Somewhat off-topic, but interesting read......
-SAN FRANCISCO (CBS.MW) -- Individuals are itching to get a piece of the rally that has driven prices of small-cap stocks 18 percent higher in the past three months.
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Micro-cap companies, those penny stocks that are far off Wall Street's radar screen, have done even better this spring, in many cases doubling and tripling in value.
For many of the smallest companies, the rush to purchase risky securities has been a boon, bringing new shareholders to replace the ones that owned shares at far higher, Internet boom prices.
"There are so many stocks out there that people used to own at $20 or $40, or more, and now they're saying, 'Well, this company has far greater revenue, its expenses are cut in half, and it's defending its position in its industry,' " Douglas McIntyre, chief executive of video software maker On2 Technologies (ONT: news, chart, profile), told me Wednesday morning.
"Oh, and its stock is a buck, or two bucks," said McIntyre, whose On2 traded as high as $40 after a 1999 initial public offering. On2, which is developing video-on-demand software for chipmakers such as Philips and Texas Instruments, has shares that sell for less than $1.
The so-called micro-caps and nano-caps -- with market caps less than $100 million -- are causing investors to turn their heads toward an arena once given up for dead: highly speculative, cash-hungry companies that could dominate their fledgling industries, if only they got that one contract that could put them in the big time.
For every company with a stock price that has doubled or tripled since the small-cap rally that began in March, there is at least one that has gone nowhere, or traded in a choppy fashion that would make the most seaworthy investor queasy.
McIntyre, speaking to me from New York, pointed to the shares of another video software company, Loudeye (LOUD: news, chart, profile). "Loudeye used to be, what, a $46 stock, and it sold for as little as 20 cents. At the low end of their historical trading ranges, individuals are starting to carve out a little piece of their portfolios to make room for survivors," he said.
Loudeye shares rose sharply this week when the company said it would provide digital media and distribution services for The Orchard, a distributor of non-major label music. Loudeye will encode, process and distribute more than 120,000 songs in The Orchard's music catalog. Loudeye shares now trade for $1.65, up 30 percent Wednesday morning.
"These guys have had news, but none of it with dollars attached since they reported their Q1 loss," says McIntyre. "They now have a market cap over $80 million. It's an interesting market again."
The ups and downs are not easy to tolerate for individuals.
Drug developer Amarin Corp. (AMRN: news, chart, profile), for one, is riding tremendous waves of both optimism -- over a pipeline of promising nerve-disorder drugs that could treat Parkinson's and Huntington's disease -- and pessimism, over increased generic-drug competition and the London/California company's need to raise capital.
Amarin shares, profiled in The Calandra Report, lost ground this week after the company reported a sharp drop in quarterly sales of its No. 1 product, Parkinson's treatment Permax. The stock drop came even though Amarin, a $30 million company that is on track to become a specialized marketer of nerve-disorder drugs in the United States, warned more than three months ago about the "substantial charge" it would have to take as it reviewed the Permax generic competition.
Such are the stakes for companies whose sub-$100 million stock-market values fluctuate wildly on news-driven price swings.
Still, the micro-caps in my view have plenty of room to run this year. Driving the group in part will be the 8 percent or so yearly growth of America's M3 money supply, a growth in cash supplies that will provide -- for better and worse -- steady liquidity for investor speculation.
In March, in The Calandra Report, I detailed a portfolio of small-cap companies that would benefit greatly from a springtime liquidity rally and the ability to reverse years of financial losses. I expect many of the newest additions to that small-cap and micro-cap list to add to their heady gains as they post quarter-to-quarter gains in profits and large increases in gross margins.
To be sure, I also must live with my pronouncement, made last year, that America's largest stocks would suffer from their bloated market values and a tepid economy. Large stocks, as measured by the S&P 500 Index, are lagging small-cap stocks (SML: news, chart, profile) by just two percentage points since early March.
In other words, the collapse of the Dow Jones Industrials giants has yet to take place -- as I was almost certain it would. For that, I must live with the consolation that America's smallest companies, including those in Canada, are off to the races, reflating the value of individuals' long-depressed holdings.
Are there still discounts to own in the world of the small? Yes. A featured stock on The Calandra Report Recommended List, Royce Micro Cap Stock Fund (OTCM: news, chart, profile), has gained 18 percent since first making the list at $8. Yet the closed-end fund, which specializes in manager Chuck Royce's careful selection of well capitalized but microscopic-sized companies, still trades at a 9 percent discount to its net asset value.
Royce's shares on Nasdaq Wednesday were selling for $9.50, $1.01 below the $10.51 net asset value of the fund posted by Nasdaq the night before. The discount has narrowed only slightly in the small-cap rally. The Royce trust, which pays quarterly dividends, buys shares of companies that are worth $400 million or less.
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