When penny stocks are not a high-risk gamble
You’re not throwing caution to the winds if you take the right approach to small stocks, says a U.S. expert whose latest pick is from Canada.
Earlier this week the coach of football’s New England Patriots made a risky call with minutes left in a game. It failed and the Patriots lost to their bitter rivals by one point.
This would be no more than another item for sports talk radio, except that it is now being bandied about as an example of risk management.
As in this quote from the Wall Street Journal: “His decision went against the natural instinct of all human beings when they’re forced to make high-stakes decisions.”
Studies show that people overwhelmingly make the supposedly safe choice, “to the point that they err on the side of caution — even though doing so may lead to worse results.”
To which Mr. Max Bowser would say, Amen. The Bowser Report has been one of America’s foremost advocates of penny or microcap stocks for years.
And he insists that investing in penny stocks is not a high-risk gamble. When you go about it the right way, the rewards outweigh the risks.
Even when things look bleak, a patient, well-informed investor will still prosper, he says. We’ll follow his argument and look at his latest Company of the Month, which happens to be from Waterloo, Ontario.
A double whammy
When the market slumped from September 2007 to August 2008, so did Mr. Bowser’s recommended stocks. They lost $6,213, to be precise.
But from August 2008 to September 2009, they wiped out that loss, racking up $7,054 in profits.
Why was there such a contrast? It all gets down to management, in this editor’s opinion. And even the best of them faced an almost impossible situation.
“Managements in the earlier period faced a double whammy — an economic collapse and a bear market.”
During those dark days, Mr. Bowser acknowledged the dangers and the anxiety of investors. But his approach was to advance, not retreat.
A brave announcement
In January 2008 “we bravely announced that instead of buying 400 shares of each Company of the Month, we were going to acquire 1,000. Why? Because we were convinced the market would turn around.”
By August 2008, he admitted that this was the worst bear market in his experience — little knowing that the turnaround would start within a month.
Still, he concluded his August article with this paragraph: “There has been speculation in the financial press that small stocks could lead the market out of the current downturn.”
And that is exactly what happened, “to the chagrin of advocates of high-priced issues,” adds Mr. Bowser with undisguised relish.
A real challenge
Mr. Bowser cannot stress too often that management makes the difference (and he regularly talks to the people who run the firms he invests in). “A bear market is a real challenge of a chief executive’s skill.”
And one that can be overcome — the editor cites two well-managed firms that made money during the bear market.
One was IEC Electronics (NYSE-IEC), which is in the “prosaic world of printed circuit board assemblies,” but turned in a double for Mr. Bowser, thanks to the “outstanding efforts” of CEO Barry Gilbert and his team.
The other was The Female Health Co. (NASDQ-FHCO), a maker of female condoms headed by a veteran of the pharmaceutical business, 75-year-old Mr. O.B. Parrish. (See Daily Buy-Sell Adviser, September 18.)
The editor thinks a small Canadian firm is in the same class.
Air pollution control
One may or may not believe in the onset of global warming, Mr. Bowser says, but “the controversy has made us all more conscious of our environment.”
Right in the middle of it all is 33-year-old TurboSonic Technologies (OTC-TSTA), headquartered in one of Canada’s high-tech capitals, Waterloo. It designs and markets air pollution control devices.
Its products meet the strictest emission regulations for a number of industries, such as cement and mineral processing, ethanol and biofuels and petrochemistry. It has 24 patents and another 11 pending.
These efforts are very timely, says the editor, since the U.S. Environmental Protection Agency “will be issuing new air pollution rules for coal and coal-fired plants by November 2011.”
Among other patents, TurboSonic holds the exclusive worldwide rights to Catalytic Gas Treatment (CGT), which destroys pollutants like formaldehyde and methanol from gas streams.
Naturally, Mr. Bowser talked to the CEO, Mr. Edward Spink, who told him that the firm is well on its way to the development of a new “conductive compositive that can be used by utilities in place of certain expensive alloys that now cost around $50 a pound.”
A lot of the company’s sales are made through engineering firms, often those engaged in plant construction or upgrades. In the past year, 70 per cent of those sales came from the U.S., 17 per cent from Spain and 4 per cent from Canada, with the rest scattered around the world.
Waterloo may be home, but there are also offices in New Jersey, North Carolina and Milan, Italy. The stock does not trade on either Toronto exchange, but only on New York’s over-the-counter “pink sheets.”
TurboSonic’s latest quarter was strong, with revenue up 38 per cent and net income up 200 per cent. There is no long-term bank debt. Management tends to stay with the company a long time, Mr. Bowser notes approvingly.
Still, the company suffered a loss in 2008, thanks largely to regulatory problems that caused a delay in orders. The editor believes that has kept the stock from rising. It is trading at $0.70.
But he believes in the stock. And he firmly believes that a well-run company is never a gamble, no matter how small it may be. Go for it.
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