Why Value Microcap Stock Rocks?

Why value microcap stock rocks?

Since October 2006, two of my value stocks, AOB and ETLT has increased 50%+ and 30%+ respectively... take a look at the original post written on October 2006 (link and excerpt at the bottom of this article). If I have to explain why AOB and ETLT went up, I would say because of good Q306 result and good potential future (AOB is gaining interest from institutional interest while ETLT is still flying under the radar as institution don't usually invest/cover bulletin board stocks).

Why long term strategy rocks?

AOB 50% return in 3 months sounds great but it's nowhere near the 1000%+ return that you will have from AOB if you purchased about 2 years ago and continue to hold today. I have been accumulating ETLT for almost a year now and I hope in the next 3-5 years I will look back and see that the current 30% quick gain in 3 months will be insignificant (but I can't blame some of my friends who did cash in this 30% gain as any gain is a good gain, plus ETLT could turn out to be a big flop/scam)

So what is the moral of the story?

If you do your DD correctly and buy a great value microcap company (at a reasonable price), all you have to do is to wait patiently while periodically monitoring the progress of your company (making sure the business progress is positive and continually profitable), and don't forget to let the company reach its true potential.

Patience is king!

Sidarta Tanu
Disclosure: This is not a recommendation for an investment. Investment in AOB and ETLT (and similar stocks) are risky and you can lose all your investment. Always do your own due diligence.

AOB October 31st post link ($7.3)
The option ($7.50 leaps) might give a huge potential return (maybe ten-bagger) if the stock goes to $10-$15 in the next 3 years or so (the $5 call option is already too expensive and might as well buy the shares). I've had several ten baggers in the last 6-7 years (but none of them are from options position), and I can say it is a wonderful experience/feeling to hit a ten-bagger (let alone several of them).

ETLT October 16th post link ($.50)
Eternal Technologies (ETLT.OB)
Market Cap: $20M-$22M
Share price: $0.50-.$0.56 (5 days range)
Diluted outstanding: 40M shares
Preferred outstanding: 0
Cash: $30M+ (restricted cash)
Debt: $0Earning: $4M+ (and has been profitable for many years)
Retained earnings: $35M
Sales: $23M
PE = 5P/tangible book < 1

Institutional Support is Important

I can't emphazise enough how important institutional support is for a company/stock. Most of the big moves in the stock market (except for the pump and dump stocks) are made when institution is involved (either buying or selling). Retail investors can impact the stock price to some degree but if you want a bigger move, you will need institution to be involved. Obviuosly, institution will only buy if they believe the company has great future and that the stock will go higher. I still encourage people to look at the company business result and prospect before looking at other metrics like the institutional support etc.

Of course, many people will say that after the fact information is no good to us (and that hindsight is always 20/20). However, I will give some example where stock that has gone up due to the institution buying can continue to go up for some more. But ultimately, I want to show that predicting (and buying) stocks that institution will buy in the future will give much higher potential return (with greater risk also of course) .

I will give 2 examples today. Both of them are the stocks that I have mentioned before. The first one is AOB. When I found AOB about 2 years ago, it was a $1 stock listed at a bulletin board which institution probably will not touch. But the business is healthy (making $.15 EPS) and balance sheet is also nice with enough cash and sharehodler equity. The stock went to AMEX. Then it went up to $4-$5 after several quarters of outstanding growth and smart acquisitions (HSPL, GLP, HQPL). Some private placement made to fund acquisitions below $2, which can be argued that some accredited investor (and not only retail investors) help the stock price to go up. But the big break didn't come until Morgan Stanley bought $25M worth of AOB stock at $4.8 per share (and also got the warrant to purchase more stocks at about $6.35). Other institutions have also bought the stocks since then. The rest as they say is history (ten-bagger at $10+ and 25% institutional holding as of recently). Even if one had bought together with Morgan Stanley (as the SEC filing by Morgan Stanley was made public), you would still make some good returns. AOB is listed in NYSE now.

CXTI has similar story with AOB in terms of great business and great growth. The stock price was on a roller coaster ride with one mistakes made by the management (by accepting floorless deal, some people called it toxic financing), but the CEO explained in the last earning call that he didn't have much choice and he has learned the lesson and will not do such things again. As new contracts are signed and backlog increases to record level, the stock started to increase in price. At one time the trailing PE was below 3. (when the price dip to 80 cents last year, and was below 80 cents less than 2 years ago). Institution started buying as it goes up to $3, and at about $4.5-$5.5, JLF asset management bought almost two million shares (pushing their total holding above 5M shares according to the form 4 filings). Since then the stock price has been above $5+ range.

I think these two examples show how powerful institutional holding (or to be exact, the increase in institutional holding) can be. However, I will refer back to my investing strategy which is fundamental/value investing. I do believe that this is the key in predicting future increase in institutional holding: Companies which has good business results (sustainable profit), good prospect/future growth and at a reasonable/cheap valuation.

All the best finding those good companies that institution might/will be buying in the future.

Sidarta Tanu

Happy New Year everyone!

Happy New Year everyone!

Hope 2007 will bring even more success, health and happiness!

I did the countdown and watched the giant ball drop (not the one in NY city) with friends which is good times, and then afterwards we sit down (get a coffee) to reflect of what we have done in 2006 (lots ofgood memories flashback. and 2006 went by pretty fast) and what we want to achieve in 2007 (to get in shape is always one of them).

I always believe in the philosophy of there is no such thing as a free lunch, but one funny thing is, we started 2007 with a free lunch.. well it's a coffee (a nice irish cream coffee)... A friend of mine told me, though it's just coffee, maybe this is a start of many good things to come.. I said confidently, "I believe so."

Last but not least, adieu Brett Favre... Thank you for the great 16 years... and for the amazing passion that you show for the game... superbowl ring and 3 MVP titles are just bonus (or residue of your skill and for playing your heart out)...

Take care,

Sidarta Tanu
PS: the free coffee is also the reason I'm still up now :)