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Harris L. Berenholz, CFA
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I like analyzing stocks, especially small caps and micro caps. My firm, Carpe Diem Advisors, LLC provides investment ideas, research and analytical services. Before establishing my firm I was (for 18 years) a Managing Director of Invemed Associates LLC, a New York Stock Exchange member firm,... More
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  • Musings on Microcaps

     

    Developments over the last few years have contributed to what some industry observers have called the demise of the microcap market. Wall Street withdrawal of research coverage caused an increasing number of stocks to become illiquid. Since trading and commissions are the life blood of the industry and small caps offer the potential for neither, Wall Street firms opted to avoid the high fixed cost of researching these stocks—unless there is the prospect of a potentially lucrative financing. Short term traders eschew small cap stocks because of liquidity constraints. Further workings against these stocks are market technicals (the introduction of decimalization undermined the economics of broker-dealer market- making in thinly- traded issues) and regulatory considerations (the onerous costs of complying with Sarbanes-Oxley weigh proportionately more on the small caps than large).

     

    The explosion in Internet activity has had additional detrimental effects: (1) Proliferation of online brokerage accounts reduced the number of brokers actively seeking out the best investment ideas in this niche market segment and (2) the public’s interest in seeking professional assistance in ferreting out investment ideas was replaced by the desire to save on commissions. This stock market apathy to companies’ good performance brought on management malaise and emotional depression.

     

    In our view, this situation creates enormous opportunity for the patient investor with a contrarian view. There is now a large universe of inefficiently- priced stocks. Furthermore, the growing influence of strategic buyers of private companies has created a scarcity value for the remaining publicly- held companies in a given industry. We may well be uniquely positioned for a payoff from investing in companies with distinct positives: growing revenues; strong balance sheets; cash and/or cash generation; expanding profit margins (in progress or expected); skilled management; and continued depreciation in the value of the stock, despite bright company prospects.

     

    Managements, frustrated by their inability to reverse the erosion in stock price and to realize value for shareholders, develop a defeatist, hopeless attitude. Being ill equipped to deal with stock market issues (as opposed to company operational issue); company executives are growing weary of being blamed by shareholders for poor stock performance. Managements, disillusioned with the low valuation accorded their stocks, are receptive to suggestions for changes in ways to go about presenting their companies to the investing and business public.(Note: this “thinking outside the box” dovetails with the unconventional but increasingly successful approach at ProActive to harness the power of social media networking to disseminate information.)

     

    Our recipe for success in the small/micro cap stocks arena is to focus only on deep value stocks of companies having certain desirable characteristics including good balance sheets; cash and/or good cash flows; competent managements; fundamental change for the better in progress or imminent; little or no Wall Street coverage; a stock valuation substantially less than the private value of the company; and an attractive risk/reward ratios.

     

    Those who view the investment process as a serious endeavor--not a source of psychic satisfaction that derives from active trading --have the best chance of succeeding. Furthermore, an investor needs patience; a willingness to “be early” and wait; the temperament and resources to buy on sharp declines. Recognizing the scarcity value of these stocks; being attuned to the need to gradually build a position; lack of pressure for near-term performance all reinforce one’s ability to concentrate on building capital over the long term.

     

    Jun 07 5:08 PM | Link | Comment!
  • A Nobel laureate heads research at International Fuel ($IFUE)

    In a recent Forbes magazine article entitled "Danger: America Is Losing Its Edge in Innovation", the author noted that:

    “…scientists and engineers are celebrities in most countries. They’re not seen as geeks or misfits, as they too often are in the U.S., but rather as society’s leaders and innovators. In China, eight of the top nine political posts are held by engineers.”

    International Fuel ($IFUE-$0.14)  is a growing technology company that has developed proprietary liquid fuel additives that enhance the performance of liquid hydrocarbon fuels and, at the same time, help preserve the environment. Its hands-on Director of Science & Technology Dr. Sergio Trindade is a globally recognized consultant and expert in sustainable development and energy, with especial reference to biofuels.

    He served five years as the Assistant Secretary General of the United Nations for Science and Technology and continues to provide consulting for the UN system, including the World Bank, and many private organizations worldwide, regarding energy, technology and the environment. 

    Dr. Trindade is a co-laureate of the 2007 Nobel Peace Prize as a member of the International Panel on Climate Change - IPCC. He provides expert technical consulting for IFT and its commercial clients and plays an integral part in the research, development and demonstration of IFT products, as well as the protection of IFT’s intellectual property rights.

    Dr. Trindade’s role continues to be crucial to the success of International Fuel in commercializing its proprietary, breakthrough technology.

    Disclosure: I and my family own IFUE shares.

    Jun 07 5:00 PM | Link | Comment!
  • Business at International Fuel Technology($IFUE) is picking up steam
    Our past observationsThe value proposition:

    International Fuel's additives save money while helping the environment in that they…

    • Increase overall gas mileage
    • Improve the quality and length of their engine's life
    • Reduce exhaust emissions such as carbon monoxide and other gases 
    • Improve lubricity of the fuel, which
    • Reduce  wear and tear in the engine and other components
    The  British Experience:

    Between 2006 and 2010, the Association of The Train Operating Companies of the U.K. (OTCPK:ATOC) retained the respected railway consultant Interfleet Technology Ltd to manage a series of trials to test the effect of using International Fuel Technology’s proprietary fuel additive in rail engines. The first four laboratory tests demonstrated compelling positive effects. In two of the trials, reductions in fuel consumption of 6.9% and 5.9% were realized. In addition, particulate matter emissions were significantly reduced in each of the four test-bed trials.

    Product distribution is the key at International Fuel.

    A deal with a major distributor in the U.K. would be a boon to International Fuel’s business.

    Today’s Important Developments
    • Unipart Rail (part of The Unipart Group of Companies), the U.K.’s leading distributor to the rail industry, signed a marketing and distribution agreement providing Unipart Rail the rights to sell International Fuel’s unique fuel additive formulations for fuel economy to the U.K. rail market.
    • This relationship is a major step forward for International Fuel by providing a powerful platform to expedite the commercialization of DiesoLiFTTM 10 in the U.K rail market.
    The Future

    Unipart Rail is developing both marketing strategy and materials and will begin actively promoting use of IFT products to its customer base, which includes most train operator in the U.K. 

    Success in the U.K. will enhance the company’s credibility and help corporate efforts with the numerous European rail operators with whom the company is in active commercial discussions.


    Harris L. Berenholz, CFA

    I and my family own these shares.

    Jun 06 12:41 PM | Link | Comment!
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