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Hand-weaving looms, warrants, and the Investor of the Year

Balancing a small business with profitable small cap investing — including warrants — the Investor of the Year explains his success.

Each year, as the leaves begin to turn and the kids go back to school, an American microcap stock advisory pauses to honour one of its subscribers.

The Bowser Report selects the Investor of the Year. As we remarked a year ago, the Investor of the Year is neither a Wall Street wizard nor a much-quoted commentator on BNN (which is just as well, or his or her reputation would probably be in tatters these days).

Last year the award went to a garden enthusiast from Eugene, Oregon named Mrs. Jane Allen. They must be growing a fine crop of microcap investors on the west coast, since this year’s Investor of the Year is from Port Ludlow, Washington.

And there’s no regional bias, by the way, since the newsletter is published in Newport News, Virginia.

This year the editor, Mr. Max Bowser, has selected Mr. Gary Swett, who has a very interesting investment story to tell.

He developed his investment prowess while building a business, selling the business, buying it back again and selling it for good. We’ll tell his story, and then take a look at Mr. Bowser’s Featured Stock of the Month.

A loom in Spain

For 35 years, Ken and Rachel Swett ran a business you won’t find many of in the Yellow Pages — making hand-weaving looms. Mr. Swett began by making his first loom in Spain with the help of a local craftsman, and then translated those skills back home.

At one point, the Swetts sold the business, but had to take it back. “Had to work day and night rebuilding it,” says Mr. Swett. During that time, he stayed out of the markets. When the business was back on his feet, he re-subscribed to Mr. Bowser’s publication and started investing again.

And ultimately the Swetts sold the business, “this time for cash.”

The money from the sale went straight into dividend-paying stocks. At one point, the couple’s portfolio contained 30 different stocks from Mr. Bowser’s microcap llst. Now there are 12 stocks and two warrants.

Overlooked warrants

Mr. Swett has done very well with warrants. Many investors have no more than a passing familiarity with warrants, which give buyers the right to purchase stock at a fixed price within a fixed time. As a rule, smaller companies issue them to boost their stock float.

As a microcap specialist, Mr. Bowser has a regular section on warrants (and is one of the few advisories we see that covers them at all).

Mr. Swett invested in 18 of them, for an overall gain of $89,000. Not surprisingly, he thinks they’re a worthwhile investment more investors should look into. “I believe they are overlooked and represent very good leverage with manageable risk. I like them because, unlike options, they are issued by the company itself and usually have long expiration dates. But warrants are only as good as the company that issued them.”

Be patient with warrants, he adds. Mr. Swett rarely sells when a warrant doubles, a lesson he learned the hard way.

He bought GMX Resources (NASDQ-GMX) at 19¢. He sold 4,000 at 48¢ for a profit of $1,160. Later, he sold 1,500 for $10, for a profit of $15,000. “Big difference,” he comments wryly.

Similarly, he usually sells his stocks when they double or triple, depending on how much momentum is involved.

Ethical investing

Today’s market, says Mr. Swett, “is like a steeplechase with different hurdles.” But that doesn’t stop him from investing.

He checks his portfolio three times a day on the computer. And he invariably uses limit orders, but just for the day, not indefinitely. Even if the bid/ask spread is only 2 or 3¢, he adds, he will always use a limit order rather than issue a market order to buy at the optimum price. He keeps control of his investments.

He normally buys 1,000 shares at a time, but will purchase 5,000 shares of a company he really likes. Because they are cheaper, he will order 2,500 to 5,000 warrants regularly.

Not least, Mr. Swett is a practicing Quaker. “I buy only socially responsible companies,” he says. He sold one firm when it announced it was going into the payday loan business, “which I think is unethical.”

Perhaps a healthy infusion of the Investor of the Year’s ethical practices might have kept Wall Street out of the mess it’s in now.

Fun to watch

Mr. Bowser’s relationship with his investor-subscribers is somewhat unique. He selected his latest Featured Stock of the Month with the help of one of his readers.

The company is Clearfield Inc. (NASDQ-CLFD) a telecom supplier in Minnesota. Let’s look at the firm from the point of view of the man who recommended it, Mr. John Anderson of Roseville, Minnesota.

The company’s niche is in small rural areas that big companies don’t find profitable enough to cover, says Mr. Anderson.

“I met a guy a couple of years ago who works there and after talking to him about Advanced Photonix [another optoelectronic firm], I learned his company was in telecom also. At the time, however, they had a division that was killing the bottom line. Since that time they have jettisoned the division and have been profitable for a number of quarters.

“What truly has been fun to watch has been seeing Clearfield’s revenue rising each quarter. I have done a good deal of research on the telecom industry and know we are in the very, very early stages of a long period of growth.”

The company had been in Mr. Bowser’s database for years, but with Mr. Anderson’s encouragement, he dusted it off and liked what he saw. The stock is currently trading at $1.25.

If it’s fun to watch a company grow, it’s just as much fun to see individual investors build successful portfolios, one careful step at a time. It can be done, in any kind of market.