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Latest Issue Of Hidden Value Stocks Is Out! 23%+ Returns

Our Q3 2017 issue is finally out and we think readers will enjoy –  please check it out below. First is the teaser which everyone can read and send to your friends. Followed by the full version for all premium readers. You can check out our new landing page here (this is how much we love our readers we even made a goofy video for you all!) if you would like to get a free 7 day trial to learn what everyone is talking about. You can refer a friend and for each member you get $100 off your membership or $50 in cash if not a member. Refer a firm and make thousands!

Check out 23%+ returns – that is not a back test nor cherry picked – it is all equal weighted- those were the returns generated by the manager picks profiled and timed from when the interview was conducted with some up over 200%. Not bad!

Also readers can check out our new case study on small cap investing below, as well!

Full latest issue

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Updates From Stanphyl

Some of the latest from Stanphyl’s letter sent to investors on 9/29/2017 – tickers and data redacted for regular users but available for premium members below. Enjoy and let us know if you have any questions.

I added a bit in September to our position in REDACTED REDACTED after it reported a decent FY 2017 Q3 with year-over-year revenue up 6% and operating income roughly flat. REDACTED has hired an investment bank to “explore strategic alternatives”—in other words it has put itself up for sale, and thanks to its 52% (full year) gross margin and potential for large SG&A eliminations if it weren’t an independent public company, I think REDACTED should be sell-able to a strategic buyer at a significant premium to the current price; for example, an enterprise value of 1.25x 2016 revenue would be over $12.50/share, while a “worst case” scenario of 1x revenue would still be around $10/share. The company reports that the sale process is REDACTED .

We continue to own REDACTED REDACTED company with approximately REDACTED of annual 56% gross margin revenue and approximately a zero enterprise value. In August REDACTED reported slightly improved Q2 2017 revenue of REDACTED vs. Q1’s REDACTED and guided to a flat Q3, with operating cash burn continuing at around $1 million per quarter. REDACTED is now focusing its growth on “smart” commercial & municipal LED lighting as its fab-less chip business has long been in gradual decline, and if the lighting business accelerates (and it could, due to recent sales force hires and new products), I think there’s a chance it can hit a break-even annualized revenue run-rate of $40 million by late 2018 (pushed back from my earlier hoped-for timeline) at which point—assuming REDACTED of remaining net cash (vs. $21 million today) and REDACTED , an enterprise value of 1x revenue on this 56% gross margin company would put the stock at around $12/share. Additionally, Echelon has approximately $255 million in federal NOLs and $127 million in state NOLs, worth tens of millions of dollars if it can utilize them. So if it can pull this off (and theoretically, the market for the REDACTED should be huge between the U.S. and Europe), this stock can be a home run for us. So far though (as noted above) there seems to be little sign of improvement, although revenue at least seems to have stabilized and that flush balance sheet does give it a long runway to succeed. In September the company hired a new REDACTED ; let’s see if he does any better than the last guy.

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The Small-Cap Investing Handbook Part One: Introduction

This is the first part of what will be a ten part series on small-cap investing.

Throughout this series, I’m going to take a look at both the benefits, and drawbacks of investing in small caps, considering all of the evidence available to us today for both sides of the debate.

When completed we are planning to turn the series into an e-book, which we hope will be a comprehensive guide to investing in small caps.

The series is a collaboration between ValueWalk and ValueWalk’s new small cap investing magazine Hidden Value Stocks.

Hidden Value Stocks is a quarterly publication which profiles two top-notch small-cap focused hedge funds in each issue. Within each issue, the managers discuss their investing process as well as to small-cap ideas each. To find out more, head over to www.hiddenvaluestocks.com.

 

small-cap investing
small-cap investing

The Small-Cap Investing Handbook Part One: Introduction

Small-capp stocks have a reputation that’s not necessarily good but at the same time, it is not necessarily bad. The majority of the world’s most renowned investors started their early careers by investing in small caps.

The reason why is because the likelihood of the market mispricing securities in the small-cap arena is much higher than with blue chips. Blue-chip stocks tend to be well covered by Wall Street analysts and owned by the largest funds. Small caps, on the other hand, are generally overlooked by Wall Street as it’s not lucrative enough to produce coverage on smaller names.

As a result, some small caps fly completely under the radar of most investors, and it’s here where the largest mispricings exist.

Small-cap investing – Building wealth

Warren Buffett is perhaps the most famous example (barring his tutor Benjamin Graham) of an investor who has used small caps to make a name for himself. In his early days, Warren Buffett made millions for his investors by investing in such names as Dempster Mill and Sanborn Map. Both of these examples were trading at a deep discount to net asset value when Buffett became involved because Wall Street had no idea of how much they were worth. Warren Buffett took the time to do the legwork and was richly rewarded as a result.

Peter Lynch is another investor who made a name for himself in the small-cap arena. Lynch is considered to be one of the greatest money managers of all time and he achieved this accolade by finding small-cap companies that weren’t yet on institutional investors’ radar.

Lynch firmly believed that individual investors had inherent advantages over large institutions because the large firms either wouldn’t or couldn’t invest in smaller cap companies that have yet to receive big attention from analysts or mutual funds.

Still, while Buffett and Lynch have made names for themselves by investing in small caps, investors should be under no illusion that small-cap investing is easy.

It is considered (although as you will see later not entirely factually correct) that because small caps can produce high returns than the market, investing in small caps comes with greater risk. Even though the evidence does not support this statement 100%, it is an important observation.

Unloved small caps can outperform because they fall under the radar of larger investors and research houses. However, because these small caps are not well researched, it is vital that you conduct your own rigorous due diligence. It’s here where most investors trip up.

The 25 Best Personal Finance Books To Read This Year

Both Warren Buffett and Peter Lynch are known for their researching ability. Buffett is known for his love of figures and continual study of company earnings reports, while Lynch was known for his hectic travel schedule to visit company managements when he was running the Fidelity Magellan Fund from 1977 to 1990.

Yes, small caps can outperform the market, but unfortunately, these premium returns don’t come easy.

Can small caps outperform?

The first study that seemed to suggest small caps can outperform appeared in 1980. Titled “The Relationship Between Return And Market Value Of Common Stocks” the study found that smaller firms have higher risk-adjusted returns, on average, than larger enterprises and this ‘size effect’ has been in existence for at least 40 years.

To arrive at this result, the relatively simplistic study broke companies down into market capitalization deciles and found that companies in the lowest decile and the higher returns, after adjusting for conventional risk. Figures showed that the average excess return from holding very small firms long and very large firm short is, on average, 1.52% per month or 19.8% on an annualized basis.

By replicating the above study and extending the sample period through to the end of 2014, Aswath Damodaran professor of corporate finance and valuation at the Stern School of Business at New York University found that this small-cap performance anomaly has continued with companies falling into the lowest decile during the period 1926 to 2014 earning 4.33% more than the market after adjusting for risk.

The 1980 small-cap study has been used again and again as the basis for other academic studies on the topic and by actively managed small-cap funds in marketing materials. But today, there’s a growing debate over whether or not the small-cap premium actually continues to exist or if it has been arbitraged away by those seeking to profit from this market anomaly.

Houston Wire and Cable Company: Not For the Faint Hearted

With earnings closely linked to capital and infrastructure spending in the economy, Houston Wire is a stock meant only for the long term players.

The Houston Wire and Cable Company (HWCC) has been in business for over 40 years, with a history marked with successful IPO’s, and a number of mergers and acquisitions. Operating in an industry heavily linked to capital investment in the economy, HWCC and its peers have recently seen a drop in demand, and resultantly, a decline in sales and earnings. The company, in proportion to its size, seems to be suffering significantly more than its peers.

Houston Wire: Business Overview

HWCC is one of the largest providers of electric and mechanical wire and cable, hardware, and related services, in the USA. The company provides a single source solution to its customers, with an unparalleled variety of products available in stock. While most of its competitors operate within a limited geography or product category, HWCC provides an unmatched depth and breadth of product, with nationwide delivery within 24 hours. This business model, while may provide a USP to the company, can become a burden when times are tough. High levels of inventory, large warehouses, and a widespread distribution network can hurt the balance sheet when sales aren’t going as planned – exactly what is happening with HWCC.

HWCC serves utilities, industrial and infrastructure markets. One-third of the company’s revenues are dependent on activity in the oil and gas sector, where investment has been on a continuous decline for two years now. Similarly, the Capital Projects and Infrastructure (CP&I) spending in the USA has been on a decline since its peak in 2014, and according to PWC, is expected to fall further in 2017 before finally rising again.

Financial Performance

In this scenario, it is not surprising that sales for HWCC have been on a downward trend since FY’15, with annual sales dropping 21% versus the previous year, and sales for 3QFY’16 dropping 17% versus 3QFY’15. HWCC is hurt by the downturn in the economy, more than its peers, with the industry average decline in sales standing at 4% for 3QFY’16. Gross margins for HWCC stand at 18% for the most recent quarter, compared to the industry gross margin of approximately 30%. This difference in cost structure, while may not affect the company’s financials in economic booms, explains why the company is unable to cover its fixed costs when sales are on a decline. While total operating expenses for 3QFY’16 have decreased versus the same period last year, this decrease is not proportionate to the decrease in sales, resulting in a net operating loss of $1.8 million (-3% of sales). As operating expenses consist largely of salaries and other fixed costs, this result is not surprising. Earnings for 3QFY’16 show a loss of $0.09 per share, compared to earnings of $0.04 during the same period last year.

The company’s liquidity position has consistently remained strong, with the current ratio in 3QFY’16 standing at 5.3, more than double the industry average, and in FY’15 at 6.5. The strong current ratio, as well as its decline, can be attributed to inventory levels which are generally high. There has been a 16% drop in inventory during the first nine months of the year, which combined with the reduction in accounts receivable and trade payables (due to reduced sales), has led to the size of the balance sheet reducing by 12% versus FY’15.

HWCC has more long term debt than its peers, but stands stronger where total debt to equity is concerned. The long term debt to asset ratio stands at 20%, in 3QFY’16, down from 25% in FY’15, and is at its lowest levels since 2010. While the company may have more debt than peers, it is in a strong position to meet its financial obligations, with the TIE ratio equal to 14 times (almost three times the industry average). The company’s cash position, while deteriorating versus previous periods, is strong, with a healthy cash flow from operations despite operating losses.

Market Performance

The market, however, doesn’t appear to have positive expectations from HWCC. The company’s stock price has been on a steady decline since the beginning of FY’15, losing more than half its value since then. There is little liquidity in the market with respect to trading volumes, with an average 3-month volume at 41.5 thousand shares. The one-year target price is in the range of $5-6, a drop versus the current price of $7.

If we look at the BV per share, we see this at $5.6 per share, with a P/B ratio of 1.1 (3QFY’16). With the industry trading at a P/B value of 1.8, we see that the market is undervaluing HWCC. The company seems to agree that the stock is undervalued, and has repurchased 91.5 thousand shares between July and September 2016.

The stocks beta against the NASDAQ is 0.15, indicating its strength as a tool for diversification. With returns that have little to no correlation to the market, it provides a buffer when the market behaves against expectations.

Future Outlook

While HWCC has made little capital investment in recent periods, and growth opportunities seem limited, the company recently announced the acquisition of Vertex, a leading master distributor of industrial fasteners, for $32 million. This acquisition ties in with HWCC’s business model and strength in master distribution and indicates management’s positive outlook for the future.  

With CP&I spending expected to increase beginning from 2018, it is obvious that the HWCC stock is not about to provide you with immediate returns. If you are looking to make a quick buck within the next few months, or even a year, this is not the stock for you. However, if you play it out for the long term, sit through the economic downturn, and wait it out 3-5 years, you may just have a winner on your hands.

Interested in ideas?

If you’re looking for more ideas, why not subscribe to our quarterly publication Under the Radar Small Caps.

Take a look at this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here.

Severn Bancorp: Having Weathered The Storm The Bank Is Now Set For Growth

Severn Bancorp (Nasdaq: SVBI), parent company of Severn Bank, is one small cap company to keep your eyes on. Based in Maryland, Severn designs its products and services to meet the needs of the Chesapeake Bay Region (Maryland, Delaware and North Virginia).

One might wonder if the targeted region is large enough to draw the attention of sophisticated investors. The answer would be yes. Severn is a prime example of what many call a “lean and mean” organization. Severn appears to have a bright future that is built upon a storied past.

Severn Bancorp: Weathering the storm

Founded way back in 1946 as a building and loan company, Severn has widened its scope of business to include certificates of deposit, retirement accounts, personal checking accounts and commercial checking accounts. Severn is also a community mortgage lender, providing funds for everything from purchasing to construction, rehabilitation and refinancing, with a special focus on Anne Arundel County.

In 2008, like hundreds of U.S. community banks, Severn was forced to turn to the TARP program to keep their doors open, selling 23,393 original shares of preferred stock to the U.S. Department of the Treasury. The high-interest rate (5% initially then 9% in 2013) took its toll on many banks, forcing them out of business altogether, but Severn endured. In 2009 they also benefited from Dodd-Frank and were released from all agreements with their regulators.

In 2016 the company issued a private placement offering that enabled them to restructure their debt and pay off the remaining TARP balance. Severn sold 2 million shares of common stock at the price of $5.50 for a total of $11 million, lowering the debt costs and paying all accrued and unpaid interest and preferred dividends, propelling the company forward. The bank is now well-capitalized having reduced their cost of funds and improved their financial strength.

In recent years Severn bolstered its management team with two additions that have proven to be solid choices. First, in 2015, they brought in Christopher Chick as Chief Lending Officer. Chick has won many awards in his career, serves on many boards and committees and offers expertise in one of Severn’s most crucial areas – lending. In 2016 the company added Paul Susie as EVP and CFO. Susie has years of experience in both managing and growing companies of similar size and scope. Both men show the company’s commitment to the future.

All of these changes, along with continued management discipline, has led to a steady rise in valuation. Just a few years ago, in 2012, stock was selling at $2.60. Today, the price is hovering around $7.50 and has been steadily rising. The company has seen nine consecutive quarters of profitability.

Management is key

Part of Severn’s long-term stability comes from the leadership of Chairman and President Alan Hyatt, who has been in this role for nearly forty years. Hyatt has built a reputation throughout the region with local small and midsize businesses that rely on Severn’s community style customer service. With Severn, you get the feel of a Nasdaq corporation with the experience of a small bank.

The last few years have seen Severn not only survive, but grow. They are as healthy as they have ever been and gaining further strength daily, as the stock price would indicate. The company is growing at a rate of roughly 10% annually. Year against year pricing shows January 13, 2016 at $5.30 and January 13, 2017 at $7.50. Severn appears to be making the right moves at the right times, all of which is the result of sound financial strategy and tactics.

Only the board knows what the future plans look like. Will they continue to focus on their existing market? Will they expand their territory, products and services? Or, will they seek to be purchased. My guess is the latter. Either way, the stock seems to be healthy with a lot of upside potential.

Interested in more ideas?

If you’re looking for more ideas like Severn, why not subscribe to our quarterly publication Under the Radar Small Caps. Within the report we discuss four potential small-cap ideas with hedge fund managers.

Take a look at and download this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here.
One fund manager in the previous issue returned 85% for his investors last year!

Severn Bancorp: Having Weathered The Storm The Bank Is Now Set For Growth

Severn Bancorp (Nasdaq: SVBI), parent company of Severn Bank, is one small cap company to keep your eyes on. Based in Maryland, Severn designs its products and services to meet the needs of the Chesapeake Bay Region (Maryland, Delaware and North Virginia).

One might wonder if the targeted region is large enough to draw the attention of sophisticated investors. The answer would be yes. Severn is a prime example of what many call a “lean and mean” organization. Severn appears to have a bright future that is built upon a storied past.

Severn Bancorp: Weathering the storm

Founded way back in 1946 as a building and loan company, Severn has widened its scope of business to include certificates of deposit, retirement accounts, personal checking accounts and commercial checking accounts. Severn is also a community mortgage lender, providing funds for everything from purchasing to construction, rehabilitation and refinancing, with a special focus on Anne Arundel County.

In 2008, like hundreds of U.S. community banks, Severn was forced to turn to the TARP program to keep their doors open, selling 23,393 original shares of preferred stock to the U.S. Department of the Treasury. The high-interest rate (5% initially then 9% in 2013) took its toll on many banks, forcing them out of business altogether, but Severn endured. In 2009 they also benefited from Dodd-Frank and were released from all agreements with their regulators.

In 2016 the company issued a private placement offering that enabled them to restructure their debt and pay off the remaining TARP balance. Severn sold 2 million shares of common stock at the price of $5.50 for a total of $11 million, lowering the debt costs and paying all accrued and unpaid interest and preferred dividends, propelling the company forward. The bank is now well-capitalized having reduced their cost of funds and improved their financial strength.

In recent years Severn bolstered its management team with two additions that have proven to be solid choices. First, in 2015, they brought in Christopher Chick as Chief Lending Officer. Chick has won many awards in his career, serves on many boards and committees and offers expertise in one of Severn’s most crucial areas – lending. In 2016 the company added Paul Susie as EVP and CFO. Susie has years of experience in both managing and growing companies of similar size and scope. Both men show the company’s commitment to the future.

All of these changes, along with continued management discipline, has led to a steady rise in valuation. Just a few years ago, in 2012, stock was selling at $2.60. Today, the price is hovering around $7.50 and has been steadily rising. The company has seen nine consecutive quarters of profitability.

Management is key

Part of Severn’s long-term stability comes from the leadership of Chairman and President Alan Hyatt, who has been in this role for nearly forty years. Hyatt has built a reputation throughout the region with local small and midsize businesses that rely on Severn’s community style customer service. With Severn, you get the feel of a Nasdaq corporation with the experience of a small bank.

The last few years have seen Severn not only survive, but grow. They are as healthy as they have ever been and gaining further strength daily, as the stock price would indicate. The company is growing at a rate of roughly 10% annually. Year against year pricing shows January 13, 2016 at $5.30 and January 13, 2017 at $7.50. Severn appears to be making the right moves at the right times, all of which is the result of sound financial strategy and tactics.

Only the board knows what the future plans look like. Will they continue to focus on their existing market? Will they expand their territory, products and services? Or, will they seek to be purchased. My guess is the latter. Either way, the stock seems to be healthy with a lot of upside potential.

Interested in more ideas?

If you’re looking for more ideas like Severn, why not subscribe to our quarterly publication Under the Radar Small Caps. Within the report we discuss four potential small-cap ideas with hedge fund managers.

Take a look at and download this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here.
One fund manager in the previous issue returned 85% for his investors last year!

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