During a recession or recovery — green shoots everywhere you look

The media vacillate daily about whether the economy is growing, whether the recession is lifting, and the market is like the audience at the US Open, heads moving back and forth in unison.  One way to look at the recovery — fast or slow, V-shaped or the dreaded W, robust or lackluster — is that it will probably happen, based on past history and the underlying strength both of the US economy and the economies of other industrialized nations.  And there are some things one can bank on already, including the new crop of technologies and spunky little companies that will emerge, or are already emerging.  There are books and articles on the subject, but a good summary was supplied by McClatchy newspapers last spring: http://www.mcclatchydc.com/2010/04/08/91844/from-the-ashes-of-recession-new.html.  And it’s worth remembering that companies like HP and Microsoft were started during recessions.

The back-of-a-napkin technology stories tend to be exaggerated, and having spent 30 years with small companies, I know it’s 99% perspiration, as Thomas Edison is said to have said (and General Electric was born in a recession too, come to think of it).  The dynamic is simple: companies anticipate lower sales and so they retrench, firing people, sometimes in waves of thousands.  No one likes firing people, so the firings tend to be LIFO-based to give them a rationale, or wholesale site-closings (favored by heavy industry).  The LIFO unemployment lines hit younger employees disproportionately hard, and some of those go on to start companies (most new companies are started by young people, not by middle-aged people who have moved to the center of the economic spectrum already).

And you thought algae were just pond scum?

It’s a bit early to take a roll-call of new companies spawned by the 2008-2010 recession, but it is likely to be an impressive list in fairly short order.  We are already seeing some major public offerings queueing up for VC-backed new companies like Melbourne FL-based Petroalgae (OTCBB: PALG; http://www.petroalgae.com/), which has no revenues, but also has the good fortune to be banked by Goldman Sachs, UBS and Citi for its projected $200 million raise this autumn.  It has a totally theoretical market cap in the billions already, but the truth of that will be in the aftermarket.  At any rate, it ain’t gonna be chickenfeed.

As Marie Daghlian pointed out in a perceptive article in Seeking Alpha (http://seekingalpha.com/article/220538-renewable-energy-stocks-fuel-ipo-queue), Englewood CO-based Gevo Inc, also with no revenues, is a biomass-to-fuel company looking for $150 million with a syndicate of banks only slightly different from that employed by Petroalgae — this time it’s UBS, Goldman Sachs and Piper Jaffray.  Gevo has a splendid website: http://www.gevo.com/.

There’s actually been a good deal of talk about these two pending IPOs already, but I bring them up in order to point out that the companies that grow up in a recession tend to be companies with a different “take” on reality.  Exxon and BP continue to believe that the energy future is totally dependent on fossil fuels, but the European Union has decreed that 20% of Europe’s electricity will be derived from renewable sources by 2020, and that a 20% decrease in electricity usage will be accomplished in the same time period (the so-called 20-20-20 rule: http://ec.europa.eu/environment/climat/climate_action.htm ) — which creates some cognitive dissonance with the fossil-fuel-forever point of view.

And truthfully, you don’t have to have your ear firmly to the ground to know that there are all kinds of smaller, brainier, cutting-edge companies popping up in all kinds of sectors and all around the world.  In the Netherlands there is privately held Hydroring*, which has developed and is installing as we speak, micro-turbines to be submerged in rivers to create electricity without building dams — and these are donut-shaped turbines that fish can swim through (http://www.hydroringcapital.nl/).  At present we are told there are orders for 5 of these in the UK, 1 in the Netherlands, several in Germany and 2 in India.  Each one is expected to produce around 40 kWh on a constant basis year-round, without disrupting wildlife or shipping.

Bright Automotive — not just about cars any more

And in a variation on the theme of new companies, the “new” General Motors, itself preparing the biggest IPO in history, has extended a hand to one of the most promising of the really “new” greentech companies: privately held Anderson IN-based Bright Automotive (http://www.brightautomotive.com/), whose battery-pack work is probably more significant than its slightly odd-looking delivery truck design.  However you look at it, though it’s a move sure to infuse some new ideas into the face-lifted former automotive sales leader from Detroit: http://www.ecnmag.com/News/Feeds/2010/08/applications-power-gm-bright-automotive-announce-strategic-relation/.

And while Petroalgae is pursuing its mega-deal in the US, Algae.Tec is in the process of closing a very modest deal in Australia for what seems like a far more innovative method of producing the same product at lower cost: http://www.algaetec.com.au/.  It also seems to have deals to build in Australia and China: http://www.prnewswire.com/news-releases/algaetec-signs-mous-for-china-and-australia-pre-listing-101591198.html. 

And although we have a policy against long articles, there are new green shoots as well in medical devices, pharma, biotech, software, media, internet, fish-farming — you name it, and clever people are doing it. 

However you look at it, one of the most important pieces of the puzzle facing a new company is how to get enough money to survive.  In the next installment of this series, we’ll talk about a new crop of “mid-market” investment banks bidding to take the position formerly held by the (sometimes 5 or 6, but usually 4) Four Horsemen, only one of which is still around (Needham & Co).  Signal Hill anyone?  Janney?  Madison Williams?  Baird?  Revolution Partners? 

Stay tuned.

* Denotes Allen & Caron client

Small Investment Banks in a Pleasing Ramp of Increased Value

A dart-throwing investor would have had a good chance to make money investing in small investment banks recently.  We’ve looked at this specialized sector several times in the past, and of course in the Bad Old Times these stocks were as depressed as any in the market.  But recently the number of multiple-base hits and long balls has been increasing.

San Francisco-based Merriman Curhan Ford (Nasdaq: MERR; http://www.merrimanco.com/) is a case in point.  The full-service investment bank has become the market leader in PAL services for the OTCQX top-end Pink Sheets market, and they have carved out several industry niches, including a strong bid for the smaller deals in the greentech space (near and dear to us).  Recently they have announced some registered-direct deals that look interesting.  MERR shares closed yesterday at $0.63 (about a double from the low), vs a year-high of $1.46, but the stock has been tending to the upside pretty strongly.   Still, the market cap is only $8 million, which may make it worth a closer look.

Houston-based Sanders Morris Harris Group (Nasdaq: SMHG, http://www.smhg.net/) has always had a strong mandate in energy and more recently in alt-energy, and has a very oil-y gas-y customer base.  Recently under the leadership of George L Ball, they have been focusing more on asset management, and have announced their intention to sell off most of the investment banking group to Siwanoy Capital, after taking impairment charges on that group throughout the financial downturn.  SMHG has rebounded to $5.95 after a Feb low of about $3.76 and a 52-week high of $11.07.  Market cap is about $170 million.

Miami-based Ladenburg Thalmann Financial Services (Amex: LTS, http://www.ladenburg.com/), also a full-service financial services and investment banking firm, has also done a near-double from its springtime lows, with shares closing yesterday at $0.75 and a market cap of about $125 million.  LTS has been active in SPACs, and in the placement of public and private debt, and is now the parent of well-regarded healthcare boutique Punk Ziegel.

NYC-based Cowen Group (Nasdaq: COWN, http://www.cowen.com/), after a March low of about $3.59, has rebounded to a close yesterday at $6.70, no doubt due at least in part to its recent deal with Ramius LLC, a large asset manager that has partnered with Cowen (Ramius is now the control shareholder).  But clearly the combination is being seen favorably, and Cowen is a good old name as well — and with some smart bankers in its chosen niches of healthcare, technology, greentech, communications, and aerospace/defense.  COWN shares trade about 150,000 per day, and the market cap is just over $100 million.

Minneapolis-based Piper Jaffray Companies (NYSE: PJC, http://www.piperjaffray.com/) would have been a long ball if you bought it at the springtime low in the teens.  PJC is now trading at $50.65, near its highs, with a market cap just a hair below $1 billion, and daily trading in the range of 210,000 shares.  Founded in the 19th century and later acquired, it was spun out of US Bancorp a few years back, and has an enviable reputation as a full-service investment bank for tech, healthcare, media, telecom, alt-energy and financial services.  Good research staff.  And probably good upside from these prices.

Portland OR-based Paulson Capital Corp (Nasdaq: PLCC, http://www.paulsoninvestment.com/) has rebounded very nicely as well, thank you very much.   After trading as low as $0.80 in late spring, the shares closed at $1.95 yesterday, though admittedly on very low volume.  Longtime leader Chet Paulson must have been smiling when he announced a profit of $0.18 for the 2nd quarter versus a wrenching loss in the year-earlier period, and the company has announced some deals recently in the smallcap, nanocap tech sector that has become a hallmark of Paulson deals.  Paulson also runs the Westergaard Waldorf conferences, founded by brilliant and insightful John Westergaard 30 or so years ago.

A complicated story, but worth studying, is Arlington VA-based FBR Capital Markets (Nasdaq: FBCM, http://www.fbrcapitalmarkets.com/).  FBR, whose initials originally stood for Friedman Billings Ramsey, has been through the wars regarding financial peril, but maintains its position as a high-toned investment bank, though a youngster in a field populated largely by oldsters.  FBCM is trading at $5.27 for a market cap of about $330 million, and trading volume of about 225,000 shares.  FBR recently separated from a company now known as Arlington Asset Management, which is the largest holder of FBCM.  A recently filed registration statement will free up Arlington to divest its holdings, which may mean some significant blocks could be available. 

We never advise people to buy, sell or hold — we simply look at interesting companies and comment on them.  Please look carefully before jumping into the water — make sure there are no rocks under the surface, no alligators, and no toxic substances.  We like the small investment banks; they are full of smart people prepared to take judicious risks, but do your diligence please.

Small I-banks: Some Catching the Wave, Others Not (Yet)

With big-bank stocks soaring on optimism about improving finances, improving loans, and the return of  profits, it is probably time to look again at the small investment banks to see if there are any bargains there.  Turns out there probably are.  I-banks (esp the smaller ones) tend to be a bit like the shoemaker’s kids when it comes to relationships with the investment community, and as a result they are sometimes really neglected in earnings roundups. 

It’s true that the investment banks most likely have a later date on the recovery curve than the commercial banks — because they make most of their money in transactions, raising money, handling mergers, and providing lucrative ancillary services.  The Wall Street bazaar has been quiet for months, of course, nary an IPO, and the only M&A transactions we read about are mega-mergers like Merck & Schering-Plough hooking up. 

But you can bet the markets will begin to fill back up as the hundreds or thousands of small companies that are forming begin to be eligible for financing.  We are seeing it already in the greentech and automotive areas, of course — but the frenzy is focussed for the moment on “free” federal money.  At some point that focus will switch back to professional investors and even to the retail market.  When that happens, the rising tide may lift a lot of i-bank boats, not just Morgan Stanley, Goldman Sachs and Jefferies and their ilk.

We have reported on 10 small i-banks recently, and for the most part their shares have NOT made anyone wealthier in the last month or so.  But that may mean that some of them are real blue-light specials. 

Three of the banks we have reported on are up over the last 3 weeks or so: Houston-based (but NYC-weighted) Sanders Morris Harris Group (Nasdaq: SMHG, http://www.smhg.net/) closed Monday at $4.04, vs $3.74 when we last looked in mid-February.  SF-based Merriman Curhan Ford (Nasdaq: MERR, http://www.merrimanco.com/) closed yesterday at $0.47 vs $0.34 in February, a significant percentage improvement.  And NYC-based Broadpoint Securities (Nasdaq: BPSG, http://www.fac.com) moved up from $2.56 last month to $2.68 yesterday. 

It may be worth pointing out that all 3 of these banks have been in the news.  Both SMHG and MERR are greentech and alternative energy specialists, and both are active in the OTCQX PAL program, sponsoring foreign-based companies in their US ADR (American Depositary Receipts) listings.  MERR has gathered momentum in the fixed-fee PAL sector, with 14 companies listed on its website today, and is increasingly prominent in the greentech biz as well.  SMHG, though earlier in the PAL business,  has been transforming itself from a broadly diversified financial services company into more of an asset management/private wealth management bank, and recently sold off its capital markets operation to a Chinese group. 

Broadpoint Securities has become Broadpoint Gleacher by acquiring in a $70 million cash-and-stock transaction  the M&A specialist Gleacher Partners. 

Of the other i-banks we have reported on, Miami-based Ladenburg Thalmann (Amex: LTS, http://www.ladenburg.com) reported a not-surprising downdraft in revenues for 2008, with an EBITDA loss of nearly $6 million, but at $0.55 is selling for about 75% of last year’s revenues, and about 60% of last year’s revenues if its big asset manager, Triad, had been on board all year long. 

SF-based JMP Group (NYSE: JMP, http://www.jmpg.com) declared a cash dividend of $0.01 per share in spite of a loss for the full year of 2008 (what i-bank did NOT lose money?  Umm, lemme think — can’t think of one).  Its shares are $4.02 vs $4.60 last month, and for a pretty up-and-coming bank, the market cap of $80 million may be attractive.

Some i-banks have suffered more than others in the market.  NY-based Cowen Group Inc (Nasdaq: COWN, http://www.cowen.com/) has been spanked for surprising the Street on the downside last month, and is trading at $4.90 vs an early-Feb $6.25, but its reputation and position on the Street may make it worth a second (or third) look.  The same may be true of Minneapolis-based Piper Jaffray Companies (NYSE: PJC, http://www.piperjaffray.com), whose $153 million loss for the 4th quarter of last year was mostly — $127 million — a goodwill charge and some downsizing expenses.  Their shares are selling for $22.93 about half its 52-week high of $45.99, in spite of its reputation as one of the “hotties” in its chosen high-tech, medical and associated industry sectors. 

Also a surprise is the way that Rodman & Renshaw (Nasdaq: RODM, http://www.rodmanandrenshaw.com)
 has been taken to the woodshed by investors, following its YE results last week.  Its shares are at $0.28, vs a year-high of $2.99 and a mid-Feb price of $0.65.

SmallCap I-Banks: Worth a New Look

OK, so let’s say that as a person interested in the small-cap world, you are wondering how you might locate an interesting, solvent and competent investment bank to add to your portfolio.  Leaving aside the behemoths (Morgan Stanley, Goldman Sachs, Credit Suisse, UBS, et al) and the i-banks that are subsidiaries of other corporations (like Merrill Lynch and Wachovia), there are a large number of small “boutique” investment banks to look at, some of them quite interesting, some with industry-leading credentials in their niches.  Almost all of them are selling at or near their lows, most likely on the assumption that all investment banks are going to take it in the slats before this financial crunch is over.

All of the banks listed below have outstanding financial conferences — all of them worth attending.  If for no other reason, readers might want to visit the URLs to put the dates of the conferences on their calendars.  But there may also be stocks here that are worth putting on your screen to keep an eye on.  We have made no attempt to be definitive, nor to list all the banks that you might find interesting.

Two of the best-known small bank names are companies that were comparatively recently spun out of larger corporations — both considerably prior to the onset of the current recession.  Those are Minneapolis-based Piper Jaffray Companies (NYSE: PJC, http://www.piperjaffray.com/), formerly a subsidiary of US Bancorp, with a quite substantial reputation in healthcare, cleantech and technology, and experience in a large number of other areas that are detailed on their website.  They announced a loss of $146 million for the year 2008, but to be fair, most of it was noncash, and income from continuing operations in the 4th quarter was positive.  PJC closed Friday at $32.51 vs a 52-week high of $45.99.  The largest of the banks we are going to mention today by market cap, PJC had a market cap of  $614 million on 2/06. 

The other spin-out also has an old name, Cowen & Company, AKA Cowen Group (Nasdaq:COWN, http://www.cowen.com/), headquartered in midtown Manhattan.  Cowen, a classic Wall Street partnership at one point, was bought by Societe Generale some years back, and then spun out as a free-standing company in July 2006.  Like Piper Jaffray, Cowen has a technology slant, with a strong emphasis on healthcare, cleantech and other technologies.  For its latest reported quarter (Sept 30, 2008), Cowen reported a loss of $57 million, including a $50 million write-down of “legacy goodwill.”  That was on slightly higher revenues compared to the previous year.  Cowen’s market cap is much smaller than Piper Jaffray’s, and its shares closed at $6.25 on 2/06 (vs a high in the year prior of $10.50), leading to a market cap of $89 million.

Cowen recently brushed off an offer to be acquired by MUCH smaller Rodman & Renshaw (Nasdaq:RODM) — a classic minnow-swallows-whale transaction had it gone through.  More about RODM below.

Two west-coast based companies would be on your list: San Francisco-based Merriman Curhan Ford Group Inc (Nasdaq: MERR, http://www.merrimanco.com/AboutUs/index.php) and Portland OR-based Paulson Capital Corp (Nasdaq: PLCC, http://www.paulsoninvestment.com/).

MERR, like many of the other banks in this list, is strong in healthcare and technology, but it has a particular expertise in greentech/cleantech, and apparently strong relationships with prominent greentech investors such as The Quercus Trust.  Unlike the other banks in this group, MERR also has a small but growing business as a PAL (advisor) to international companies whose ADRs are listed on the OTCQX (http://www.otcqx.com/otcqx/home).  It also has taken steps to shore up its balance sheet over the last few weeks, and announced a management restructuring that brings in some new blood, still under founder Jon Merriman.  MERR closed on 2/06 at $0.34, vs a year-high of $6.50, yielding a current market cap of just $4.4 million, which may make it more attractive  for diligence purposes than even some of its talented peers.

Paulson Capital is an older firm with a history under its veteran founder, Chet Paulson, of sponsoring quirky companies — some of them successful, others not.  But it has the distinction of having been a stable and independent i-bank for longer than any other firm on the list.  It also is the proprietor of the Westergaard Waldorf Conferences, probably the longest-running series of small-cap conferences in the industry.  PLCC closed on 2/06 at $1.60, down from $5.49, for a market capitalization of $9.5 million.

NY-based RODM (properly Rodman & Renshaw Capital Group Inc, http://www.rodmanandrenshaw.com/), has been a leading investment bank in the PIPE world for a number of years.  In fact, most often it is #1 in terms of the number of deals it puts together; in 2008 it did 44 transactions totalling $588 million.  Rodman’s name harks back to a Chicago-based company that was purchased by a Latin American bank, and merged with a NY i-bank, Mabon Nugent.  The project did not work out, and the bank parent closed it down; the current Rodman emerged subsequently after purchasing the name, etc. Their position in the healthcare PIPE world, and also other technologies, and their research department, are without doubt one of the most active, and one of the most successful in completing deals.  RODM closed on 2/06, however, at $0.65, down from a 52-week high of $2.99, for a current market cap of a bit over $22 million.

NYC-based Broadpoint Securities Corp (Nasdaq:BPSG, http://www.fac.com/) is a successor to a company originally known as First Albany Corp, and later as FAC Equities Corp (still reflected in its website URL).  Its focus is technology (a legacy of the ultra-tech First Albany, no doubt), greentech, healthcare and energy, along with other areas that are listed on its website.  BPSG closed on 2/06 at $2.56, down from a 52-week high of $3.54, for a market cap of about $204 million, the second largest on our list. 

Finally, one would look at another grand old name that dates back to 1876, and has been reincarnated as a new firm, Miami-based Ladenburg Thalmann Financial Services Inc (Amex:LTS, http://www.ladenburg.com/), which now includes the operations of NY-based Punk Ziegel, a notable and respected life sciences/biotech bank.  LTS is a full-service i-bank, and has been particularly successful in the last few years in structuring and closing 33 SPACs (basically, blank-check pools raised to make acquisitions), raising $6.6 billion in the process.  LTS says it is the #1 SPAC bank in the country, and we would have no way to argue with that.   Their shares closed on 2/06 at $0.78, down from a year high of  $2.59, for a market cap of a tad under $134 million.

So there it is, not a complete list by any means, but something to chew on.  We do NOT recommend stocks — we just follow interesting companies on the theory that well-informed investors will do their own due diligence.