized a repurchase of up to $25 million in common stock.  Could lift shares tomorrow.

The Baltic Dry Index still looks like it is beginning to turn south.  To nobody’s surprise, the dry bulk shippers continue to drop precipitously (short EXM).

DISCLOSURE:  Long AIRI.OB, short EXM.  No position in other stocks mentioned.

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