The folks at Wall Street Daily are very active in trying to build up their subscriber lists — and Louis Basenese, who writes the WSD Insider newsletter as well as the more small-cap focused MicroCap Tech Trader, has made a couple of hot picks over the last year or so that have gone up abruptly (some have also come back down), so he tends to get a lot of attention from Gumshoe readers who enjoyed some profit from his teasing of Parametric Sound (PAMT) or Unipixel (UNXL) or, more recently, of ImageWare Systems (IWSY).

I’ve never owned any of those three myself, his picks that get aggressively teased in promos tend to be very speculative looking (at least to me) plays on a projected future based on some proprietary technology. That’s heady stuff, and it sometimes works out, but going into it unless you understand the marketplace and the company very well is undoubtedly risky. I take risks with my investments, but when the level of uncertainty makes me queasy I stay away or, if I’m unable to resist the temptation, I only gamble with very small amounts of cash.

Since everything sounds good in the teaser pitch for a newsletter (otherwise, well, those copywriters would be out of a job), I prefer most of the time to wait out ideas and see if I like the stock some day later on, when I’ve forgotten the promises of the newsletter tease and can just assess the company on its own merits. Of course, I make lots of mistakes, I can’t (because of both my trading rules and my personality) be a rapid trader, and I can’t own even every stock that looks appealing without completely diluting my portfolio (I own too many stocks as it is) … so I’ll miss a lot of hot rides. That’s OK. I’d rather write about these stocks for you than try to trade every one of ’em.

But I know that there are a great many of you who delight in trading the stocks that are so actively pitched by the newsletters — some of these letters, after all, have tens of thousands of paying subscribers who can turn an unknown stock into a highly liquid barnburner … at least for a little while (though sometimes the ride ends abruptly), and sometimes those little speculative tech stocks do become “real” companies that generate profits and grow. So we like to get the names of those stocks out there so you can evaluate them for yourself.

I’ve got a couple names for you down below that seem to be getting teased now for his MicroCap letter … but first, the latest pitch from Basenese’s WSD Insider is not for a stock but for a book. What is it?

I’ve been getting a lot of questions about Basenese’s tease today for “one of the most expensive books on earth” — he’s promoting his WSD Insider subscription by promising to send you his crib sheet version of this famous investing book, a book that “normal” folks really cannot buy. Here’s how he describes it:

“This is easily the most intriguing column I’ve written all year.

“It’s about one of the most expensive books on Earth.

“The book reveals a way to accomplish the impossible, which explains why Wall Street has been accused of burning as many of these books as it can.

“It also helps explain why this book sells for as much as $2,500.

“You won’t believe how I just found a copy.”

Enough hyperbole? No? OK, here’s a bit more from Louis:

“Analysts, money managers, hedge fund managers… you name it! They’ve all put the book through the ringer.

“Every word analyzed.

“Every sentence interpreted.

“Every number verified. And then re-verified.

“Studies have even been done by prestigious academic institutions.

“And guess what?

“Everything checks out.

“It’s the most brilliant piece of non-fiction literary work over the last 100 years.

“By following the author’s very simple principles in the book, you can always…

“Buy low. Sell high….

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

“It’s easily the most coveted investment book in history.

“The book could easily turn you into a millionaire inside of a year.

“It definitely changed my life.

“And I want it to change yours, too.”

Sound exciting? Well, what he’s almost undoubtedly talking about is Seth Klarman’s Margin of Safety: Risk Averse Value Investing Strategies for the Thoughtful Investor. This book was published in 1991 and generated very little attention at the time, but since Seth Klarman has been an extremely successful hedge fund manager (he runs the Baupost Group) for something like 30 years now, and because his returns have been so tremendous even as he focuses on risk avoidance and value investing and not using leverage or making risky bets, he is thought of in some corners as a worthy successor to Warren Buffett in the world of Ben Graham value-investing acolytes. And he’s made a ton of money for his investors, mostly big endowments and a few wealthy families. Here’s a nice little profile of him from The Economist last year. He’s also pretty reclusive as far as big-name hedgies go, he doesn’t speak at conferences all the time or argue with other hedge fund managers on CNBC and it’s not as easy as it is with some managers to get ahold of many of his annual investor letters, so perhaps that lends his published words a bit more gravitas.

It’s a good book, I think. It’s worth reading if you can get your hands on a copy (there are still 100 or so libraries that own it, though it’s one of the most-stolen library books thanks to its huge cost, and there are plenty of illegal PDF copies circulating in the investing community), but it’s not revolutionary … and unless you’ve never read up on or thought about value investing or fundamental analysis it’s unlikely to completely change the way you manage your money. It’s not going to turn you into a millionaire with some secret strategy, it’s just going to provide a good perspective on value investing, on Seth Klarman’s particular value philosophy and the process he used (and may still use, I don’t know) to find and choose attractive investments, and some more specific chatter about a few items that were high on investor interest lists back then, like junk bonds and thrift conversions. Seth Klarman didn’t get his success by slavishly following the ideas of Benjamin Graham or Michael Price (one of his early mentors, a great mutual fund manager), and you and I are not going to find success by slavishly following Seth Klarman — value investing success is about hard work, patience, access to capital, a mindset that gives you both stubbornness and flexibility at different times, and — dare I say it — luck, connections, and timing.

If reading this book or reading any of the other great value investing books or writers helps to change your mindset or focus you on the long run, on fundamentals, on patience and not worrying too much about the whims of the market day to day then it will be valuable for you — but it’s not because the book is full of unusually excellent insights or secrets.

I’ve read much of the book, but there’s no way on earth I would pay $2,500 for the privilege — and if it ever gets reprinted, the allure would disappear instantly and it would probably be worth $50 or whatever other good used investment books are going for these days. It wouldn’t surprise me if Klarman, who scoffs at speculative investments like collectibles in the book, enjoys a good laugh at the ridiculousness of people spending this kind of money to get a copy of his 22-year-old tome. It’s hugely expensive because it’s rare and has never been reprinted, but more importantly because there are lots of multi-millionaires who like to have it on their shelf when a client comes in to ask them about their value investing credentials, or who genuinely want to read it, and if you’ve got Seth Klarman money then ponying up a couple thousand dollars for a copy of Seth Klarman’s book is not going to dent your wallet. The difference between $25 and $2,500 for these folks is pretty negligible, and I’d guess that many of the people who can easily spend $2,500 to buy a copy don’t have the time or inclination to actually read it.

I’ve never thought of Louis Basenese as a value investor at all — he’s usually touting the next great technology or breakthrough stock these days, and speculating about future growth from transformational products, not things Klarman likes to do at all. Klarman carefully differentiates between investors, who are committing capital with the expectation of cash generation by the enterprise that will benefit them, and speculators, who are betting that someone will want to pay more for a stock than it’s currently worth. I like what I’ve read of the book, and I’d be happy to write more about it in the future if folks are curious, but if you’ve read Graham’s Intelligent Investor or many of Warren Buffett’s annual letters, both of which are much more accessible “must reading” for value investors, you’re probably going to consider this a good and useful book but not a shockingly exciting book that reveals investing secrets. If you don’t like deep value investing or the analysis of past market irrationalities, the book will put you to sleep.

Here’s a quote from the book that caught my eye as I was skimming it today:

“Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success. Rather than allowing returns to compound over time, they attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could possibly be in possession of valuable information that is not illegally obtained or why, if it is so valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more subtly, as complacency in the face of bad news. Finally greed can cause investors to shift their focus away from the achievement of long-term investment goals in favor of short-term speculation.”

So … with that in mind and with tongue in cheek, what are some of the recent “hot tips” that Louis Basenese has been touting for his other newsletter?

I pulled some clues from a recent ad so we can toss a couple of ’em out there for you today:

“Authorized by Louis… Another tiny company just figured out how to harness a force that’s a BILLION times stronger than gravity! The technology is being aggressively sought-after by the biggest energy players in the world. Even better, news of two key commercial partnerships is expected to hit before the end of the year. Louis just prepared a special report detailing everything, including the company’s ticker symbol.”

OK, so I definitely can’t tell you for certain who he’s teasing there, so we’ll leave the Thinkolator out in the garage — but I can use my plain old Gumshoe noggin to guess — and I’d guess that he’s teasing Clearsign Combustion (CLIR), a little $75-million company that is trying to commercialize a new combustion technology, primarily for power generation (burning fuels more cleanly, which is a big deal both economically and environmentally).

That’s a wild guess, and I don’t know the company well — but I know Basenese was hot on it last year (he posted a longish article on SeekingAlpha about it here, getting into debates with some short-sellers), and it does match the “billion times stronger than gravity” clue and the connection to the energy industry — their combustion uses electrostatic forces to control the flame. Electrostatic forces are billions of times stronger than gravity, though I don’t know why that’s particularly important in this case. You can see their technology described here.

Like many of the stocks he picks, this is based on technology that will have to be commercialized and their intellectual property licensed to become a large player in their industry — they don’t have any revenue, so their value, whatever it may be, lies in proving the technology and getting partnerships or customers. I can’t speak intelligently about Clearsign without becoming a lot more informed about it than I am now, and given the highly promotional nature of their investor relations and the ongoing long/short/scam/breakthrough debate this doesn’t pass my initial interest test to dig into it so you can take this one on your own … enjoy!

And here’s another for you to think about:

“Authorized by Louis… Yet another $2 company just quietly solved hospitals’ most common surgical error. Its solution is now a staple in 135 hospitals, with 71 more ready to sign a deal. Shares are destined for an aggressive move higher in the coming weeks. Louis just prepared a special report detailing everything, including the company’s ticker symbol.”

Well, I don’t have a “special report” for you, but I just prepared a couple paragraphs detailing very little, here they are:

The “most common surgical error” they’re talking about is, unfortunately, not the bizarre headline-generating “operating on the wrong side of the body” for which the solution is, “get a Sharpie, and pay attention dammit, his left leg is fine!” — this one is about the presumably far more common error of leaving something inside the body. In this case, surgical sponges.

And what’s the solution? Sponges that are tagged with a machine-readable code. You (well, presumably one of the nurses or assistants) have to scan them as you put them in, using a little device, so you know exactly how many sponges have to be accounted for before you close up the incision. The company, says the Thinkolator, is Patient Safety Technologies (PSTX, trades over the counter). Their product is called the Surgicount system, and it sounds like they give new customers a scanner and then sell them the barcoded sponges and towels that are used in surgery — the distributor, Cardinal Health, is a substantial shareholder in PSTX and reportedly gets a 20% commission on sales, as is the Chinese manufacturer of the sponges, A Plus International, whose head is also on PSTX’s board.

This is also a tiny company, market cap around $80 million, and they are unprofitable — though there’s a long analysis of the stock from a Seeking Alpha contributor that argues they’re now past break-even on cash flow and are an appealing buy (they have to depreciate the scanners and patents, which shows up on the income statement but not on cash flow). I haven’t checked that or read their filings, just confirmed that this is very likely the stock Basenese is teasing — though the copywriters may be using some old writeups of his, they did have 135 hospitals on their customer list about 18 months ago but that number has more than doubled now to over 300.

They have high gross margins, it’s still generally a low cost product (the company presentation says that retained sponges cost an average of $51.63 per procedure, mostly because of legal costs of the 1 in 8,000 surgeries that results in a retained sponge, so it must cost less than that to use their products), and there are competitors in the marketplace who have sponge-counting and sponge-tracking systems. PSTX claims to have a jump on the competitors, and they do have a decent customer base and those manufacturer and distributor relationships, but I have no idea whether or not their patents on this barcoding system will give them any kind of competitive advantage if some big player like Becton Dickinson decides to get into this little segment of the market. Presumably there are several effective ways to keep track of sponges, but I don’t know if there will be massive competition or damaging price competition in this space.

So … it’s a small company with small scale, they had 150 customers in the first quarter of 2012 and recorded about $17 million in revenue for that year. Part of that is new customers stocking up and the addition of more than 100 new customers during that year, but that’s somewhere between $50-100,000 in revenue per customer per year. They’re close to break-even now and do claim an operating cash profit, so if they’re able to ramp up sales substantially by pulling new customers on board you can paint a picture that has them generating nice cash flow over the next few years — don’t know if it will happen, but it’s feasible based on their current numbers. A near-40% gross margin for a company that’s not operating its own manufacturing plants or running its own distribution should be something they can maintain, I imagine, and I guess the biggest question about their other costs is how much it will cost to increase sales in terms of maintaining a sales force that’s knocking on doors at hospitals, and how much sales can increase organically if Cardinal Health is helping to market their offering (I don’t know). At this point it’s really about growing the customer base and growing sales. If you think they can do that, it might work out well — if you don’t think they can, you won’t like this one. Their latest investment conference presentation, which you can check out here, says they posted 53% sales growth in the first quarter of 2013 on a growth in the customer base of 89%.

In order to be trading at something rational-sounding like, say, 25 times earnings (I just made that up), they’d have to have sales of a bit over $30 million at the current rate (that’s assuming operating expenses are still around $10 million, gross margin still around 40%) to bring in a profit of about $3 million (and thus a PE of about 25 for an $80 million company). If the sales per customer stay in that $50-100,000 range, that means something like 150-200 new customers.

So you can’t really value it based on earnings at this point, but they are at least not burning through cash and they do seem to have a viable small business — whether it grows enough to make you want to value it as an $80 million company is a question you’d have to answer for yourself.

So there you have it, two more ideas that look like matches for some clues thrown out by the WSD Insider folks — tiny, technology-based, looking to change the way a business operates, and obviously risky. I can’t imagine Seth Klarman buying either of these, given his bedrock commitment to preservation of capital, but it might well be that a couple thousand dollars put into either one could be worth more in a decade than a copy of Klarman’s book, you never know. If you like the looks of one or the other (or if you wouldn’t touch ’em with a 10-foot pole), let us know with a comment below.