Small-Cap Equity Investments

By Marc Robins, CFA

By the grace of the Gorge Business News’ publisher, I am privileged to write an occasional article about investments, equity investing, the stock market, and essentially what I’ve done for an occupation for 40 years. This column is not an advertisement for my services or a venue for investment ideas. The names of companies that I include are for educational purposes only and any topic mentioned within this column will need considerably more research by the reader and a discussion of risk with their investment broker.
 
As the publisher knows, I’m in the midst of writing a book about some of my most successful investment ideas. I tell you this not because I’m trying to pre-sell volumes once published or even advertise the fact that my book would make a great “stocking stuffer” for (next) Christmas. No, I’m excited about my book because I think the topic is spot on! For too long, I’ve heard many hard working adults say “the stock market is worse than gambling in Los Vegas!” Au Contraire! I know about the “in’s and out’s about the odds regarding gambling (I consulted with one of the largest providers of games to the casinos for six years and have been schooled about the “math behind wining”) and at least with the market the proverbial odds are gamed in your favor.
 
Enough of that. What I want to share with you in this column is the variety of businesses that one can be exposed to by exploring small-cap stocks (Companies that have a market capitalization [number of shares outstanding times the market share price] that is less than $1 billion. I mention this group of companies and their shares for one reason, I think that by investing in a select few of small-caps equities smart and fortunately investors can find names that will appreciate 10-fold. These are known as 10-baggers.
 
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Ah, back to the book. I mention ten-baggers, small-cap stocks and the book for this reason; my first chapter begins with the story of my first official analyst recommendation in 1980…Portland-based, Precision Castparts, Inc. This firm was just bought out by Warren Buffet’s Berkshire Hathaway for $37 billion. I know a gentleman on the East Coast that bought for his daughters shares of Precision at about the same time as my report. The point of this example is that over the course of 35 years, every dollar that was invested in PCP (the trading symbol) turned into $18,500. That is nearly a 20% compounded return for the duration of the holding. In other words, PCP as a portfolio holding actually exceeded the performance of Berkshire during that same period.
 
OK, back to the point of this column. I was at an investor fair just this last week and one of the most fascinating aspects of the small-cap equity arena is not just the potential for above average returns but the variety of operating companies that investors have to learn about. Here is a selection of a few ideas I learned about:
 
• Akers Biosciences, Inc. This is a Company based in Pennsylvania that creates, development and sells disposable, quick-acting, diagnostic testing devices to help doctors evaluate and diagnose diseases and to help facilitate time sensitive therapeutic decisions. These products are sold now in the USA as well as Europe and are expect soon to be available in China. I was fascinated by the company because its simple technology was able to reduce critical and vital analytics into basic yes/no diagnostic results quickly and accurately. AKER has tests for alcohol detection, a ketone device for weight loss, one test for chlamydia, another for Tri-cholesterol check, etc.
 
• Viridis Energy, Inc. is a Canadian operations that specializes in producing and marketing wood pellets for home heating fuel as well as overseas power plant operation. Based in Kelowna BC, Viridis produces about 60,000 tons of premium softwood pellets annually from pine, spruce and fir. They pride themselves on the quality of their product and that no additives, bark or other contaminants are encapsulated in their pellets. What I found very interesting is that by mixing a certain percentage of their Okanagan pellets with pulverized coal as fuel, many coal burning plants that produce electricity can be rendered less harmful to the environment and reduce their carbon emission rates to extend their operating lives.
 
• Where Food Comes From, Inc.. Although we don’t have any Chipotle Mexican Grills in the Gorge area, most all of us are aware of the unfortunate E. coli “poisonings” that have occurred across many western states. WFCF is exactly the business that should benefit from this mishap. What the company does is provide “birth to slaughter” process auditing of beef, pork, chicken and lamb supplies. Although quite small, they are the number one provider of certification and verification services to the food industry. Their verification “certificiates” include food that is market “organic”, “grass fed”, antibiotic free, Non-GMO, hormone and antibiotic free and other verification certifications. Given that we as a society care more and more about where our food originates and what kind of conditions are the animals exposed and treated with, this is an interesting operation that should have a long and fortunate future.
 

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