The Warren Buffett of microcap stocks
August 10, 2001
The Warren Buffett of microcap stocks
Mark Johnson, Editor of the Internet Financial Connection, provides the following interview with Joe Dancy, the publisher of the LSGI Technology Market Letter members.aol.com. Below is the write-up.
Joseph Dancy, manager of the LSGI Technology Venture Fund, has seen his portfolio outperform the Nasdaq Composite index by 45.2 percent so far this year. A value-based investor in small growth companies, he has been referred to as "the Warren Buffett of microcap stocks."
Interviewed in late May, we revisit Dancy this week for his view of the market and some of his favorite stocks:
Q: You have been very positive about the small and microcap sector, and have outperformed the Nasdaq Composite index by more than 40 percent this year by investing in this sector. Are you still bullish on the small-cap sector?
A: The small-capitalization sector does especially well when the economy emerges from recessions or economic slowdowns. T. Rowe Price recently noted that as economic conditions improve, small company stocks enjoy especially vigorous recoveries. In the 12 months following each of the nine post-World War II recessions, small-cap stocks rose an average of 38 percent, beating large-caps in all nine recoveries.
And investors have been avoiding the larger cap mutual funds, allocating more funds to the small-cap sector. In May large-company funds received only $1 billion in new investments, compared with the $3.3 billion that went to small-cap funds. So the demand has been increasing for smaller companies.
Most important, valuations of the small-cap sector remain compelling. The sector is very inefficient, and many companies have impressive growth prospects. So to answer your question, yes, we are still very bullish for the small-cap sector.
Q: Joe, quite a few investors are concerned about the weakness in the economy. Does this weakness concern you as an investor?
A: Economic growth has clearly slowed, but we see the economy stabilizing for a number of reasons. Energy prices have declined substantially for both oil and natural gas, the Federal Reserve has been very aggressive cutting interest rates, the Bush administration has added fiscal stimulus with the tax cut, record numbers of folks are refinancing their mortgages at big cost savings, the money supply has been growing strongly, and quite a bit of money is on the sidelines in money market funds that can be invested in the market when it becomes apparent that the economy is turning.
Individually each factor may not have much impact, but taken together all these factors could be quite powerful. Keep in mind we are not economists and are not market timers; we are always invested in undervalued companies. But moving forward, things look very positive.
Q: When we last talked you were very bullish on a company called ACLN Ltd (ASW $35.23). It was selling for less than $30 and has run up to around $35. Do you still like this firm?
A: ALCN serves a very interesting niche market, transporting and distributing automobiles from Europe to Africa. It also serves other areas. Revenue growth has been explosive, increasing almost 90 percent. Demand has been awesome for their services. The company is profitable, selling at a price-earnings ratio below 10, and carries no debt. Our target price is $55. It is a small-capitalization firm.
Q: You were also bullish on a company called Amarin (AMRN $22.50) the last time we talked. It has moved from $10 to more than $20 a share. Do you still like Amarin?
A: Amarin announced a new agreement with Elan Corporation to market and distribute certain drugs currently marketed by Elan. We like Amarin's niche, and in our opinion the management is very sharp.
Amarin's revenues last quarter increased fourfold, and it reported $1.00 per share earnings versus a loss during the same quarter a year earlier. We expect revenue and earnings growth to continue, but not at the same rate as last quarter. Selling at a price/earnings ratio below 10 based on our estimates of this years earnings, we expect revenue and earnings growth in excess of 20 percent longer term. Our target price has been raised to more than $40 a share.
Q: What about the energy sector? Are you still positive on oil and gas producers?
A: The price of crude oil and natural gas has decreased substantially the last few months, in part due to the economic slowdown both here and overseas. New power plants now under construction will add to long-term demand for natural gas, and the supply will increase modestly. Longer term we still like this sector, and find Quicksilver Resources (KWK $17.20) and Denbury Resources (DNR $8.79) especially attractive. Both companies will do very well at current oil and natural gas price levels.
Q: Any other companies that you like now?
A: Suprema Specialities (CHEZ $14.72) is a cheese manufacturer growing revenues over 50 percent and selling at a price/earnings ratio below 12. It has several things that are very attractive to us -- gross undervaluation, growth, relative strength, a microcap that has been overlooked, and a management that has begun to aggressively tell its story to investors. We have a target price of $25 on the stock, which probably will be revised upward once we see last quarter's earnings.
Q: Give me one more investment idea before we close.
A: Sherwood Brands (SHD $4.70), a manufacturer and distributor of candy and similar products for Wal-Mart and other distributors. Growing revenue at 39 percent per year, it sells at a price/earnings ratio less than 10. Warren Buffett liked See's Candy and bought the company, so the investment idea worked for him anyway. We like Sherwood.
Q: Tell us about your fund and your investment objectives.
A: Our goal is capital appreciation. We want firms that are growing strongly and have an interesting business niche. The firms should be profitable and grossly undervalued. We find these firms in the most inefficient part of the market -- the small and microcap sector. And we are long- term investors.
The fund is closed to new investors. We are limited on how much money we can effectively manage in the microcap sector. But investors can subscribe to our LSGI Technology Newsletter that details what we are buying and includes an Excel spreadsheet of our holdings. We have spent thousands of hours conducting due diligence and analysis. The newsletter summarizes those efforts.
Q: In the sake of full disclosure, do you or your fund own all these companies?
A: We own all these firms and are adding to our positions. As Warren Buffet likes to say, "We eat our own cooking."
[Note: details on Dancy's LSGI Technology Market Newsletter can be found at: members.aol.com ]
To get The Internet Financial Connection Newsletter e-mailed to you for FREE, send a blank e-mail to ifc-subscribe@topica.com. In 1998, 225 different specific stock ideas appeared in the IFC. As of July 5, 1999, the return of the group of stocks that appeared in the IFC in 1998 rose an astounding 51%. What is even more amazing is that in 1999, 185 stocks appeared in this column and as of July 3, of 2000, that group of stocks was up 56%. |
