AspenBio (APPY) is a Colorado-based biopharmaceutical company focused on the development of a test for appendicitis and for improvements in the area of animal reproduction where the company has formed a partnership with Novartis (NVS).

ISTA is a California-based company which has emerged over the past several years to become the fourth largest prescription ophthalmic (visual pathway) firm in the $5 billion U.S. market.

The company currently has three products on the market-

In late December, nearly everyone was looking forward to the end of 2008 and the start of a new year and new presidency. January started off with a strong rally and at least for a couple of days, U.S. equities were over 20% above where they sat on November 20, 2008 (the low thus far for major U.S. indices). However, the realization that global economies still have more issues to work through, that Obama will not be able to magically bring the global economy back to life and that troubles continue in previously large sectors, such as financials, pressured stocks lower in the middle to late part of the month.

The S&P 500 finished out January with its worst January performance in its 113 year history, registering a nearly 9% decline. Other key U.S. indices registered sharp losses with the Russell 2000 lower by more then 11% and the Wilshire 5000 down 8.3%. International indices also suffered with the FTSE down more then 6% (in local terms) and the DAX and Nikkei down nearly 10% (local), however, indices in Korea and Brazil actually recorded gains for the month.

With the recent inauguration of Barack Obama as the forty-fourth President of the United States and a very heavily democratic Congress, we are likely to see significant changes in both the political and economic environment within our country and possibly across the globe. In a piece I wrote last year for Bottom Line, I discussed what some likely macro themes would be depending on whether McCain or Obama became the next President of the United States. Now that we are a few days into the new Obama administration and clearly have a more difficult fiscal and economic position as compared to last year, I am updating some of my thoughts and including some potential small cap investment ideas for the next administration. In coming days, I will be posting additional thoughts on the specific names mentioned in this article to the subscriber section of my blog.

1. Environment/Alternative Energy: During Obama's campaigning, he discussed spending upwards of $150 billion over 10 years to develop clean-energy alternatives. Based on early indications from the stimulus bill and other thoughts, I would suspect that if anything, that number is conservative. All that being said, I still think it’s very difficult to figure out exactly which alternative energy will take off (if any) and therefore I would look at the consulting firms such as Exponent (EXPO) and Ecology & Environment (EEI) for investment. I am somewhat concerned by solar names as they have a significant reliance on high-energy prices along with subsidies from various governments and I would therefore be cautious on those names. That being said, I think the green movement will continue for at least four more years.
2. Infrastructure: I don't think this pick will surprise anyone but certain infrastructure companies should benefit from increased government spending and then as we get into the later years of the Obama administration by an improving economy. A couple of small cap companies I like here are Meadow Valley (MVCO) and Perini (PCR). Infrastructure should also be helped by increased federal aid to states.
3. REITs: I would be careful with these in the short term but over the cumulative four-year period where Obama is in office these are likely to outperform. Clearly, with the large amount of money being poured into the economy by the government, taxes will have to rise at some point. Income from REITs is not eligible for the lower tax rate on capital gains and therefore a closing of the gap between income tax rate and capital gains rates could be beneficial for companies in this space. An interesting company here is Entertainment Properties (EPR), who is focused on entertainment properties such as movie theaters which have held up relatively well in the current difficult economic environment.
4. Generic Drugs: It is very possible that Obama will work to lower prescription drug costs through the negotiation of prices with pharmaceutical companies. This could benefit generic companies who offer low-cost medicines to consumers. Some potential winners are Teva Pharmaceuticals (TEVA), Watson Pharma (WPI) and potentially smaller names such as Caraco (CPD) or Mylan (MYL).
5. Lower end consumer goods: The potential of increased tax breaks on lower income individuals could help some of the retailers focused on this audience such as Aaron Rents (RNT), 99 Cents Only Stores (NDN), Family Dollar Store (FDO) and potentially even McDonald's (MCD).
6. Education: Obama has made it clear that he would like to increase spending on education and at the same time increase potential tax write-offs for those attending universities. The issue with many of the education stocks is that many have had a nice run-up already and are trading at fairly high P/E levels. Therefore, I would hold off on these names for now but the universe which includes Apollo Group Inc. (APOL), Career Education Corp. (CECO), Career Education Corp. (COCO), DeVry Inc. (DV), American Public Education (APEI), ITT Educational Services Inc. (ESI), Strayer Education, Inc. (STRA) and even Washington Post Co. (WPO) (Kaplan) could be attractive if they were to decline 15-20% from current levels.

I would also take a look at many of the cash-rich companies that have low debt loads, which populate the market in high numbers at the present time.

We are about to end the Bush era with President-elect Obama's swearing in to office on January 20. Below is a look at how the 10 key GICS sectors performed during President Bush's time in office from 8 years ago to January 19.

Note that these returns are cumulative over the entire period.

VIX crossed 80 for the first time in its history, the price of crude soared to $147 per barrel and then collapsed to $30 only to regain a small amount of ground in the last few trading sessions, several mutual funds and hedge funds closed shop, the largest Ponzi scheme was uncovered, credit markets froze and equity markets had one of their largest declines in history while 90 day T-bills briefly had a negative yield. So with all of this unprecedented activity in 2008, what is potentially in store for 2009? Below are my nine predictions for 2009.

1) Equity markets will have high volatility as compared to history, however, they will be at diminished levels as compared to 2008. My expectation is for a relatively strong beginning and end of the year with a difficult middle of the year where markets will break through the prior lows of 2008. The beginning of the year's market will be fueled by increased optimism over a change in administration, a large $750B-$1T stimulus package and a belief by investors that things can not get any worse. In the middle of the year, a realization will occur that things are not improving as quickly as expected and that although the stimulus package will improve growth over extremely low levels in the first quarter it will likely not be as high or as quick as many had hoped. Finally, towards the end of the year, equity prices will once again move higher as consumer confidence finally begins to return very late in the year.

2008 has been a year that many would like to forget. From a 39%+ decline in the S&P 500 to a nearly 50% fall in the price of crude oil (more than 70% from highs in July) to declines in the prices of nearly all fixed income instruments (except Treasuries), it has been a tough year. Below, I have compiled a list of the ten worst calendar year returns for the S&P 500 Index with performance for the next year and annualized five year returns shown in the following columns.

Although, every situation is different a couple of items are clear. First, the calendar year decline in 2008 is historic (likely the second largest ever) and second, interestingly, after each of these largest calendar year declines the annualized five year returns have been positive and in many cases sharply higher thereafter.

On late Friday, it was announced that Lev Pharmaceuticals' (LEVP.OB) prophylactic treatment for the rare but life-threatening disorder known as hereditary angioedema- HAE was approved by the FDA.

This is the first treatment to be approved in the United States for HAE and will likely have an almost immediate impact on the bottom line and cash flows for Viropharma (VPHM), who is expected to close on its deal to acquire Lev Pharmaceuticals on October 23, 2008 (2 business days following Lev's shareholder vote).

Lev Pharmaceuticals (LEVP.OB) is a biotechnology company, which has focused on developing a treatment for the serious, and potentially life-threatening disorder known as hereditary angioedema, which has no FDA approved treatments in the United States. Lev's treatment is known as Cinryze and the company is seeking approval for both acute and prophylactic indications with a PDUFA date of October 14, 2008.

In late January 2008, Lev received a complete response letter from the FDA for the acute indication seeking additional information regarding manufacturing, chemistry and controls used in the studies. Lev did not present the prophylactic treatment for approval for the late January 2008 decision. In early May, Lev presented in-depth findings to an FDA advisory panel for the prophylactic treatment of HAE where the panel unanimously recommended approval to the FDA which will be making its decision next week.

Below, is a list of 5 names which I find extremely attractive in the small and mid cap space (several of which are not covered by any analysts at the present time). My research process is focused on those names which are underfollowed, undervalued and have some type of catalyst for value realization over the next 2-3 years.

1. Highbury Financial (HBRF.OB): Highbury Financial is a majority owner of Aston Funds- an asset management firm focused primarily in the mutual fund space which has subadvisors including Montag & Caldwell, River Road, Veredus, Optimum, TAMRO and others. The company has approximately $4.7 billion in mutual fund assets along with another $150 million or so in separate account assets. Aston has started 11 new funds over the past year with a total of 26 strategies including the recent launch of alternative mutual funds. The stock is trading for roughly 8x trailing cash EPS (it would be similar on a regular EPS basis except for a charge incurred in the 4th quarter) with strong cash flow generation, no long-term debt and strong recent underlying fund performance.
2. Hanesbrands (HBI): Hanesbrands was spun off from Sara Lee a couple of years ago. They are focused on the underwear and innerwear segments of clothing with the majority of competition coming from Berkshire's Fruit of the Loom brand. The company was spun off with a large debtload of over $2.5 billion and higher than average cost structure. Over the past couple of years, the company has steadily brought debt levels down while at the same time improving the cost structure at the company. This does not mean that the company is without issues as they have had some noticeable increase in inventory and little in the way of sales growth (mostly due to the economic conditions domestically along with a later back to school season) but at a 12x trailing p/e, strong cost cutting and a likely improving overall economy the stock is very attractive at current levels of $24/share.
3. Exponent (EXPO): Exponent Inc. was started in 1967 as Failure Analysis Associates as a consulting firm with expertise in engineering and structural analysis. The company has expanded over the years to add expertise into over 90 business areas including regulatory expertise in biotechnology, environmental science and health care. Today, the company employs well over 700 people with revenues of over $190 million per year. The largest single area of business for Exponent is in product liability litigation and litigation support which represents 65% of total revenue. The company is a consistent grower with low to mid teen revenue and mid teen income growth per year. The company has a stellar balance sheet with no debt and over $60 million in cash and equivalents (over $4/share). The company also has solid free cash flow generation with consistent EPS and CF growth.
4. Allied Defense Group (ADG): Allied Defense Group is an attractive turnaround company in the defense sector. ADG was a classic case where a company overexpanded into non-core areas thus dividing management energy and focus and eventually causing financial distress on the company in the 2007 and early 2008 period. Over the past several months, the company has undergone a significant restructuring where the company has sold its non-core operations in order to better focus management on its core operations in the ammunition business. The company has record backlog of about 4x the market capitalization of the company and is likely to accelerate EPS and CF growth especially in late 08 into 09. The company has the ability to earn over $1.00 per share in 2009 while trading at just above $6 at current levels.
5. Chyron (CHYR): Chyron is a leading graphics company which has been in business for several decades. You have likely seen this company product on your television set where the graphics often seen on the lower part of your screen are typically made by this company. I am anticipating an acceleration in revenue and earnings growth at the company over the next several quarters as the HDTV television requirements are enacted in 2009 and due to their new relationship (starting 9/08) with Gannett (GCI). The company also has an association with Yahoo Finance for the stock quotes and charts. The company has other potential catalysts with its digital signage program. The stock is trading at an attractive valuation of about 10x my estimates for next years earnings with a healthy balance sheet and solid CF generation.

I will posting information on five additional ideas in the next few days.

Markets were generally higher during the month of August with the broad Russell 3000 Index climbing by 1.5%. Much like July, we saw a reversal of what we saw in the first half of the year with sectors that were generally strong in the first half of the year underperforming. Below is a look at the performance by sector for the month:

August Performance (Russell 3000 by GICS sector)- order by performance
Consumer Discretionary +6.7%
Telecom +2.7%
Consumer Staples +2.6%
Technology +2.5%
Health Care +2.1%
Industrials +1.7%
Financials +0.1%
Utilities -0.5%
Energy -0.8%
Materials -2.8%

Year to date tables (first to 6/08 then 8/08)
Performance by Russell 3000 GICS sector 1/08-6/08 (order by performance):
Energy +12.8%
Materials +2.3%
Utilities -2.8%
Industrials -11.9%
Health Care -12.3%
Technology -12.6%
Consumer Discretionary -15.6%
Telecom -16.9%
Financials -27.1%

Performance by Russell 3000 GICS sector 1/08-8/08 (order by performance):
Consumer Staples -2.5%
Materials -4.2%
Energy -4.6%
Health Care -5.1%
Industrials -8.8%
Consumer Discretionary -9.5%
Utilities -9.6%
Technology -11.5%
Telecom -18.7%
Financials -22.0%

Allied Defense Group (ADG) is nearing completion of its 2-year turnaround from a company facing significant liquidity issues due to a lack of corporate focus (i.e. too many acquisitions and too much concentration on one client) to one that is able to fully concentrate on its core ammunition business across the globe.

In the beginning of 2007, the company had several divisions which took management focus away from concentrating on key initiatives: 1) Ammunition division- This included MECAR, MECAR USA, Allied Technology and Titan, 2) Electronic Security- VSK Group (access control, intrusion protection), CMS, NSM (industrial and law enforcement security products) and GMS (miniature digital transmitters and receivers and equipment for surveillance) and 3) What they termed 'other,' which included their environmental safety and security segment termed Seaspace. The company faced significant cash flow issues in 2007 as their largest customer delayed expected ammunition orders which forced credit facility defaults which forced a refinancing of debt.

All of the Investment Directors at Vestibula have unique attributes to our portfolio management and research strategies which allow us to offer characteristics which will be attractive to certain sets of investors. My own philosophy is to look for undervalued stocks which are typically underfollowed (many of the stocks I own have either no analyst coverage or are covered by one of two analysts) and which have some type of catalyst for value realization over the next 12-24 months. Below, I have highlighted two examples of companies in the portfolio which follow the above criteria.

1) GSI Technology (GSIT) - Current Market Price- $3.75 per share.

As of June 30, 2008, the year to date performance of sectors in the Russell 3000 Index were as follows (from best to worst):
Energy +12.8%
Materials +2.3%
Utilities -2.9%
Consumer Staples -7.9%
Industrials -11.9%
Health Care -12.3%
Technology -12.6%
Consumer Discretionary -15.6%
Telecom -16.9%
Financials -27.1%

From June 30, 2008 to August 8 we have seen a near complete shift as can be evidenced by the following returns in the period (the figures in parentheses are the numbers year to date to 8/8/08):
Health Care +10.2% (-3.3%)
Financials +9.3% (-20.3%)
Consumer Staples +7.5% (-1.0%)
Consumer Discretionary +7.2% (-9.6%)
Industrials +4.8% (-7.7%)
Technology +3.8% (-9.2%)
Telecom -3.9% (-20.1%)
Utilities -8.3% (-10.9%)
Materials -8.5% (-6.4%)
Energy -19.0% (-8.6%)

It has been a very interesting week for the portfolio thus far, with several very large movers (in both directions). so I thought I would highlight a couple of my thoughts:

Allied Defense Group (ADG): It has been one fantastic week for this stock as it has climbed 33% thus far for the week with the only news being a recommendation by the portfolio manager of the Aegis Value Fund on CNBC. Of course, this was one of the more beaten down stocks over the past few months and so long as the company can turn their record backlog which is multiples of the current market capitalization into real revenue and profits (which we hopefully will see more indications of in the next quarterly report out next week) then the stock is still very inexpensive at current levels in the mid $6 range.

One of the areas that has been beaten up rather significantly and in my opinion far too deeply has been microcap and small cap asset management firms. Below are two companies which I see as being potentially huge winners over the long-term. What each has in common is a strong ability to achieve excess returns in markets, a strong and conservative management team, and a healthy balance sheet.

Highbury Financial
- The company owns 2/3 of Aston Funds, which operates 30 mutual funds and ETFs. Highbury (HBRF.OB) acquired Aston from ABN Amro (ABN) in 2006 and since launch has added 11 new strategies to their list of sub-advised mutual funds.
- Trading at just 6x trailing cash EPS with strong cash generation each quarter
- Very strong balance sheet: The company has $8.6 million in cash as of the last quarter-end with no debt. The cash level is equal to $0.95 per share (assuming no warrant dilution).
- Asset growth is beginning to return for the company. According to my estimates, Aston Funds was able to register a nearly 3% increase in mutual fund assets in the second quarter despite a 3% drop in the S&P 500 Index which is likely to reflect in a slightly stronger EPS figure for the company when they report their latest quarter figures.
- Long-term oriented management team. I have spoken with Richard Foote, CEO of Highbury on a number of occasions and his focus is clearly on the long-term. Highbury is interested in making strategic acquisitions to expand their asset management footprint, however, they are not going to overpay for these companies.
- Highbury had roughly $4.67 billion in mutual fund and ETF assets along with an additional (approximately) $150 million in separate accounts, yet trades with a market capitalization (ex-warrants) of just $27 million.
- The company has a strong business model with little in the way of incremental costs. Thus, the company could have a substantial decline in assets yet still operate profitably.

Epoch Holding Corp. (EPHC)
- Holding company which fully owns its subsidiary Epoch Investment Partners.
- The company was founded in 2004 by William Priest, who has a strong background of developing highly successful organizations. Priest in prior roles had co-founded BEA Associates, was named CEO of Credit Suisse Asset Management Americas, and then co-founded Steinberg, Priest and Sloane Capital Management.
- Epoch runs a series of strategies concentrating on the creation of alpha and on favorable return per unit of risk characteristics. The company runs 10 separate account strategies and 3 mutual funds. Performance of the majority of these strategies have beaten their benchmarks with lower drawdowns.
- Strong quarterly asset growth: Assets increased in the last quarter from $6.2 billion to $6.6 billion. The all cap value product is the largest product representing approximately 25% of overall assets.
- Strong balance sheet with good cash flow generation, over $30 million in cash ($1.68 per share) and no debt. The company also pays an annual cash dividend of 12 cents per share which equates to approximately a 1.2% dividend yield.
- The largest risk is William Priest's age as he is in his mid-60s, although he remains dedicated to continuing with the business.

The portfolio's second acquisition of the year thus far, Lev Pharmaceuticals agreed to be acquired by Viropharma for approximately $2.75 per share comprised of $2.25 in cash and $0.50 in Viropharma stock (subject to a collar of between $10.03 to $15.68). In addition to this upfront consideration, shareholders have the right to two contingent payments worth up to $1.00 per share: 1) $0.50 per share consideration under 2 potential scenarios: a) Cinryze is approved for acute treatment of HAE and orphan exclusivity is granted or b) orphan exclusivity for the acute treatment of HAE has not become effective for anyone for two years from the date of closing and date of FDA approval for prophylaxis, whichever is later, 2) $0.50 per share consideration when Cinryze reaches $600 million in cumulative net sales within 10 years of closing.

I want some additional clarity on these two milestone payments and their structure and will update subscribers once I get this information. I have also asked for clarity on the potential conditions whereby this agreement would be terminated outside of the customary reasons, such as non-approval by Lev shareholders. The transaction is anticipated to close in the fourth quarter of 2008.

This is the second part in the four-part series of potential winning and losing themes under either Obama or McCain administrations. In today's edition I will be looking at ten potentially winning themes if McCain is elected the next President. For the purpose of this exercise, I will assume the likely scenario under a McCain administration of a majority Democratic Congress.

10 Potentially Winning Stock Themes of a McCain administration:

I thought it would be interesting and fun to start a series of discussions of what some general positive and negative themes could potentially be under either a Obama or McCain administration. I'll begin with an analysis of what some potential winning themes could be under an Obama administration. I will follow this up over the next couple of weeks with an analysis of potential winning themes under McCain followed by negative themes of each candidate. Since it is very difficult to predict the exact composition of Congress in the future and where each candidate will spend his most time and energy in office these are all simply educated guesses at this time.

10 Potentially Winning Stock Themes of an Obama presidency:

1) Environmental companies. Clearly, there is a strong belief from Obama in alternative energy and in the development and use of more environmentally friendly products, which could be a huge potential growth engine for these types of companies, especially if subsidies are given by the Government. Areas that are less discussed that would likely benefit could include companies that work as contractors with alternative energy companies or which are involved in environmental cleanup or consulting work.

It was a tale of three seasons for the financial markets during the second quarter. Equity markets started off the second quarter with a bang, led higher by not only the energy and materials stocks but also consumer-related and even financial stocks as investors had increased confidence that an economic recovery was just around the corner in the back half of the year.

At the end of April, the S&P 500 was higher by nearly 5% with the NASDAQ was showing even higher performance to energy and materials and also to small caps from large caps as economic fears began to take shape late in the month and the financial sector began to once again take it on the chin.