Denise, I'm glad that you like my idea of periodically posting the results for my suggested five-small-cap portfolio. I'll do this from time to time, unless things get too embarrassing for me! By the way, two of the stocks in this portfolio have SI forums that I initiated, both on August 5th, 1997 (FWT, then 90 cents, last close $1.25; LER.B, then $4.40, last close $7.10).
As to your query re Global Election Systems, the world market for their products is very far from saturated. The principal devices that they produce and market are needed one for each polling station, so that when they make a sale to a particular voting jurisdiction the sale is typically in the scores or 100's. Although I don't have hard figures to support this, I suspect that they could quintuple their sales or more for many years and still not saturate the market, which includes developing countries as well as much of the U.S. which has not yet automated their polling systems. Moreover, GSM custom produces software and voting forms for particular elections and referenda.
As to your broader question about four key criteria that a small-cap must pass for you to like it, I'll provide the following synopsis of my assessment for the five components of the portfolio, as follows:
1. Management
GSM (Global Election Systems): they have not yet shown that they are seasoned to handle rapid, sustained growth, so only time will tell
FWT: a very experienced and able management with a solid track record
BWR: apparently sound management, willing to take calculated bets on new mines; largest shareholder is Dundee Bancorp
LER.B: excellent, ambitious, disciplined management
ECX: significant questions about management ability in view of faltering growth, erroneous earnings forecasts, and other missteps; though they performed superbly for several years before this
2. Stock dilution
GSM: some concerns about stock dilution via options to new directors and other insiders (though most of the latter were actually put in place a few years ago)
FWT: no problem
BWR: no problem (they issued a pile of shares near the $9.00 peak last year and are now positioned to buy back shares at less than one-third that price)
LER.B: no problem
ECX: some dilution last year associated with convertible (no-floor) debentures, and other dilution associated with some acquisitions in recent years, but they have been able to grow EPS rapidly (until the last two quarters)
3. Growth
GSM: rapid growth possible and likely over the near and mid-term
FWT: modest but sustainable growth likely over the mid-term
BWR: growth dependent on zinc prices and overcoming metallurgical problems at their Caribou minesite, but company has been in a major growth mode for a couple of years
LER.B: excellent growth prospects, through acquisitions and internal growth, as proven now for several years
ECX: superb growth through Q3 of 1997, but disappointing since then; likelihood that growth has stalled for the next 3 quarters
4. Profit target -- "Can this investment at least double capital in 2 years' time?"
GSM: Absolutely, double or triple
FWT: Absolutely, double
BWR: Absolutely, double or much better, but contingent on zinc prices
LER.B: Could well double
ECX: Could double or possibly triple, but there are some question marks as indicated above
Of the five companies, one can sleep best at night with LER.B and FWT, but they are probably the two that are more limited on the upside; that is, I would be surprised if they did much better than double. GSM and BWR have more potential to better than double, but there are clear risks that have been identified. ECX will have to overcome some of its recent problems before one could hold it with great confidence, but it still has some attractions. All of these are low PE, high growth companies that seem to be sharply undervalued by the market. Jay |
