That Light at the End of the Recession: Who Is the Levi Strauss of the Recovery?

There are articles this morning with significant news for the economy as a whole and for the investment community in particular.  First of all, the job market improved more than expected, and is back on the curve it was on earlier this spring, with job creation in the private sector at 176,000 jobs, and new applications for unemployment well under the “magical” number of 400,000. 

Early gold miners wearing Levis. Photo courtesy of

Second, and possibly more important, the number of business bankruptcies has fallen and is on track to finish the year at its lowest level since prior to the beginning of the “Great Recession.”  The comes chockablock on top of a truly boffo month of June for consumers, especially people buying cars.

There are storm clouds — European and Chinese wobblies specifically, with interest rates dropping, which is likely to push the value of the US dollar up, making our goods more expensive overseas.  Actually though, two of our biggest trading partners are virtually (but not officially) pegged to the US dollar (Mexico & Canada), and many other economies, such as Australia — resource rich and recessionless — are fairly stable with regard to the greenback. 

So the question is, if we are seeing all these lights at the end of the tunnel — what should we be doing as investors?  We at SmallCapWorld have no answers, no recommendations, because we are not financial advisors,  but we are finding some areas more interesting than others.  Infrastructure continues to be a big agenda item, for instance.  For those with a longer horizon and some patience, homebuilders are looking more interesting.  And an intriguing article in the New York Times last weekend theorized that the electric vehicle market, in spite of the highly publicized obituaries of the lithium-ion battery companies,  may not be dead in the water:

Many investors look at sectors like these when economic reports are positive, hoping to find bargains like four-leaf clovers.  An article this morning in Motley Fool may be a case in point, for instance:  Heck, even Warren Buffett is out in the weeds looking for something special, buying up newspapers (talk about last century!). 

I’d like to suggest that there is a larger pond to splash about in, and it is not sector-specific: cross-border companies, especially those trading in the USA as ADRs (American Depositary Receipts).  It seems as though ADRs tend to trade at a significant discount to the valuations given their peers on US markets.  That is less true of largecap ADRs, a fast-growing group, by the way, but largely controlled in valuation by trading in their home exchanges.   But it seems to be increasingly true across the board in smallcap ADRs.  After all, what was the biggest success story of the California Gold Rush?  I think it was Levi Strauss, which did nothing more than invent blue jeans for the miners.  Facilitators tend to be ignored at times.

Why would this be so?  Well, maybe it is that they are farther away than US-headquartered companies; they use currencies that may be more volatile these days; they tend not to market themselves well to US investors; they seldom trade on Nasdaq or the NYSE.  In fact, most of them trade in the regulatory twilight zone that used to be universally referred to as The Pink Sheets.  However that may be, there are some very big, very prosperous, very well-known companies now trading on the “pinks” after having delisted from the big exchanges when Congress started tightening the regulatory screws a couple of financial bubbles and several Ponzi schemes ago.

If there are bargains in the ADR world, they will be found eventually — at least that is the theory behind the “if you build it they will come” philosophy that used to be called “build a better mousetrap” or “stick to your knitting.”  And for the Sherlock Holmes types among us, there are all kinds of companies worth looking on the upgraded “pink sheets” listings called OTCQX and OTCQB.  With the not-so-slow decline of the Bulletin Board, these listings may look like the Wild West, but they are not the typical old “pennystocks” that many investors remember.  And the JOBS Act is breathing new life into these small newcomers by suspending a lot of the draconian rules that govern fund-raising for larger companies:

Anyway, the point of this article is not to pick out stocks in the pink sheets, it is to look for stocks that could benefit from a gold rush pointed at the pink sheets.  The first and most obvious is OTC Markets Group itself (OTCQX: OTCM), the proprietor of the Pinks, the OTCQX and OTCQB.  OTCM, headquartered in New York City ( , is chugging along at an increasing revenue rate that looks to be in the range of at least $32 million to $35 million this year, and bringing about 15%  (or $0.12 per share) to the bottom line in the most recently reported quarter.  Just to put this in perspective, the market cap is around $73 million and OTCM is handling 10,000 over-the-counter securities.  The volume of trading in OTCM is under 1,000 shares per day, which puts a bit of a technical barrier up for some people — but it is hard to imagine this part of the market NOT growing.

Another you-never-heard-of-it company that stands to benefit is one of the Fortune 500: INTL FCStone Inc (Nasdaq: INTL).  One of the busiest traders in the market, INTL is said to be the largest marketmaker of cross-border stocks in the US, and they are an increasingly prominent advisor to OTCQX and OTCQB companies under the “PAL” or Principal American Liaison designation.  They are also one of the largest buyers of gold in the world.    The shares are trading at $19.61, not far off their lows; the market cap is $375 million, and the average daily trading volume is 84,000 shares.  This article in SeekingAlpha addresses the value that might be there:

There are some very small dark horses, like San Francisco-based Merriman Holdings (OTC: MERR;, which claims to be the largest PAL operation with regard to OTCQX companies.  MERR is quite small and has a recent history of management change and financial distress, but their newswires are busy virtually every day with new OTCQX clients. 

And there are some much larger companies that stand to benefit, like the Australian whiz-kid, Computershare Ltd (OTCQX: CMSQY and ASX: CPU).  Their market cap is well out of our ballpark at $4+ billion, but they have come out of the pack like Secretariat at the Derby, recently taking over the stock servicing portfolio at Bank of New York Mellon.

We own none of the securities discussed in this article.


Construction Industry a Home for Variety of Small Cap Stocks

Photo courtesy of catalin on

Much was made in the media recently of the  construction of the exoskeleton of 1 World Trade Center, which, topping out at 1,271 feet, makes it 21 feet higher than the Empire State Building, according to the New York Times ( For many months the building, also called Freedom Tower, has been and will continue to be the workplace of a variety of construction teams and workers which, at Smallcapworld, serves as a reminder that construction-related activities are the focus of many diverse small cap companies specializing in a variety of trades.

Here are four companies heavily involved in construction, in one form or another. They were selected randomly and we have no connection to any of the companies included in this blog post.

Minneapolis-based Apogee Enterprises (Nasdaq: APOG, designs and develops glass products and services in North America and Europe in two segments: Architectural Products and Services, and Large-Scale Optical Technologies. The architectural segment installs and maintains the outside skins of commercial and institutional buildings. APOG was recently featured in as one of “5 stocks insiders love right now ( Average volume is 117,000 shares a day but it has recently been higher. 52-week range is $7.79-$16.44 and market cap on May 8 was $455 million. It closed May 8 at $16.17, up 1 cent on the day.

Houston-based Comfort Systems USA (NYSE: FIX, is in the commercial heating, ventilating and air conditioning (HVAC) business. It specializes in large scale office buildings, retail centers, apartment complexes and manufacturing centers. The company was founded in 1917.  On May 2, FIX announced a $0.05 a share dividend for shareholders of record at the close of business May 14. Average daily volume is about 111,000 shares a day and market cap is $364 million. It’s 52-week range is $7.81-$13.05. FIX closed May 8 at $9.95, up 13 cents on the day.

Humboldt, KS-based Monarch Cement Co. (OTCBB: MCEM.OB, manufactures and sells portland cement under the MONARCH brand name to residential, commercial and governmental customers. Founded in 1908, its chief customers are based in the Midwest. The stock is very thinly traded–only about 2,250 shares a day. Its 52-week range is $20.51-$28.50 and market cap is about $99 million. MCEM closed May 8 at $24.69, down 31 cents for the day.

Melbourne, FL-based Goldfield Corp. (Nasdaq: GV, engages in the electrical construction and real estate development business throughout the U.S. Its electric business includes building transmission lines, concrete foundations, distribution systems and substations and other electrical installation systems for utility systems. Goldfield also installs fiber optic cable. Its real estate business includes the development of residential condominium projects, mainly in Florida. Goldfield Corp. was founded in 1906.  GV trades about 227,000 shares a day and has a market cap of about $32 million. GV stock was upgraded from hold to buy by TheStreet Ratings in April. Its 52-week range is $0.24-$1.29. GV closed May 8 at $1.31, up 11 cents on the day.

Following the Global Stimulus Trail

Someone has to get all that money, right?

That’s one possible take on what has become a global phenomenon: the stimulus program as a response to a struggling national or regional economy. In his State of the Union address, January 27 this year, President Obama discussed a second US stimulus package, on top of the $787 billion (Recovery Act) pledged during 2009. China has presented a $587 billion stimulus plan, which represents 20 percent of its GDP. Other governments around the world are following suit.

Lord Foster's Viaduc de Millau -- very high-profile infrastructure project

One working assumption is that the bulk of the stimulus money will go to construction projects, particularly the “shovel ready” projects focused on infrastructure—roads, sewers and water treatment systems, bridges, schools, hospitals and public buildings. And President Obama stressed his preference for “green” projects, including “smart” electrical grids and energy-efficient buildings.

Money Morning noted that global infrastructure spending could reach $35 trillion over the next two decades ( According to some analysts North America will spend $180 billion on infrastructure each year, Europe will spend $205 billion, Asia will spend $400 billion and $10 billion will be invested in Africa annually. If you still need convincing, here is a worldwide inventory of infrastructure spending plans (

Back to who will benefit, particularly small caps. How about global cement and engineering-related companies such as Texas Industries (NYSE: TXI), or Michael Baker (NYSE Amex:  BKR), U.S. Concrete (Nasdaq: RMIX), Sterling Construction (Nasdaq: STRL), Orion Marine Group (NYSE: ORN) and also an international cement engineering company doing most of its business that is outside of the USA: KHD Humboldt Wedag (NYSE: KHD). 

Texas Industries (NYSE: TXI,, at a market cap of about $940 million, engages in the production and sale of heavy construction materials in the United States. TXI operates in three segments, cement, aggregates, and consumer products.  It serves the public works, residential, commercial, retail, and industrial and institutional construction sectors, as well as the energy industry. TXI traded Friday at $33.97 vs a year-high of $47.33, with average volume of nearly 300,000 shares

Michael Baker (NYSE: BKR,, at $350 million market cap, provides professional engineering and consulting services for public and private sector clients worldwide. Its markets include aviation, defense, environmental, facilities, geospatial information technologies, homeland security, municipal and civil, pipelines and utilities, transportation, and water.  The company offers various design and related consulting services, including program management, design-build, construction management, consulting, surveying, mapping, geographic information systems, architectural and interior design, among other services.  BKR was trading Friday at $39.46, vs a 52-week high of $44.67 on average volume of 47,000 shares per day.

U.S. Concrete (Nasdaq: RMIX,, is small at $39 million market cap, but customers include contractors in commercial and industrial construction, street and highway construction, and other public works and infrastructure. RMIX produces and sells ready-mixed concrete, precast concrete products, and concrete-related products in the United States. Its products include ready-mixed concrete; stone, sand, and gravel aggregates; building materials, such as rebar concrete block, wire mesh, color additives, curing compounds, grouts, and wooden forms; concrete masonry; and other products and tools used in the construction industry.  RMIX was trading at $0.91, vs a year-high of $3.15, probably reflecting a their substantial loss as of Sept 30, 2009 on a significantly lower revenue level, reflecting financial conditions that may have ameliorated somewhat since Sept 30.  RMIX trades nearly 700,000 shares a day on average.

Sterling Construction (Nasdaq: STRL,, at $300 million market cap, has a customer list including county and municipal public works departments, regional transit and water authorities, port authorities, school districts, and municipal utility districts. STRL is a heavy civil construction company and, through its subsidiaries, engages in the building, reconstruction, and repair of transportation and water infrastructure. Its transportation infrastructure projects include highways, roads, bridges, and light rail; and water infrastructure projects comprise water, wastewater, and storm drainage systems. The company also provides general contracting services.  STRL was trading at $19.50 on Friday, vs a 52-week high of  $20.99, on average volume of about 125,000 shares per day.

Orion Marine Group (NYSE: ORN,, at $500 million market cap, has customers including federal, state, and municipal governments. Orion services the heavy civil marine infrastructure market. They provide a range of marine construction and specialty services on, over, and under the water along the Gulf Coast and the Atlantic Seaboard, as well as in the Caribbean Basin.  ORN traded at $19.00 on Friday, up 6.5%, on average volume of 300,000 shares and a market cap of 508 million.

KHD Humboldt Wedag* (NYSE: KHD, is poised to split into two separate companies, pending regulatory and shareholder approval.  The current company at $400 million market cap., has a cash-heavy balance sheet, an operating business in engineering & construction (E&C), and a royalty stream from the mining and sale of iron ore at a mine in Newfoundland.  The company intends to spin out the E&C operation in a one-for-one distribution to shareholders, and to change the name of the NYSE-listed company to Terra Nova, which will become a royalty-centered company with intentions to broaden its royalty portfolio.  The cash split has been proposed as $113 million to Terra Nova and $295 million to the spinout of the E&C company.   The E&C company designs and develops plants and machinery for producing cement, largely in developing economies such as India, south Asia, the Middle East, and the former Soviet Union, with some customers in the governmental sector and others in the private sector.  KHD traded at $12.84 Friday, vs a year-high of $16.10, on volume of 275,000 shares per day, and a market cap of $389 million. — M Lucarelli

*client of Allen & Caron, publisher of this blog

Traffic & Infrastructure Bailout Bonus Babies

There has been no shortage of market pundits trying to pick which firms will benefit most from the $850 Billion + stimulus package that is winding its way through Congress.  It looks like $30 Billion will be spent repairing roads, bridges and sewage treatment plants on “shovel ready” projects that will put people to work quickly. We do not know how this money will impact the economy, but it seems a safe bet to say that increased highway work could lead to more traffic.

So take a look around the next time you are stuck in traffic – chances are you seeing the products of several microcap companies that stand to benefit from this slice of the stimulus pie. Chicago-based Quixote Corp. (Nasdaq:QUIX, sells traffic cones, crash cushions and barriers.  Its shares closed yesterday at $3.48 with volume of about 30,000, down from a 52-week high of $18.25, for a current market cap of $32 million, less than half of Quixote’s revenues, and possibly an indicator that people have not yet realized that there may be a bailout bonus in their future.  Quixote is also a leading domestic provider of highway advisory radio (HAR) systems and Intelligent Transportation Systems. Its products go hand-in-hand with highway construction work.

Plano, TX-based Viewcast (EBB:VCST,“>), a provider of streaming video technology, is well positioned as a key component for the traffic monitoring market — especially when travelers need to get traffic updates on their cellphones or other mobile devices in real time.  Viewcast has a market cap of $12.7 million and a current price of $0.39, a little more than half its 52-week high, with average volume of just under 25,000 shares per day.  We are told that local-news stations are finding that this service helps draw in hard-to-reach viewers, just as “traffic updates on the 1s” keep people tuned in to all-news radio. Local governments can use Viewcast-type feeds to monitor progress and bottlenecks at road improvement projects.

St Paul, MN-based Image Sensing Systems Inc (Nasdaq:ISNS,  offers products that measure traffic speed and volumes to monitor current congestion levels and forecast journey times. ISNS has a market cap of  just over $26 million and a current stock price of $6.69, down from a 52-week high of $16.50, but with low average trading volume.  Traffic management systems use this traffic data in real time to govern traffic flows and to monitor road capacity usage for long-term planning.

Last but not least is Fairfax, VA-based ICF International (Nasdaq:ICFI,  It does not play in the traffic space specifically. It is a management services firm. But earlier this month it won awards to help the Federal Highway Department to mitigate the loss of wetlands during highway expansion, so it potentially combines the attractions of greentech with those of bailout bonus eligibility.  ICFI currently has a market cap of $352 million and a stock price of $23.68, down from a 52-week high of $28.17.  It has an average trading volume of 134,000+ shares.