Obama Budget Proposes Big Increases for Spending on Clean Energy

Photo courtesy of KMBC.com

Photo courtesy of KMBC.com

President Barack Obama’s fiscal year 2014 budget proposal made headlines this week mainly for its changes to Social Security, but the increases proposed in US government support for clean energy spending did not go unnoticed. Reuters News Service called the increases for electric cars, wind power and other green technology “dramatic,” particularly because they arrive in the face of Republican criticism.

While many government agencies get slimmed down in the budget proposal, the Department of Energy would get an 8 percent increase to $28.4 billion next year, Reuters reported. Included are a 75 percent increase in spending on advanced vehicles to $575 million and a 29 percent increase in spending on the ongoing effort to integrate solar and wind power into the national electric grid, Reuters reported. Support for biofuels would increase by 24 percent.

“These increases in funding are significant and a testament to the importance of clean energy and innovation to the country’s economic future,” the Obama administration wrote in the budget proposal, according to the Reuters report.

While Republicans have criticized the US backing of companies like Solyndra, a solar panel maker that went bankrupt, and Fisker Automotive, a hybrid sports care maker which is struggling and laying off employees to hold off bankruptcy, President Obama has maintained that clean energy is a key to the country’s future.

Government support for the clean energy industry “has nearly doubled (the US) energy generation from wind, solar, geothermal and other renewable energy sources” since Obama took office in 2008 and maintaining this level of support “could lead to breakthroughs in the years to come,” Reuters reported.

We’ve been following several wind and solar energy companies, including:

Newbury Park, CA-based Sauer Energy (OTC: SENY, http://www.sauerenergy.com/) is a development stage company developing vertical axis wind turbines for commercial and residential uses. Formerly BCO Hydrocarbon Ltd., the company disposed of its oil and gas interests and in July 2010 purchased Sauer Energy and in May 2012 purchased Helix Wind Corp. Back on Dec. 24 it was trading for $0.24. It closed April 12 at $0.10, down 1 cent for the day. Its market cap is now $9 million and 52-week range is $0.08-$0.39.

China-based China Ming Yang Wind Power Group (NYSE: MY, http://www.mywind.com.cn/) is a wind turbine manufacturer focused on designing, manufacturing, selling and servicing megawatt-class wind turbines. Last July, MY announced it was considering a joint venture with China-based Huaneng Renewables Corp. to develop wind power and solar power projects in China and overseas markets. MY stock closed Dec. 24 at $1.21. It closed April 12 at $1.35, up 1 cent for the day. Its market cap is now $169 million and 52-week trading range is $1.06-$2.47.

Chatsworth, CA-based Capstone Turbine Co. (Nasdaq: CPST, http://www.capstoneturbine.com/) develops and markets microturbine technologies, including technologies used to provide on-site power generation for wind power. It closed Dec. 24 at $0.91 with a market cap of $278 million.CPST closed April 12 at $0.93, down 4 cents for the day. Its market cap is now 282 million and 52-week trading range is $0.73-$1.20.

San Mateo, CA-based SolarCity Corp. (Nasdaq: SCTY, http://www.solarcity.com) designs, installs and sells or leases solar energy systems to residential and commercial customers, as well as electric vehicle charging products.  It closed March 15 at $16.74 with a market cap of $406.5 million. SCTY closed April 12 at $19.97, down 41 cents for the day. Its market cap is now $1.5 billion and 52-week trading range is $9.20-$21.40.

Ontario, Canada-based Canadian Solar (Nasdaq: CSIQ, http://www.canadian-solar.com/ ), which sells a variety of solar products, closed back on March 15 at $3.50 with a market cap of $151 million. It closed April 12 at $4.07, down 3 cents with a market cap of $176 million. Its 52-week trading range is $1.95-$5.15.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com/), which makes a wide variety of solar products and systems, closed back on March 15 at $11.80 with a market cap of $1.4 billion. SPWR closed April 12 at $11.06, up one cent for the day. Its market cap is now $1.8 billion and its 52-week trading range is $3.71-$13.88.

China-based Trina Solar Ltd. (NYSE: TSL, http://www.trinasolar.com/) designs, manufactures and sells photovoltaic modules worldwide. Back on March 15, TSL closed at $4.11 with a market cap of $291 million. It closed April 12 at $4.19, up one cent, with a  market cap of $335 million. Its 52-week trading range is now $2.04-$7.99. 

China-based Yingli Green Energy Holding Co. (NYSE: YGE, http://www.yinglisolar.com/) makes photovoltaic products including cells, modules and systems. YGE closed back on March 15 at $2.47 with a market cap of $387 million. It closed April 12 at $2.12, down 5 cents, with a market cap of $324 million. Its 52-week trading range is $1.25-$4.12.

China-based Suntech Power Holdings (NYSE: STP, http://am.suntech-power.com), the world’s largest producer of solar panels, closed at $0.70 back on March 15 with a market cap of $127 million. It closed April 12 at $ 2012, and then rose to $1.87 in early January, but has been falling since. STP closed March 15 at $0.75, udown 12 cents for the day, with a market cap of $135 million. Its 52-week trading range is $0.30-$2.96.

St. Peters, MO-based MEMC Electronic Materials (NYSE:WFR, http://www.memc.com) manufactures and sells silicon wafers and photovoltaic materials. Through SunEdison, it’s a developer of solar energy products. It closed March 15 at $4.53 with a market cap of $1 billion. WFR closed April 12 at $4.76, down 6 cents, with a market cap of $1 billion. Its 52-week trading range is $1.44-$5.70.

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David Fondrie from Heartland Advisors: A Glass-Half-Full Guy Looks at the Sequester and Economic Growth

David Fondrie is a Senior Vice President and Portfolio Manager for the Select Value Fund at Heartland Advisors in Milwaukee (www.heartlandfunds.com).   He joined Heartland in 1994 and subsequently served as Heartland’s Director of Equity Research for ten years from 2001 to 2011.  He also held the position of CEO of Heartland Funds from 2006 to 2012.  He’s a Badger from the University of Wisconsin and served with the armed forces in Korea.  He started his career with Price Waterhouse and is a CPA.  Our paths have crossed repeatedly over the years since we had interests in some of the same companies.  Like many Midwesterners, he is a plain-spoken man.

Dave Fondrie, Heartland Advisors Inc

Dave Fondrie, Heartland Advisors Inc

We had an opportunity to chat on March 1, the day the much-discussed government spending sequester went into effect, and I asked him what he thought would happen as a result.

DF:  The headline effect is likely to be worse than the real effect.  It’s not going to be as devastating as the articles in the press would have us believe.  There will no doubt be some pain inflicted on defense stocks, for instance.  But for the most part people have been expecting this to happen, so it is not a surprise, and it is built into the market.  There are too many green shoots in the economy now for something like the sequester to knock them all down.

JA:  Are you seeing it more like a speed bump than a brick wall?

DF: Yes, exactly.  I think Congress will get around to the budget and the cuts, adjusting them to what makes more sense.  If you look around at the United States economy right now, what is striking is what is going on in the oil and gas field.  Suddenly we are one of the lowest-cost energy producers and consumers in the world.  Not only does that have a direct effect on business, it is creating a new industry that is building out the infrastructure that will allow us to provide low-cost natural gas energy to industrial America.  This has put us in quite a positive situation.

We are paying $3.50 for natural gas, where Europe is paying $12.00 and Japan is paying  $16.00.  So to me that means that companies that rely on energy for their operations are much better off here than in other major developed economies around the world.  A steel forge, for instance or a company like Precision Castparts Corp (PCP), which use enormous amounts of energy in making parts, are a lot better off here than anywhere else.  Fertilizer plants.  The renaissance in chemicals here is extraordinary.  There are 12 new ammonia plants on the drawing boards, and they all will have a reliable and lowcost stream of natural gas as both energy and raw material.  We can use that ammonia domestically and stop importing it from other economies.

LNG.  There are a number of proposals for LNG plants.  These days we are talking about exporting LNG, where we never thought about anything but importing it in years gone by.  I think this low-cost energy source is underappreciated.  In fact it will spur the continued development of oil and gas, infrastructure, chemical plants, and other types of industrial expansion.   All of that is good for the economy.  Add to that some continued improvement in employment and housing, with home prices increasing, and we foresee stronger consumer confidence, especially as a result of higher home prices.  Already 401(k) values have been improving, and it is undeniable that we are in a low interest-rate environment as well.

All this headline talk about the sequester risk is overblown.  There is no doubt that federal spending and the size of the national debt have to be brought under control.  Entitlement plans have to be rationalized.  But add to the overall situation the fact that China is clearly recovering.  Chinese electrical usage is up, their industrial consumption of materials and energy is up, and as China grows, their growth is good for the other economies that feed her growth.  Europe is not likely to get any worse.

We’re looking for 2.5% to 3% GDP growth in 2013.  The stock markets continue to be reasonably valued.  Corporate balance sheets are good; earnings are good and continuing to improve modestly.  The S&P 500 is trading at 14 times earnings, where in the past it has traded at an average of 16 times earnings.

The wild card is what happens with interest rates.  People have not yet abandoned bonds, but the inflows have receded after several years.  There have been outflows from the equity markets for five years.  Now we are seeing a trickle-back return to the equity markets.  Sadly there is a pattern that is repeating itself, with many buyers entering at the midpoint of an equity run, not at the beginning.  But this is the way cycles go.  We are in the 4th or 5th inning if you take a long view of this bull market over the last three years.

JA:  So are you buying energy companies?

DF:  Not particularly.  Low energy prices are not particularly favorable for exploration and production companies.  But we are looking closely and buying companies that supply goods and services to the energy patch.  For the last two or three years, for instance, it has been apparent that there will have to continue to be huge investments in the energy patch.  If you are drilling in North Dakota, you may have no infrastructure to bring the liquids you are pumping to the refineries, which all tend to be downriver by quite a distance.  We have huge backups in Oklahoma because there is not enough pipeline to carry all the energy.  One company we have owned for 2 to 3 years is Mas Tec Inc (MTZ).  We bought it in the 12s and it closed Friday at $30.78.  Part of their business is in pipelines, and they have also done well at the gathering systems in areas where energy is being produced at the wellhead.  Those are both high-growth areas; the stock was trading cheap two years ago, and it has given us a reward.  Quanta Services Inc (PWR) is very much the same story – we used to own that stock as well, but we sold it when its valuation reached what we thought was a sensible level; in their case they are exposed to pipeline development and new high-voltage lines.

JA:  How about life sciences companies?

DF:  The FDA has been problematic as they have increased their oversight of the industry resulting in complex regulations and inspection observations (commonly called 483 observations).   We own Hospira Inc (HSP), which was a spinout a few years back from Abbott Laboratories  (ABT).  They have run awry of the FDA at a manufacturing facility in Rocky Mount, North Carolina.  In Hospira’s case, addressing the 483 observations and revising processes and procedures has resulted in over $300 million in costs and reduced output of drugs that are already in short supply.  We are all concerned with safety; however those concerns should be balanced with a sensible and timely regulatory process.

JA: Does that put a caution flag out?

DF:  I can’t speculate on what kinds of furloughs the FDA will have to put into effect.   I doubt that we will have chickens rotting on processing lines waiting for FDA inspectors as the press and certain congressional members have suggested, but the big issues around drug approvals will continue to be important, and is likely to be slowed down even further with the automatic budget cuts.  Hopefully they will prioritize their cutbacks and the expense reductions will have less impact than we might expect.  But government does not always work very efficiently.  We hope they will be smart and furlough the poor performers instead of just following  a LIFO pattern.

JA:  How do you feel about ObamaCare and stocks?

DF:  I do sense that there is a bit more thought being given to the impact of ObamaCare.  We just reviewed the 2014 Medicare Advantage benchmark payment rates by the Centers for Medicare and Medicaid Services (CMS), and the cuts were more draconian than expected.  But the government was clear that they are not trying to cripple the HMOs because they are a vital part of the new program.  I am a glass-half-full guy most of the time, and I think if people sit down and talk they can get to some reasonable results; let’s hope that happens.  There is always give-and-take with reimbursement rates, and they end up meeting someplace in the middle.  US businesses are resilient; once they know where the boundaries are, what the rules are, they adjust.  What happens is what you expect in a capitalist system: change comes quickly.  Capitalism works pretty well.

JA:  Where do you think people ought to be looking in the equity markets this year?

DF:  I am in the camp that says we will continue to have a modest economic recovery.  In that kind of environment you have to look at cyclical companies.  We are overweight in industrials and information technology companies.  Everyone is going to look at productivity, and technology is important there.  People will continue to invest in technology to improve productivity.  We are going to be hooking up all kinds of machines at home and in factories to the Internet.  We think tech plays work.  We might stay away from actual PCs, but mobility will continue to expand, and downloads will continue to grow, keeping  Internet growth robust.  Probably financials are good, due in large part to a stronger housing market.  We are a little more cautious on that because the interest rate environment does not allow much net interest rate gain to banks.  But housing will drive loan growth, and the banks have plenty of capital to lend.  With business loans at 3.5%, it is hard for banks to make money.  If we got an uptick of half a percent, it would do wonders.

In tech companies, we like Cisco Systems Inc (CSCO).  We see Cisco as a chief enabler of the infrastructure of the Internet.  Cloud computing is driving a lot of internet traffic.  Cisco is cheap at 12 times earnings, and there is that nice dividend yield of 3% too.  The balance sheet is pristine; altogether it is a very attractive risk-reward proposition.  I run a value-oriented multicap fund.  Cisco is seen as a growth stock, but right now it is also a value stock.  They have gotten their act together after some unwise acquisitions a few years back; we think the downside is minimal.

JA:  What about social media?

DF:  Social media doesn’t really fit our style.  Even Google is not in an area where we play.  Thematically I like agricultural plays like Archer Daniels Midland Company (ADM).  It is trading a bit above book value, and the dividend yield is 2.4%.  If we have a big corn crop, ADM is going to benefit from processing all that corn.  I believe we will have a big corn crop this year, and we need one.  ADM’s PE is under the S&P 500.  I can’t predict the weather, but we are getting moisture that we badly need in the Midwest, so the water table can support strong crops this year.  We’re looking at fertilizer companies, seed companies, and farm equipment (especially on a dip).  Railroads are a bit expensive right now, but it is worth noting that the number of rail cars carrying oil is growing at 25%, which makes those cars part of the infrastructure for moving energy.  Oil companies and refiners are buying those cars and the rails are moving them.  We’ll buy rails on dips too.

One final area that is more in the later innings is deepwater offshore.  We are particularly interested in drilling off the east and west coasts of Africa.  We like the companies that build out those platforms and subsea infrastructure to bring that oil to market.  We like the boat companies that service those rigs.  These are long-cycle investments; the big international oil companies don’t start-and-stop those projects.

JA:  What about shipping companies?

DF:  There may be too much capacity there.  OSG went bankrupt.  What has happened in the US is that we are importing less oil than we were five years ago, and the amount we are producing here has increased.  Our demand for oil from overseas has decreased.  So tanker ship demand has decreased as well.  If China starts to really boom again, that could absorb some of the excess capacity, but I don’t see that as near-term.

JA:  How about the greenback?

DF: The euro is at risk, but the dollar should hold its own.  If the Chinese let their currency float more that might affect the dollar, but for now the dollar is fine.

JA:  Is there an upside to the 2.5% to 3% GDP growth you mentioned?

DF:  Maybe in the back half.  If we resolve our government problems, that might restore more confidence.

JA:  Thanks, Dave.

Allen & Caron owns none of the stocks mentioned in this interview, and Joe Allen owns none of the stocks mentioned in his personal accounts.  Please do your own research.  JA

From Bananas to Data Switches to SBCs–Some Small Caps to Watch

Photo courtesy of acus.org

If you missed our recent interviews with leading investors/portfolio managers Warren Isabelle, Mary Lisanti and Nick Galluccio, it’s worth the time to go back and read them. All three are highly-acclaimed, veteran small cap stock investors, and each offers valuable insights about what to look for in 2013 and the investment landscape to expect in upcoming months, among other important information.

They called out a variety of stocks to watch, including some small caps. So let’s take a look at the small caps in the group (less than $1 billion in market cap). We’ll come back and check on their progress in a few months.

Santa Clara, CA-based Extreme Networks (Nasdaq: EXTR, http://www.extremenetworks.com) makes data switches among other products. The company has recently brought in new management focused on marketing. Its 52-week trading range is $2.87-$4.43 and its market cap is $357 million. It closed Jan. 18 at $3.76, down 1 cent for the day.

Lexington, MA-based Synta Pharmaceuticals (Nasdaq: SNTA, http://www.syntapharma.com) develops and commercializes small molecule drugs. Its lead drug, Ganetespib, is designed to inhibit the growth of cancerous tumors. Its 52-week trading range is $3.57-$10.83 and its market cap is $664 million. It closed Jan. 18 at $10.74, up 32 cents for the day.

Waltham, MA-based Repligen Corp. (Nasdaq: RGEN, http://www.repligen.com) is a life sciences company that manufactures biologic products used to make biologic drugs. Most importantly it manufactures Protein A, a reagent used to manufacture monoclonal antibody-based therapeutics. Its 52-week trading range is $3.51-$7.31 and its market cap is $213 million. It closed Jan. 18 at $6.83, down 5 cents for the day.

Westford, MA-based Sonus Networks (Nasdaq: SONS, http://www.sonusnet.com) is a provider of voice and multimedia infrastructure solutions and has a new product line of SBCs (session border controllers). Its 52-week trading range is $1.36-$3.11 and its market cap is $643 million. It closed Jan. 18 at $2.29, down 1 cent for the day.

State College, PA-based Rex Energy Corp. (Nasdaq: REXX, http://www.rexenergy.com) is an independent oil and gas company operating in the Appalachian and Illinois basins. It operates approximately 2,120 wells, mostly for natural gas. Its 52-week trading range is $8.80-$14.65 and its market cap is $728 million. It closed Jan. 18 at $13.78, up 17 cents for the day.

Charlotte, NC-based Chiquita Brands International (NYSE: CQB, http://www.chiquita.com) is an international marketer and distributor of bananas and other produce sold under the Chiquita and other brand names in 70 countries and packaged salads under the Fresh Express brand, among others. Its new management is emphasizing bananas and other fruit. Once a $30 stock, its 52-week trading range is now $4.62-$10.57 and its market cap is $347 million. It closed Jan. 18 at $7.49, down 3 cents for the day.

Houston-based Carrizo Oil & Gas (Nasdaq: CRZO, http://www.crzo.net) is an independent energy company and another natural gas play. At the start of 2012 CRZO had proved oil and gas reserves of 935.6 billion cubic feet, most of it natural gas. Its 52-week trading range is $19.04-$31.62 and its market cap is $890 million. It closed Jan. 18 at $22.19, down 20 cents for the day.

Warren Isabelle: 2013 Will Be A Stock Picker’s Market

Warren Isabelle is a Managing  Member of Ironwood Investment Management LLC, located in Boston.  Ironwood is a prominent small-cap investor, defining small-cap as below $2.5 billion in market cap.  Prior to forming Ironwood in 1997, Warren was Head of Domestic Equities for Pioneer Capital Growth Fund, Pioneer Small Company Fund and  several institutional portfolios.  Before joining Pioneer in 1984 he was an analyst with Hartford Insurance Company.  He is a bit of a polymath, with a U Mass BS in Chemistry, an MS in Polymer Science and Engineering, and an MBA from Wharton.  He has been the subject of articles in Barron’s, Business Week, Forbes, Fortune and The Wall Street Journal.

I first met Warren at Pioneer in the early 1990s, and had the pleasure of talking to him late last week about his outlook for the year ahead.

WIPhoto

JA:  What are your predictions for 2013 overall, and what kind of market do you think we will be seeing?

WI:  This year my crystal ball is as murky as I have ever known it to be.  The crosswinds that are blowing are not gentle breezes; they are pretty stiff gale winds.  I think we will see some growth spurts in the market this year, and some retreats, but frankly I don’t see a heck of a lot of progress being made this year for the overall market.

Businesses have been on a roll the last four or five years in terms of improving productivity, cutting expenses, improving margins, and so forth.  A lot of companies are making money hand over fist, but until we get some macro issues sorted out, those crosswinds are going to make forward progress difficult.

2013 should be a stock picker’s market.  We will be looking for companies that can maneuver through the times ahead.   The market will have a hard time breaking higher ground, but we are stock pickers and always have been, and if we can continue to do our job well, our investors will be rewarded.  The world is so concerned with the macro issues; it pays dividends for us to pay attention to those.  On the plus side, we do have easy money – the cost of capital just seems to get lower and lower and though the recovery does not seem all that well established, you might say that time tends to heal all wounds.  There are green shoots here and there, and that will continue.  Small caps generally do better in a developing recovery, and we expect that to continue.

On the other hand there are plenty of mines that could explode and cause big problems.  As such, we have to be careful of stock trading liquidity.  One thing that has benefitted us at Ironwood over the last few years is that we have been much more willing and able to maneuver with individual holdings and as a result, our performance has not suffered from liquidity issues as it has in the past.  Before that we used to be dedicated buy-and-hold investors, period.  But since 2008 we believe we have reconsidered on that issue, and we are not afraid to hold cash now if the environment warrants.

JA:  In many recoveries, there are a lot of new companies started by people who either were laid off in the downturn, or who lost faith in the ability of their employers to continue growth.  Are you seeing any of that this time around?

WI:  Here’s my take.  I do a lot of work with the University of Massachusetts, both on the investment side for the Foundation, and on the intellectual property side with the Lowell campus.  I can tell you that the entrepreneurial spirit is as alive as it ever was.  But what has happened is that the traditional venture capital model of relatively long-term funding with an eventual IPO – has been impacted negatively by this ugly downturn.  As a result, many providers of early-stage capital have largely lost patience for long-term investments.  The era of that model being dominant, I think, is over, and that VC model has run its course.  The VC money that is being invested now, and there is less of it, appears to be being put into narrow areas like Software as a Service and Cloud Computing.  The model is shifting, and I am sorry to say that I do not think that crowdfunding will be the answer.

There just are not a lot of IPOs.  We don’t see the new-company formation process in as high a gear as it was before.   The risk-return equation is now much more weighted toward return, and light on risk.  That means deals are later-stage, and valuations are higher.  The early-stage companies are not in the mix.  Is the model totally broken?  All I can say is that later-stage deals are what we see happening now.

JA:  Do you think we will get a budget this year?

WI:  I think the House will produce a budget, and then it will be up to the Senate to modify it.   There will be a good deal of hemming and hawing and a lot of finger pointing, but I think we will get there.  A lot depends on whether President Obama will negotiate or not.

JA:  Let’s talk about sectors to watch for 2013.

WI:  I can tell you what we’re looking at.  First of all we think that because of the general uncertainty about our economic situation, “discovery” names will be interesting this year.  For example, there are many unmet needs in healthcare – therapeutics, diagnostics, and even medical devices to some extent.  If we can continue to find the names that have potential, not only will that help in meeting  medical need, but  large pharmaceutical companies and the bigger and successful biotech companies will be standing in line seeking to replenish their product offerings.  Those big companies have become distribution channels to a large extent, and they need the discovery companies to help in coming up with new products.

We tend to like companies that are local – not exclusively, but that is a bias we have.  We like to be close to the companies we invest in, knowing what makes them tick, and close geographically if possible.  If your investments are in the neighborhood, it’s a lot easier to fill in the information blanks, it seems to me.  One local healthcare company that we have owned for a while that is still relatively small is Synta Pharmaceuticals Corp (SNTA), which is in Lexington.  One thing I noticed early on about them is that with new financings, the senior management consistently invested serious money into the future of the company. Their most recent offering was also heavily subscribed by insiders.  We consider it very favorable when management is willing to take the same kind of risk that we are exposed to.

SNTA has a number of products, but I will mention its lead product, Ganetespib, an Hsp90 inhibitor.  Hsp90 is a protein that is necessary to the growth of tumors, and if you can inhibit it, the theory is that you can degrade or destroy the tumor, the more so in combination with other cancer drugs.  I believe it has shown pretty good results in non-small cell lung cancer, for instance, which is a notoriously difficult cancer with high mortality rates.  And, as I said, the insiders have put their own money on the table, which is encouraging.  SNTA has gone from $4 to $10 in the last year, but we think there could still be good upside if, with clinical success, some big pharmaceutical company decides to make a bid for them.

Another company, and one that took us a long time to get involved with, is Repligen Corp (RGEN), which is also close by, in Waltham.  I visit them every few months to make sure I stay on top of developments there.  About 18 months or so ago, they had change in their board of directors which turned out to be the first clue that the company was finally undergoing a transformation. Their legacy and main business currently is the supply of Protein A, which is essential to Protein A affinity chromatography, considered the gold standard in the purification of monoclonal antibodies.  They went on to develop some drugs, but  were never adequately structured for that, in my opinion, though over time they actually built up a pretty good cash balance.  Following several disappointments and apparent lack of focus, they came dangerously close to being perceived as something of a zombie.  Then the Board changed and they seemed to find direction and began to employ that cash.  They acquired their only competitor in Protein A and are now in a dominant position, with opportunity to really ramp up profitability by rationalizing costs and capacity.  In addition they have developed a line of disposable “column” products that are used in chromatography for the downstream purification of biologics.  This new modular approach to development and production is rapidly gaining acceptance by their customers which now include CROs, discovery companies, successful biotechs and big pharmaceutical companies.

JA: Which other sectors are you watching closely?

WI:  It so happens that through individual stock selection, we have increased our weighting in technology, and in particular we’re watching some turnarounds with interesting new agendas that are gaining traction.

First, though, I‘ll mention Extreme Networks (EXTR), which is out in California.  They make data switches, and theirs are the fastest and best products available in that category.  Why is it a great investment now?  We believe the need for ultra-high-speed data switches is here.  What has held EXTR back in the past has been the higher cost of their industry-leading switches, and while we think their management was great on the tech side, they could have been better in marketing.  Recently, a new management has come in and emphasized marketing and how to go to market.  Extreme has great products, a good balance sheet with $100 million in cash such that with good execution,  we believe the stock could  be a multiple of what it is now.

A second one – and again a local company in Westford – is Sonus Networks (SONS).  They are a comeback company who had an earlier gateway product that essentially became commoditized and is winding down now.  That is all people see about SONS today.  But they have a new product line now built around Session Border Controllers, or SBCs.  They basically hold access (a “pipe”) open for a user, something like a traffic cop, so lots of information can get through when desired.  We think that the old product decline will be offset by the growth of the SBCs over the next 18 months or so, and we think that most people in the market are looking only at the old product.  This company has a $600 million market cap with $320 million in cash.  And the new CEO is taking all his compensation in equity.  That’s impressive, and we think there is at least a double in this stock.

JA:  Fascinating.  What’s next?

WI:  We like some agricultural companies as I cannot overstate the importance of food production given the global growth of what we would call the middle class.  We are again looking favorably at Chiquita Brands International (CQB).  It is not a sexy company, but they appear to be back on track.  They went off the rails with pre-packaged salads, as the effort to boost margins and steady earnings never materialized.  They were also hurt by a bizarre tariff structure introduced by the European Union which cut deeply into volumes and profits.  Now they have new management and the emphasis is back on bananas and fruit.   All I can say is that the rough edges are smoothing out; the tariff picture is much better;  and spending is again going to their traditional business.  In past years, at the peak of a cycle, they were earning $3 a share, and the stock approached $30.  Now it’s at $8, but we think they can earn $2 a share in the near future, and if that happens, the stock ought to be at least double from here.  Yes, they have a lot of debt, but their cash flows have always been adequate.

We also like Pilgrim’s Corp out in Colorado.  Most people know them as Pilgrim’s Pride, and they are a chicken and turkey company.  They were bailed out a few years ago by JBS, a large Brazilian company that now owns 75% of the company which dampens investor interest, but we think that also provides downside protection. The stock had gone down to $3 on fears of rapidly rising feed costs, so we increased our position and the stock has rebounded nicely to over $7, with room to grow.

JA:  I have to say those were not companies I was expecting you to mention.  Anything else?

WI:  We like natural gas, and I’ll mention two companies: Rex Energy Corp (REXX) and Carrizo Oil & Gas (CRZO).  They did not help us last year but we think they are good operators which is the key to the investment thesis.  They are developing a lot of properties through fracking and drilling, particularly in areas where gas liquids are significant part of the production.  In the energy industry we are looking for companies that can acquire good properties and develop them efficiently.  Natural gas is currently in abundant supply and pricing is depressed. Of course we would like to see pricing increase, but we are much more  volume-oriented.  Longer-term, we believe we will be seeing natural gas exported from the US, and prices will come up if only because the differential between natural gas and oil is too wide. All good for the stocks, I would suggest.

JA:  That’s a lot to consider, Warren.  Many thanks.

Neither Allen & Caron nor Joe Allen owns the stocks mentioned in this article, nor do we anticipate initiating positions in the near future.  Please do your own research.

Once Promising Battery Maker A123 Systems Now Focus of Controversial Auction

Many media eyes are watching the auction of bankrupt battery-maker A123 Systems, which is currently underway in Chicago. Bids were accepted starting December 6, but the auction apparently could run into next week before a buyer is announced because of the complexity of the deal.

Some of those watching, also including politicians and military leaders, have expressed concern that the A123 lithium ion battery technology, much of it funded by the U.S. government, could wind up in foreign hands, according to

Photo courtesy of AP

Photo courtesy of AP

the Chicago Tribune (http://www.latimes.com/business/la-fi-a123-auction-20121206,0,359683.story). The Tribune notes that A123, which was once called “one of the most promising U.S. innovators in the clean fuel auto industry,” was awarded a $250 million grant in 2009 and had drawn down about $132 million of it before bankruptcy.

While none of the companies has commented publicly since the bidding opened, four suitors, including one American company, have qualified to bid, according to the Tribune story and other reports: Milwaukee-based Johnson Controls (NYSE: JCI) is the American company and NEC Corp of Japan, Siemens AG of Germany and Wanxiang Group Corp of China (the largest automotive components maker in China) are the others. The Tribune notes that Johnson Controls bills itself as “one of the last standing American companies competing in and building this U.S. advanced battery industry.” (New Castle, PA-based Axion Power International, among some others, would argue with that statement. See below)

As we noted back in August, Wanxiang made a bid to buy A123 back and thought they had a solid agreement, according to the Tribune. But apparently, due to concerns politics would be problematic, A123 never agreed to make the deal.

Other companies are apparently interested in buying parts of A123, according to the Tribune, but no names have yet been made public.

There are a few small cap battery makers that could be considered peers of A123, although most of them are not in the lithium ion battery business. They include:

Newark, NY-based Ultralife Corp. (Nasdaq: ULBI, http://www.ultralifecorp.com/) designs, manufactures and offers services for power and communications systems, including rechargeable and non-rechargeable batteries as well as communications and electronic systems and accessories, and custom engineered systems. ULBI operates in two segments: Battery and Energy Products, and Communications Systems. The battery segment includes lithium 9-volt, cylindrical and various other non-rechargeable batteries, as well as rechargeable batteries. ULBI has a 52-week trading range of $2.39-$5.50 and a market cap of $46 million. It closed Dec. 7 at $2.62, down 8 cents on the day.

Salt Lake City-based Oak Ridge Micro-Energy Inc. (OTC: OKME) is a development stage company that licenses thin-film, solid state batteries for industrial, medical and government applications. The applications include wireless smart sensors, security cards, RFID tags, semiconductor memory chips and implantable medical devices. The thin-film lithium and lithium ion batteries are ideally suited for a variety of applications where a small power source is needed. OKME has a 52-week trading range of $0.06-$0.51 and a market cap of $20 million. It closed Dec. 7 at $0.20, down 3 cents for the day.

Carrollton, TX-based Universal Power Group (AMEX: UPG, http://www.upgi.com/) is a supplier and distributor of batteries and related power accessories. UPG sells, distributes and markets batteries and related power accessories under various brands and its own brands. Back in August, UPG’s market cap was $11 million and was trading for about $2.15. Its current 52-week trading range is $1.26-$2.35 but its stock has fallen. It closed Dec. 7 at $1.66, down 3 cents for the day. Its market cap is now $8.3 million.

New Castle, PA-based Axion Power International * (OTCBB: AXPW.OB, http://www.axionpower.com/) manufactures high-performance, low-cost lead-carbon (PbC) batteries for a variety of markets, including mild- and micro- hybrid vehicles, which may be the commonest form of hybrid in the US within a couple of years (and already the most common in Europe). AXPW announced in May that the U.S. Department of Energy had awarded it a $150,000 grant toward the commercialization of its PbC batteries for micro hybrids. PbC batteries are as easy to manufacture as the older lead-acid batteries, but they use activated carbon instead of half the lead and are lighter, 100% recyclable, have a higher charge acceptance and faster recharging rates, all ideal for the micro-hybrid and mild hybrid markets.  AXPW has a 52-week trading range of $0.20-$0.64. It closed Dec. 7 at $0.30, no change on the day.

*Denotes a client of Allen & Caron Inc., publisher of this blog.

Could 2012 Be the Year for AG Stocks?

You can profit from Mother Earth, according to some followers of agricultural or “AG” stocks. While historically a slow

Photo courtesy Rural Route 3 blog

growth industry, many believe 2012 could provide a bountiful harvest for these agricultural stocks for a variety of reasons:

  • Since the recession of 2008, food inflation has sky-rocketed, scaring consumers.
  • Food price inflation is good for AG stocks. Starting in 2005, the International Monetary Fund’s food price index is up 90 percent. And 41 percent of food and beverage companies expect to increase prices in 2012, compared with 12 percent a year ago, according to http://www.grantthornton.com.au/files/ibr_food_and_beverage_nov11.pdf
  • As the planets population has risen, the arable land available for planting hasn’t kept up.
  • With new technology, AG products can be used in alternative fuels. 
  • With the growth in organics and more healthy lifestyles for “baby boomers” worldwide, profits are perking up.

For general research on trends in the industry, take a look at http://www.agrifoodforum.com/.

For 2012, some experts suggest AG stocks should have good growth and offer some defense for a more speculative industry portfolio. What are some small cap stocks that fall into the “AG” category and could benefit as food prices keep getting higher? 

 Omaha, NE-based Lindsay Corp. (NYSE: LNN, http://www.lindsay.com) designs, manufactures, and sells irrigation systems that are primarily used in the agricultural industry to increase or stabilize crop production while conserving water, energy, and labor. LNN also manufactures and markets various infrastructure products. The company serves departments of transportation and roadway contractors, subcontractors, distributors, and dealers.   The stock has a 52-week range of $46.03 -$ 73.75 and a market cap of about $841 million with a daily average trading volume of 140,000 shares.  For the second quarter ending February 29, LNN beat analyst estimates on both revenue and earnings significantly. It closed May 3 at $64.90, down $1.26 on the day.

West Fargo, ND-based Titan Machinery (Nasdaq: TITN, http://www.titanmachinery.com), a recent IPO which has doubled, owns and operates a network of full service agricultural and construction equipment stores in the United States and Europe. It engages in the sale of new and used equipment. The company sells agricultural and construction equipment manufactured under the CNH family of brands, as well as equipment from various other manufacturers. Recent quarterly revenues were up 67 percent to $132 million with earnings of $6 million.  The stock currently trades about 425,000 shares a day and has a 52-week range of $15.58 – $36.92. Its market cap is near $730 million. It closed May 3 at $35.28, down 77 cents on the day.

Newport Beach, CA-based American Vanguard (NYSE: AVD, http://www.american-vanguard.com) manufactures and formulates chemicals for crops, human, and animal health protection. Its chemical products include insecticides, fungicides, herbicides, molluscicides, growth regulators, and soil fumigants in liquid, powder, and granular forms.  The stock’s 52-week trading range $8.92 – $25.34 with a market cap of about $700 million and volume of more than 280,000 shares traded daily. It closed May 3 at $25.28, down 75 cents on the day.

Port Washington, NY-based Aceto Corp. (Nasdaq: ACET, http://www.aceto.com) sources, markets and distributes the following:  Pharmaceutical intermediates and active ingredients, finished dosage form generics, nutraceutical products, agricultural protection products and specialty chemicals worldwide. The company operates in three segments: Health Sciences, Specialty Chemicals, and Agricultural Protection Products.  ACET stock has a 52-week range of $4.51 – $9.99 and an average daily volume of more than 190,000 thousand shares. Its market cap is about $240 million. ACET closed May 3  at $8.90, down 17 cents on the day.

A possible company for the more aggressive investor and further out on the natural pharmaceutical spectrum is tiny San Diego, CA-based Medical Marijuana (OTC: MJNA.PK, http://www.medicalmarijuanainc.com). MJNA which is a legal growth industry in California and 15 other states, provides various business management solutions to the hemp and medical marijuana industries in the United States. It also operates the Hemp Network, a network marketing platform that provides consumers with hemp products. MJNA offers tax and collection solutions to governments including revenue collection systems, turn-key management solutions, and marijuana testing and gradation. The company’s 4th quarter revenue increased in excess of 100 percent over the prior quarter to $430,000.  MJNA’s 52-week range $.01 to $.19 with a market cap of $22 million and volume of near 3.6 million daily shares. It closed May 3 at $.038, up $0.0015 for the day.

Market Study Projects Global RFID Market to Reach $18.7 Billion by 2017

The technology used in Radio Frequency Identification (RFID) is not new, but global business continues to find additional lucrative applications for its use. Security and access control were among the initial drivers of RFID technology but now such applications as product security, inventory, production efficiency, shipping and importing, food safety, aviation and retail, just to name a few, are making use of RFID. A new market study by Global Industry Analysts has projected the world RFID market will hit $18.7 billion by 2017.

The small cap world is loaded with companies that use RFID technology as important parts of their business models.

RFID reader courtesy of Tootoo.com

Here are a few names, selected completely at random, that may be worth checking out. Remember: we are not recommending anything, but solely identifying some small companies that are publicly traded.

Israel-based B.O.S. Better Online Solutions (Nasdaq: BOSC, http://www.boscorporate.com), founded in 1990, provides an entire array of mobile and RFID solutions and supply chain solutions for enterprise logistics and organizational products. Its customer base is global but its market cap is tiny, only $2.95 million as of March 20. At mid-day March 26 BOSC stock was trading at $1.04, down 1 cent on the day, near the the bottom end of its 52-week range of $0.58-$3.67. If you’d like to learn more, tune in to the company’s fourth quarter and year-end conference call at 4 p.m. Israel time March 28.

Port Townsend, WA-based Intellicheck Mobilisa (AMEX: IDN, http://www.icmobile.com) provides commercial applications for reading and verification, government sales of defense security and identity card applications and develops wireless communications applications. Its products come in three areas: commercial identification, defense security and wireless applications. IDN bought Positive Access Corp. in August 2009. One product, IDv-Check, helps read and verify California and Canadian drivers’ licenses, among other things. At mid-day March 26 IDN stock was trading for $1.66, up 1 cent on the day, so far setting a new 52-week high. Low end of the range is $0.81.

Everett, WA-based Intermec (NYSE: IN, http://www.intermec.com) is a global business that designs, develops, integrates, sells and resells automated identification and data collection products and related services. Products include mobile computers, barcode scanners, printers, RFID products, among other things. On March 13, IN introduced two new desktop printers “perfect for space-constrained settings,” according to a press release. At mid-day March 26 IN stock was trading at $7.81, up 10 cents on the day. Its 52-week range is $5.87-$12.21 and its market cap is nearly $465 million.

Santa Ana, CA-based Identive Group * (Nasdaq: INVE, http://www.identive-group.com/) is a seller of physical and logical access control products, RFID products and identity management. CEO Ayman Ashour has built the company through acquisitions after coming over from HID Global, a division of Stockholm-based Assa Abloy, a major competitor. Identive is followed by several sellside research analysts.  At mid-day March 26 Identive was trading at $2.03, up 19 cents on the day. Its market cap is about $105 million and 52-week range is $1.37-$5.90.

* Denotes a client of Allen & Caron, publisher of this blog