Man oh man, nothing beats learning about a deep, dark secret that the fat cats won’t share with you — am I right?
That is, at least, the idea behind the promos for WSD Insider that a few of you have been sending my way lately — they’re all about “Penny cap” stocks that will let you “Make explosive gains this year” … and of course we won’t be hearing about them from CNBC or from our brokers.
Here’s how the ad starts:
“The Profit Exploding Investment Brokers Refuse to Tell You About
“Capable of turning a mere $50 into windfall profits!
“Here’s how to take advantage of the opportunity no one talks about….
“This could be the only investment capable of turning as little as $50 into extraordinary wealth.
“As some in the financial media pointed out, ‘[This investment class] gets so little attention… that you STILL have the opportunity to find some hidden gems.’
“And the real beauty of this opportunity is that you can get started with as little as $50.
“Yet the fact remains that your broker is practically ‘forbidden’ from recommending this investment to you.
“Why? Because the Wall Street elite know the reason this investment makes them so much money is because of its exclusivity – and that too much attention might ‘water down’ their quadruple-digit returns.”
Now, I should warn you up front: This ad has been around for a while, and it looks like they’re teasing the same stocks as they were last month … though an extremely similar ad also mailed in 2010 with a completely different list of stocks. (That was back when the newsletter they’re teasing, WSD Insider, was still called the White Cap Report).
The basic pitch is that these small cap investments, which tend to all be technology stocks of one stripe or another in these ads, are “Safe Penny Stocks” — I think the last pick of theirs that I wrote about from a similar ad was back in mid-2011, almost exactly a year ago, and that particular pick collapsed within days after I deciphered their ad and just started to recover a little bit recently, so, as always, caveat emptor. Or caveat lector, I suppose, since I’m not selling you this idea.
Still, we’ve been teased about some small cap companies that are supposed to be lucrative and safe, so we’ll look at the hints, figure out what the picks are and tell you the Thinkolator results, and then you can figure out for yourself the “safe” part for these — it is, after all, your money.
So here’s the bit where we get some clues:
“This strategy is great because it lets you place low-stake, well-researched ‘bets’ on the future of America.
“The companies our strategy uncovers have the vision and drive to become the next Microsofts, Ciscos, Nikes and Home Depots of the world.”
Leaving aside the fact that I’ve got the mid-July doldrums, and barely have the vision and drive to make it to my perch in Gumshoe HQ this morning, I do think we can at least ID the picks. And heck, vision and drive are probably overrated, anyway. Where are the companies with inertia and monopoly power?
I’m rambling again. Here are the clues:
“Here’s a peek at three opportunities that could make you very rich in the coming year:
“PENNY CAP STOCK #1
“A Hypergrowth Niche Market Leader
“If you’ve ever wondered how smartphones know if you’re holding it vertically or horizontally, you’re not alone. We’ve uncovered a little company that manufactures the high-tech sensors that makes this possible. It’s sitting on nearly $60 million in cash, has a slew of contracts with major Chinese phone manufacturers and is perfectly poised to capture a huge chunk of this surging niche.”
Well, the pile of clues is hardly overwhelming … but we’ll toss it into the Thinkolator anyway. And we get an answer that I’ll grade as having a 96% chance of being accurate. This is almost certainly MEMSIC (MEMS).
MEMS is a designer of, well MEMS — that’s the abbreviation for micro electro-mechanical systems, which in this case means the little analog chips that sense real world stuff and translate it into digital signals. Their designs seem to focus on accelerometers and magnetic sensors, accelerometers measure tilt, impact and acceleration (among other things) and the magnet stuff is primarily used for enhanced digital compass stuff.
Unfortunately for them, there are also lots of other companies in this space — most far larger — and unlike its larger competitors, MEMS is not (yet) profitable or particularly close to profitability. I am not clear on any competitive advantage they might have, they don’t seem to have a patent lock on any kind of basic sensors, though perhaps they have proprietary designs that they might argue are superior.
They do indeed have almost $60 million in cash — currently about $57 million, though they also have almost $18 million in net debt, so that means net cash is closer to $40 million. Still, that’s plenty of cash for a company that has a market cap of just $62 million … and it means their enterprise value, the amount it would theoretically cost a private buyer to come in and buy up all the debt and equity in the company, is only $22 million.
Which indicates to me that no one considers their designs or patents to be all that valuable — there are at least 100 tech companies that could buy them out with cash without having it be material enough that their shareholders would even notice. A longer-term look at the chart says that this stock has been on a slow decline ever since they recovered from the financial crisis (mid-2009), though there have been a couple exceptions — and one of those was recently, when the stock spiked to $5 in March before collapsing to the current levels ($2.50ish) in May on a very bad earnings release. Well, actually, the earnings release wasn’t bad, they actually made an unexpected profit on the quarter — what was bad was their projection of a much worse second quarter than expected due to smartphone design losses with a major customer slashing their revenue and turning them back to a substantial loss. Now analysts think they’ll lose 11 cents a share both this year and next … though, to be fair, there are only two analysts making guesses.
I don’t know this company at all other than the quick look I’ve just taken, so this might be unfair — but it appears from the outside that they’re a small company trying to break in by undercutting competitors on cost as much as to innovate in design. That could be the wrong impression, but nothing in their reports jumps out at me as being particularly compelling good news … other than the fact that they’re super cheap on a price/sales measure (though that’s another indication that their sales aren’t worth as much as sales by some of their competitors) and have so much cash that their enterprise value is comically low — it wouldn’t take much more of a downturn before they started trading near their net cash value. And they are close enough to profitability that they’re not bleeding off their cash particularly quickly, they lost only about $3.5 million last year so at that rate they can keep losing money for several years before they have to worry about disappearing completely.
The larger “small cap” play in this space that gets a lot more attention is Invensense (INVN), which seems to have more differentiated products (just released the smallest six-direction accelerometer, for example), and they’re profitable and trading at a pretty reasonable valuation … but they also got clobbered in the last quarter, and have struggled in the past to get design wins against major players who aren’t just “pure plays” on the MEMS market like ST Microelectronics (STM), Analog Devices (ADI), and Texas Instruments (TI).
If you ask me — and there’s no particular reason why you should — if you’re not an expert on the chip business (and I’m not), I think it makes perfect sense to stick to a couple of the major, growing, market-dominating companies who have solid and compelling margins, pay dividends, and can weather bad quarters, which sends you to Qualcomm (QCOM) and Intel (INTC) at the top of the heap. There are other great companies who make our little silicon-based doohickeys run, with leverage to different emerging trends, but unless you want to become an expert on this sector it’s hard to stray too far from the companies who are already incredibly successful and growing and remain inexpensive. (I do own Intel shares, but that’s the only company in today’s littany of stock mentions that I own.)
And … here it is, the sun is down, my head yearns for the pillow, and time has passed me by today. I’ll get to the other two “Safe” penny stocks for you on the morrow. Assuming the Thinkolator can figger ’em out, that is.