PSB Portfolio Update May 2014

May 15, 2014

Small Caps Diverge From Large Caps As Investors Seek Safety

Despite today’s drop, the S&P 500 had a fairly boring last month.  Still, the benchmark index is up about 3% from the time of our last update.

The same can’t be said of small cap stocks, as measured by the Russell 2000.  In contrast, the small cap benchmark is down a percent over the month, equating to over a 4% divergence from large cap names.

Why the big difference?  In a word, risk.

For various reasons, investors have been in risk-off mode for much of the year.  Momentum names from 2013 have sold off hard, along with small and micro cap stocks.

Instead, investors are gobbling up income stocks, proven-earnings companies, and bonds. It’s a fairly typical safe-haven rotation.

The rotation isn’t even about the US economy, which is looking as strong as it’s been in quite some time.  As the economy creates jobs and consumer spending increases, rates are still expected to remain low.

More likely, investors are concerned with geopolitical risk – especially with the conflict between Ukraine and Russia boiling over into actual fighting.  Plus, it doesn’t help that China’s economy continues to struggle.

Several stocks in our portfolio have pulled back with the risk-off trade in full swing.  Other positions have held their ground.  We’ll be looking to trim some of our holdings in the next few months and pocket some gains.  In addition, we may cut some of our losers that seem to be in the most precarious situations.

On the bright side, small cap selloffs tend to make for attractive buying opportunities. We’re almost certainly going to get the chance to add some excellent stocks to our portfolio this year.

Now, let’s take a closer look at some of our positions.

Position Updates

Please Note:  We don’t necessarily update every open position each month.  We focus on the positions experiencing significant news, notable price movement, or a change in recommendation.  Please refer to the Performance page on our website for our current buy, sell, or hold recommendation for any positions not mentioned in the Update.

. . . . MicroFinancial (NASDAQ: MFI) – Buy up to $8.60

Despite the pullback in small cap names, MFI has held its ground fairly well.  The share price has mostly traded within a sixty-cent range since our purchase.

However, we’ve already reaped some benefits from MFI in the form of a dividend.  On May 1st, the company issued a $0.07 dividend, effectively lowering our buy price to $7.96.

While it’s not a huge dividend by any means, every little bit helps.  Over time, those dividends collected can really add up.  Moreover, it’s unusual for small cap stocks to issue dividends, so companies like MFI can be hard to find.

Finally, MFI is still trading at a very cheap valuation.  This stock could provide the rare benefit of being a growth and income position.  As such, buy your shares up to $8.60 if you haven’t yet done so.

. . . . Odyssey Marine Exploration (NASDAQ: OMEX) – Hold

OMEX has been quite volatile lately, which isn’t necessarily a shock for a company in the business of finding shipwrecks.

The share price pulled back hard on earnings news.  The company missed earnings expectations and appears to be burning cash at an alarming rate.  On the other hand, OMEX also just recovered 1,000 ounces of gold from a key shipwreck.

Basically, as soon as the gold is appraised, the company can start securing money for their findings.  That should significantly alleviate any current cash flow problems.

And don’t forget, this company’s financials are going to be volatile from quarter to quarter based on the type of business it’s in.  Don’t worry too much about the most recent numbers.  Focus on the shipwrecks.  If gold continues to be recovered, OMEX will be more than fine.

Hang on to your OMEX shares for now.

. . . . Aceto (NASDAQ: ACET) – Sell

ACET is one of the oldest positions in our portfolio.  In fact, we’ve held on to this big winner for two years – all that time collecting dividends and watching our profits grow.

Nevertheless, with the pressure on small caps these days, we feel it’s a good idea to take some profits off the table.  At the current price, we’ll be pulling in a whopping 132% gains on this position!

As you can see, finding a stock that grows and pays dividends can net quite the gains. We’re locking in excellent, non-volatile gains on ACET in just two-years’ time.

Action To Take

• Sell Aceto (NASDAQ: ACET)

 

Category: PSB Portfolio Updates