SmicroCaps

It’s not even August, yet back to school promotions seem to be everywhere. With that in mind, let’s grade some of the smicrocap ideas that we’ve generated over the past year. This will be the final report card for our analyst John Femino, who is moving on to another opportunity. We wish John the best and hope that his success at his new position is even greater than the returns on his small cap ideas (which, as we’ll see, have been excellent). Prices are as of market close on July 22^nd, 2009.

Five Profitable Small Caps Priced at Significant Discounts to Tangible Book Value

Grade: A+

One of our first screens has had the most success over the past three quarters. Double plus results from ZINC and TBV boosted the portfolio’s returns, while the only stock that underperformed the Russell 2000 was a secondary recommendation. I have recently decreased my position in Horsehead Holdings since valuation is no longer as compelling, but I hesitate to remove it from my portfolio until I find a better hard asset, dollar hedge equity. QXM is my current favorite in the group. It’s supported by a healthy balance sheet, continued growth in China as well as a new 7%+ stake by a local Raleigh based hedge fund, Shah Capital Management. In the interest of fair disclosure, neither myself nor anyone else at SmicroCaps has had any interaction with Shah Capital.

Five Small Cap Companies That Had a Successful 2008

Grade: B+

John’s first screen struggled at first, but thanks to a very strong showing from TRCR since late April, the portfolio has done well. It will be interesting to see what quality of earnings Transcend Services reports on Wednesday. Food oil recycling company DAR was as high as $8.24/share in June before a 20% decline. HSR recently declared a $0.75/share dividend. All five companies remained profitable in Q1 2009 despite the difficult economy.

Five Intriguing Small Cap High Yield Plays

Grade: A

His second effort focused on high yielding stocks, one of which was an old favorite of mine that I introduced to John as a recessionary consumer staples play. B&G Foods, makers of fine pickles, taco shells and other self described “shelf stable foods”, was hit harder than one would expect during the market downturn, but has since bounced back strongly. BGS still yields a healthy 8% and has recently begun raising capital to purchase new brand assets. John noted to me that he personally purchased MEI after performing more extensive analysis in the weeks following his writing of this piece. After I mentioned less compelling valuation than prices in February, he said that the stock has “been on a wild ride this week.”

Five More High Yielding Small/Micro Caps

Grade: D

By far the worst performing screen, all five stocks appreciated in value but all but one trailed the Russell 2000. Results include dividends. Excess return on the small cap index is the most appropriate fair way to grade the performance of these stocks. Clearly, my attempt at picking high yielding small and micro cap stocks was less successful than my counterpart. All five stocks have maintained their previously stated dividend policies, and it’s possible that preference for growth may be the reason that these stocks are lagging the small cap index. Earnings for several of these names are due next month, and results will likely lead to increased volume and volatility.

Five More Profitable Small Caps Trading at a Fraction of Tangible Book

Grade: A

One quarter in, BNHNA and SORL have been very strong performers. SORL due to market moves in China and less pessimism about autos while BNHNA has recovered with a restaurant group that was decimated last year. By far the biggest disappointment has been GSIG, which has renegotiated its debt load leading to massive shareholder dilution. Former GSI Group bondholders will enjoy much of any upside from here and I now believe that there are much better opportunities elsewhere. AWX continues to be an interesting balance sheet idea despite posting a loss last quarter. Despite GSIG’s incredibly disappointing performance, an .800 batting average with two home runs and two doubles is a bit reassuring.

Ten Small Caps with Double Digit Free Cash Flow Yields

Grade: Incomplete

This last group is generating a small excess return but has not experienced a single full quarter of market and needs more time to be tested by the market. I am happy to see that my favorite of the group, PCCC has done reasonably well and has added an additional 7% today. We’ll have a follow up discussion on the group at a later time.

If you or your firm would like to discuss any of these stocks in greater detail, please we would be happy to speak with you. Please keep in mind that while all of these stocks have passed the initial screeners and our brief, preliminary analysis, neither John or I have fully analyzed these companies. If you find any of them interesting you should perform additional research before investing.

Disclosure: The author has long positions in PCCC, QXM and ZINC at the time of this writing.