The Microcap Speculator

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.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

1. Paragon Technologies [[PTG]] reported strong earnings this morning. For the third quarter, it earned $656,000 or $0.24 per share as revenue rose to $7.3 million from $5.2 million in the third quarter of 2006. Backlog grew to $7.2 million from $5.9 million at the beginning of 2007. About half of the quarterly income resulted from the reversal of a tax accrual. Len Yurkovic, acting CEO, said: “We are extremely proud to be reporting higher sales and earnings and a strong balance sheet. We are also delighted with the 49% increase in orders, particularly from the rapidly growing strength in the software-driven, high-growth potential order fulfillment systems. The Company’s quoting activity continues to be strong, and maintaining an aggressive selling focus on active sectors of the marketplace is a prime objective.” I had sold my position into the ramp, but may be a buyer today.
2. Secured Digital Technologies (SDGL.OB) is a profitable, fast growing RFID systems integrator and service provider. I’m still investigating, but at first glance it appears to be selling at a very reasonable ratio to projected sales and earnings. I will likely buy a position today ahead of what should be strong quarterly results.
3. MicrocapFeed. I came across SDGL using a demo of MicrocapFeed, a platform designed for microcap traders. I’ll write a full review of this impressive tool in the next week or so — it is one that many of you will want to use.

DISCLOSURE: No positions.

UPDATE:  2:00pm ET - I am now long both PTG (at 7.71) and SDGL.OB (at .165).

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

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.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

Paragon Technologies [[PTG]], a provider of material handling automation systems, is quietly building a solid book of business. In August, the company announced that its backlog for orders had increased to $10.7M versus $5.9M in the beginning of the year. Acting CEO Len Yurkovic then stated that “the 81% increase in the backlog of orders lays an excellent foundation for financial performance for the remainder of the fiscal year.”

Since August, Paragon has continued to book new business. In early October, it was awarded a $1M contract for an automated light-picking system and a $1.6M contract to expand an order fulfillment system. PTG is a small company with an enterprise value of only $9.08M, so the contracts and the overall backlog are quite significant.

Technically, the stock is nearing its July 2007 high and may consolidate or pullback near this resistance level. Long term, though, I expect PTG investors will enjoy substantially higher prices.

DISCLOSURE: No position.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us