Former Wall Street pro Hilary Kramer has literally written the
book on investing in small, low-priced stocks.
This summer's stock market sell-off hit small-cap stocks hard.
But the 47-year-old newsletter editor for publications such as
GameChanger Stocks and High Octane Stocks and the author of The
Little Book of Big Profits from Small Stocks (available in stores
next month), still sees plenty of investment opportunities in
stocks that trade under the $10 mark.
It's an often ignored sector of the market, viewed as a dumping
ground for broken companies. But Kramer, who spent years as an
analyst at Morgan Stanley and Lehman Brothers, argues that a smart
investor willing to roll up their sleeves and sift through the
debris can find undiscovered gems, babies that got thrown out with
the bath water and fallen angels about to make a comeback.
That's not to say she ignores bigger names at bigger share
prices. Financial junkies who have read her newsletter articles or
watched her frequent appearances on PBS's "The Nightly Business
Report" have heard Kramer weigh in on a variety of names including
3M (ticker: MMM), Pfizer (PFE), and United Technologies (UTX).
Barrons.com recently caught up with Kramer to discuss her picks
and pans. Below are excerpts from our recent conversation.
Barrons.com: What's the attraction of stocks that trade for no
more than $10?
Kramer: The book mentions several types of companies. I tend to
gravitate towards "fallen angels" -- once high-flying stocks that
suffered a big decline but are still able to overcome their
troubles. Often, stocks are discarded for good reason. But you can
also find some gems and for those investors looking for home runs,
they can be very exciting.
Q: In reality, what portion of a portfolio should investors
commit to small, low-price stocks?
A: Small stocks should not total more than 25% of the equity
side of your portfolio, because they can be so risky. The stock
market's sell-off hit small-caps hard. While one stock might double
or triple in value, four others might languish. Also, small
companies often don't pay dividends - an important source of
returns in today's current market environment. Some, however, do.
At more than $7 a share, the television broadcaster Sinclair
Broadcast Group (SBGI) pays a better than 6.4% dividend yield. It
carries a lot of debt, but should generate strong revenue growth
during the coming presidential election campaign.
Q: What should investors look for when gauging these stocks?
A: I look for growth and expanding margins. The company also
needs pricing power to maintain sales in challenging times.
Q: What names offer promising returns right now?
A: Right now, I am seeing promise in small biotech names that
are on the verge of rolling out next-generation, breakthrough
targeted therapies. These include the cancer drug makers Ariad
Pharmaceuticals (ARIA) and YM BioSciences (YMI). Optimer
Pharmaceuticals (OPTR) has a drug that fights a deadly
hospital-acquired infection. And lastly, there is Chinese biotech
3SBio (SSRX) specializing in anemia drugs. We've also been paying
close attention to the small regional banks, such as Popular
(BPOP), Citizen Republic Bancorp (CRBC) and MPG Office Trust (MPG).
Another name is Cowen Group (COWN), which was formed in 2009 when
asset manager Ramius merged with the investment bank Cowen &
Co. It has strong management and I love the business model. The
shipping logistics company XPO Logistics (XPO) is a great example
of a small company with the potential to grow into a much bigger
name. With new management coming in it has the potential to do very
well. We also like Ruth's Hospitality Group (RUTH), which runs the
Ruth's Chris Steak House chain. During the market selloff, the
stock fell from $7 to $4 a share. But it's currently trading at a
very fair valuation, especially when you consider the price at
which California Pizza Kitchen got acquired [Editor Note:
Golden Gate Capital bought the restaurant chain in July for $470
million].
Q: What's your top pick among big-cap stocks?
A: It depends what investors want from a stock. Cummins (CMI)
offers a real opportunity at $85 a share, down from its record high
of $121 a share in May. The company makes engines for mid- and
large-sized trucks and has been deemed a play on growth in the
global-vehicle industry. But Cummins is really a play on clean
technology and the push to reduce emissions thanks to its
investment in natural-gas-burning engines.
Q: Name your favorite dividend pick.
A: Spanish telecommunications giant Telefonica (TEF) has an 8.3%
dividend yield, and it's a great way to play Latin America. It's a
huge company, though many people don't realize that it has a nearly
$90 billion market cap. The stock price now sits below $20 a share,
down from a high of $27.61.
Q: Let's talk about health care. Your book devotes an entire
chapter to health-care companies. Also, a number of bigger names
have been recommended on your newsletters, including Teva
Pharmaceutical Industries (TEVA) and Gilead Sciences (GILD).
A: I am very particular about health-care stocks. I have to
believe a company is in such a high-growth area that it can
overcome the impact on its margins from Medicare and Medicaid
reimbursement cuts and efforts by private insurers to cut medical
costs. I love the Danish drug maker Novo Nordisk (NVO), which has
fallen in price to $101 from $132 earlier this year. The company
supplies insulin around the world and will profit from the growing
global diabetes epidemic.
Q: What about other asset classes? What portion of an investment
portfolio should be invested in equities right now?
A: It's important for portfolios to have equity, fixed-income
and cash components. With equities, I tend to be an accordion,
ranging from 20% to 40%. Many investors suffer sleepless nights
during a market sell off. I see it as an opportunity to pick up
bargains. When the market is frothy and overvalued, I sell off
positions.
Q: What are your Sell recommendations? A recent newsletter
mentioned Motorola Mobility (MMI).
A: We recommended buying Motorola Mobility in March and it
climbed 43% before we put it on our Sell list last month following
news of the pending acquisition by Google (GOOG) for $40 a share.
The stock now trades at just below $38 a share. The arbitragers are
probably having a field day, but for us, a 43% return is just fine.
We've also recommended selling quite a few health-care names,
including Brookdale Senior Living (BKD). The winds of change are
coming quickly with the assisted living industry facing
reimbursement issues.
Q: Drug -maker Dendreon (DNDN) was highlighted in your book as
an example of a breakout stock. The shares skyrocketed amid high
hopes for its groundbreaking prostate cancer vaccine Provenge,
climbing above $55 a share last year. Last month, it was decimated
because of disappointing sales. Will the stock recover?
A: I think eventually Dendreon will be acquired. In fact, some
very smart investors I know are playing call options, believing
it's only a matter of time. My research has uncovered new drugs
being developed by other companies, including Johnson & Johnson
(JNJ) and Bristol-Myers Squib (BMY), that might be more advanced
and more effective than Provenge. That doesn't mean that Provenge
isn't valuable. All that said, Dendreon is now at roughly $11 a
share, and could get acquired for $17 to $25 a share. So there is
money to be made here, no question about it.
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E-mail: johanna.bennett@barrons.com