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John Del Vecchio’s Small Cap All-Stars

Portfolio

Note: If a stock has gone beyond my buy-up-to price, do not buy into that position. Wait for me to issue a new recommendation, or wait for the stock price to come down. Only have 10 to 12 stocks in your portfolio at one time, and don’t put any more than 8.5% to 10% of your money into any one monthly portfolio recommendation. Only put 2% to 3% of your money into my Special Report recommendations. If a position doesn’t have a “Close Price,” it’s still active and we’re still tracking it. Can’t see the portfolio? Try the print preview

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A Tip That May Tell Us the Bottom Is Close (click to expand)

March 24, 2020

Market sentiment remains in the dumps and we are way overdue for a bounce. A healthy bounce. While stock prices were deflating, volatility was building its own bubble. A quick look at the VIX shows historic moves.

People are scared. That’s only natural.

An interesting thing started to happen though in the last few days. Even as stock prices slid some more, so did volatility. Now it’s collapsing from its oversold situation. Some of the short-term exchange traded products that bet on volatility have collapsed by 75% or more in just a few days.

No one knows where the bottom will be. Except, of course, liars.

Stock prices are moving around at a frenetic pace. When that happens sometimes it’s best to do nothing and wait for the dust to settle. Smart money comes in to buy. For sub-$10 small caps stocks, it doesn’t take a lot of buying power to move prices back up. Back up a lot.

I have been hesitant to introduce new positions during a pandemic. We’ve not been through anything like this before. However, one version of the Small Cap All-Stars model I created is hedged. As I review my models each week, they were telling me “go slow.” I listened. So, I went slow.

If you think of the model as 10 positions, then we are underweight and in cash in a portion of the portfolio. That’s right where we wanted to be.

The bounces in bear markets are dramatic. Depending on how things play out, it may present the opportunity to take off positions and reduce risk further. I suspect that’s the most likely scenario because the information about the pandemic is fluid.

What could be a tip that the bottom is close? When the news is awful and stocks go up anyway. Not just in one or two days, but a more sustainable move higher.

Wall Street strategists are throwing numbers out there like 30-40% hits to GDP. Maybe that happens. If it does, we probably have bigger concerns than the stock market. But, the level of bearishness is reaching the highest level I have seen in 22 years.

For now, we continue to be patient. In the meantime, I hope you and your loved ones stay well.

John


A Bit of Perspective (click to expand)

March 18, 2020

This week there’s no trades. First, and most importantly, I pray that you and yours are well and safe. Our health is far more important that the craziness of the stock market.

The markets are deeply oversold. These are historic levels.

I started my career on Wall Street in 1998. By 2000, I was positioned on the short side and then managed my first hedge fund to exploit the collapse of Internet stocks by 2002.

When 2007 rolled around, I went back into the hedge fund game to short the market and regional banks with exposure to goofy real estate markets.

While those periods were volatile and scary for the markets, they pale in comparison to what has happened in the last couple of weeks.

It’s not even close.

Measures of overbought / oversold conditions that have been around forever, have never been this oversold. Right now we are far more oversold than in 2008.

What’s more is that the markets are all or nothing. At the end of last week, there were eight straight days of gap openings in the market. The five-day average was the widest in history. The put / call ratio was pressing multi-decade highs. Huge money has been flowing into money market funds as investors look for places to stash cash from all of the selling.

In normal times, these conditions would have a huge bounce higher. Of course, we don’t live in normal times. But human nature never changes.

In the end, it could get worse before it gets better. No one really knows. I became very bullish in December 2008. The market didn’t bottom until about two and half months later. That was a painful period as I was “wrong” for a bit. When the market did bottom, the bounce was also historic. I have a strong feeling the same thing will be the case this time around.

I’m not going to panic. I hope you don’t either.

John

Trade Alert: NetSol Technologies, Inc. (Nasdaq: NTWK) (click to expand)

March 13, 2020

This week there’s a new trade. The wild ride has continued on Wall Street. There are now extreme measures of fear felt by both individual and professional investors. Gauges that measure the sentiment of both groups are extremely pressed on the fear side right now.

Under normal circumstances, that’s the time to step in and buy stocks big-time. Of course, we are far from normal times. That said, the market is overdue for a bounce, even if it is short-term.

On to the trade!

This week, the model is buying NetSol Technologies, Inc. (Nasdaq: NTWK). NetSol designs, develops, markets, and exports software products to the automobile financing and leasing, banking, and financial services industries worldwide. It also provides system integration, consulting, and IT products and services. The company offers NetSol Financial Suite (NFS), an end-to-end solution covering leasing and finance cycle for the asset finance industry; and NFS Ascent platform, a lease accounting and contract processing engine.

Action to take: Buy shares of NetSol Technologies, Inc. (Nasdaq: NTWK).

Like most stocks, NetSol has taken it on the chin recently. Pretty much everything has been bashed. Very little of the selling has much to do with long-term values and fundamentals.

Over the last 12 months, the company has seen improvements in earnings quality and cash flow quality. Cash flow exceeds net income over the trailing 12-months by almost $1 million compared with an $8 million short fall in the prior year. Owner’s Earnings, Warren Buffet’s measure of free cash flow, has swung to positive $1.9 million from a $204K loss. Free cash flow stands at $11 million. That’s up from $2.2 million a year ago. Trailing 12-month cash flow return on invested capital is 16%. That’s up from 3.4% last year.

In all, there’s little risk that the company’s accounts have been manipulated.

A lot of stocks are cheaper that they were a couple of weeks ago. But NetSol’s valuation suggest significant upside from today’s price. The cost for a competitor to replicate NetSol’s business suggest it’s worth about $6.60 a share. That’s more than double today’s share price.

In addition, NetSol compares favorably to its sector based on traditional valuation methods such as Price / Earnings and Price / Sales.

Finally, virtually every operating metric below positions NetSol well to its competitors.

Chart

Action to take: Buy shares of NetSol Technologies, Inc. (Nasdaq: NTWK).

John


Take a Deep Breath and Stay Calm (click to expand)

March 4, 2020

There’s no new trade this week.

Everyone needs a breather…

Unless you have been hiding out in your Doomsday Bunker without access to what’s going on in the real world, then you’re well aware of the new coronavirus and the havoc it has wreaked on markets. Not just here in the U.S., but across the globe stocks have taken it on the chin.

The effect of the coronavirus has had on stocks is historic. Never has the market gone from new highs to a correction (stocks down 10% or more) in such a short period of time. Of course, stocks tend to fall faster than they go up. Interestingly, it appears as though investors largely ignored the warning signs as the virus has been an issue for at least a few months. Now it’s spreading. The number of cases in different regions is growing rapidly although the overall numbers are still small.

There’s no doubt that this outbreak will have an impact on the economy. It could be a big one. No one really knows. Something of this nature with such huge potential hasn’t happened in 100 years. It’s a bit of a Black Swan, although this sort of thing didn’t completely come out of left field.

When SARs was an issue, it was before social media. So, the potential for mass hysteria and misinformation was much lower than today.

What mass hysteria, you ask?

Consider that the sales of Corona beer are plunging. The beer has nothing to do with the virus, and yet a PR firm conducted a study that suggested 38% of beer drinkers wouldn’t drink a Corona under any circumstances. About 14% of respondents said they wouldn’t order a Corona in public. Only about 4% of regular Corona drinkers have stopped drinking the beer. But 16% of those surveyed are confused about the link between the beer and the virus.

Corona has pushed back. The damage may already be done. News travels too fast in today’s world. Even fake news.

I find that last statistic the most interesting. I wouldn’t order a Corona in public either. That’s because I don’t like Corona beer. It has nothing to do with a virus or mass hysteria. But, when 16% of those surveyed are too lazy to even do a little digging to find out more about the virus, well, it makes me feel sorry for humanity. It makes you wonder what the effects are elsewhere.

It’s not rational.

The market needed a bounce. It certainly bounced big-time on Monday. Expect more volatility going forward. But the moves of last week hammered mostly all stocks.

Patience is key here. It’s the time to take a deep breath. It will all work out in the end.

Happy trading,

John


Trade Alert: Allot, Ltd. (Nasdaq: ALLT) (click to expand)

February 26, 2020

This week there’s a quick trade. We are closing out a winner.

Allot, Ltd. (Nasdaq: ALLT) made a big move recently from just under $10 to nearly $13. It was a clear breakout on the chart. However, momentum has recently been lost. And, it’s time to book the gain. The Coronavirus scare didn’t help (any stocks really), and computer models such as Small Cap All-Stars don’t make adjustments for what could be one-time factors.

So, the loss of momentum is recognized, whatever the reason, and the trade exited.

Action to take: Close position in Allot, Ltd. (Nasdaq: ALLT).

Happy trading,

John


Trade Alert: Intevac, Inc. (Nasdaq: IVAC) (click to expand)

February 19, 2020

I hope everyone had a nice Valentine’s Day and President’s Day this past week. Small Cap All-Stars’ belated Valentine’s Day present to you is a new trade. Let’s hope it’s a sweet treat for your brokerage account.

Intevac, Inc. (Nasdaq: IVAC) provides vacuum deposition equipment for various thin-film applications, as well as digital night-vision technologies and other products for the defense industry in the United States, Asia, and Europe.

The thin-film is used in hard disk drive media, display cover panels, and the solar industry. The photonics segment develops high-sensitivity digital sensors, cameras, and systems that are applied in the defense industry. It also provides integrated digital night-vision imaging systems.

Action to take: Buy shares of Intevac, Inc. (Nasdaq: IVAC).

Why Intevac?

The photonics side is the heady grower. Last year revenues grew 37%. The company received a $40 million order from the U.S. government and its backlog increased to $71 million. That’s up 62% over the past year.

In the last quarterly conference call, management noted that visibility of financial performance in it’s thin-film business has become murky and some revenues may be pushed late into the second quarter. As a result, the stock price took a hit on the news despite a strong showing for the current quarter.

After years of losses, Intevac’s free cash flow has turned sharply in the green. Over the past 12 months, the company has nearly topped $10 million in free cash flow. Cash flow return on invested capital has also been surging. It had dipped into negative territory for a few years, before hovering flat in 2018. But over the last year, cash flow return on invested capital has topped 10%.

Meanwhile, Intevac scores among the top smaller companies in earnings quality. Operating cash flow now exceeds net income. In addition, there’s little risk of earnings manipulation for the stock.

The company’s balance sheet is in good shape with over $36 million in cash, no debt, and working capital accounts under control.

Intevac also represents a good value in a pricy market. A discounted cash flow analysis that haircuts growth expectations by 20% produces a share estimate above $9.00. That’s about a 30% gain from here.

From a technical perspective, the stock has been in a massive uptrend since last summer. The rally peaked in mid-January. After a sharp pullback, the stock is starting to bounce. This provides a good setup to get long the stock and see if it can’t take out the previous move’s high of $7.50 and head to bluer skies.

Action to take: Buy shares of Intevac, Inc. (Nasdaq: IVAC).

Happy trading,

John


Trade Alert: Information Services Group, Inc. (Nasdaq: III) (click to expand)

February 11, 2020

This week, we have a new trade. As was the case last week, this was another position that was recently closed.

When I tweaked Small Cap All-Stars about six months ago, I expected this to happen more often. The idea is to get out of stocks not working and if the ship somehow gets righted while we’re on the sidelines, we jump back in.

Given that these stocks can be very volatile, I would expect that to happen very often.

Both of the two trades we’ve put back on are a bit frustrating. In the case of PC Tel, Inc. (Nasdaq: PCTI), shares had a huge move up after the position was closed for a modest 15% gain.

This week, Information Services Group, Inc. (Nasdaq: III) is back in the model after a modest loss the last time around. The stock surged yesterday, breaking out, and putting everything back in gear.

It’s frustrating to the extent that it makes it feel like you’re missing out. “If only I had just hung on, then I’d be up on the position and its clear skies ahead.” I know that feeling all too well. But, it’s “coulda, shoulda, woulda” type stuff. Your mind tends to ignore the stock you did get out of, stayed out of, and then it went down another 50% after that. Saving that loss is more important than not missing out on getting whipsawed to the upside.

Action to take: Buy shares of Information Services Group, Inc. (Nasdaq: III).

So, III is an All-Star again after a brief break. Since nothing really changed, other than price by a few percentage points, I’m going to include the original write up below.

Here’s what I wrote on January 8 of this year:

Information Services Group, Inc. (Nasdaq: III) provides technology research and consulting to a variety of industries. For example, the company serves the defense, banking, chemicals, and consumer goods industries. Information Services Group provides cloud-based solutions to help clients analyze trends in real-time relative to competitors and optimize the IT department for increased productivity and quality.

Information Services Group’s earnings quality is solid and there’s virtually no risk of manipulation by management. Cash flow return on invested capital is moving back up and around. Over the past 12 months, it hit 8.6% compared with 4.7% a year ago.

Operating cash flow is solid. And, it’s consistently in excess of net income. So, while profit margins look thin, cash flow margins are healthy. That’s key. Consistent cash flow generation creates a lot of space to operate and buy management time to right the ship.

Owner’s earnings, Warren Buffet’s measure of free cash flow, are also solid in the black. The company generated nearly $12 million in owner’s earnings over the past 12 months and about $14.5 million last year.

Technically, shares of Information Services Group got smushed from April, 2019 toward the end of the year. But, a bit of flat lining has been followed by a bit of an upturn. Should the stock break above $3.00, it could be off to the races

One big knock on the company has been share dilution. Share count has risen sharply. That’s not part of the Small Cap All-Stars formula. You will see share dilution frequently in many of these under the radar companies looking to bounce back. Options to raise capital are limited. So, current shareholders often take it on the chin.

That said, a case can be made the stock is cheap. A common theme among the All-Stars is that the stocks trade at a discount to peers relative to revenue. Information Services Group trades at about 0.5x sales. That’s a massive discount to the industry at nearly 2.9x revenue and the market as a whole, which is well over 2x revenue.

Of course, value investing has been out of favor. But, since I revamped Small Cap All-Stars a few months ago, the annualized returns for the strategy have topped triple digits. When value is appreciated, the returns can be quite hefty. And, those profits can be quick!

Let’s see if we can muster up a quick gain here on a stock poised to break out!

Action to take: Buy shares of Information Services Group, Inc. (Nasdaq: III).

Happy trading,

John


Trade Alert: PCTEL, Inc. (Nasdaq: PCTI) (click to expand)

February 5, 2020

This week there’s a new trade-in an old position. The model is taking another bite off the apple in PCTEL, Inc. (Nasdaq: PCTI). The position was closed in August after about five weeks with a 15% gain. The stock then had an explosive move higher before more recently getting whacked hard to start 2020. That pullback in a strong uptrend sets up the trade this time around.

As a reminder, PCTEL operates in the telecommunications industry worldwide. The company makes precision antennas used in Wi-Fi, logistics, and industrial industries.

Action to take: Buy shares of PCTEL, Inc. (Nasdaq: PCTI)

The factors that led to the recommendation in July hold true today. Earnings quality continues to remain strong and is improving. Operating cash flow continues to exceed net income and is growing. Cash flow return on invested capital has moved up sharply over the past 12 months to 7.4% from 1.8%. Free cash flow over the past 12 months is at a multi-year high at $5.5 million. That’s more than double a year ago. There’s little risk of earnings manipulation.

The balance sheet remains strong.

The balance sheet has over $38 million in cash and equivalents. Meanwhile, working capital trends in receivables and inventory are well under control. Long-term debt has ticked up to $3 million. However, the company has plenty of coverage.

PCTEL still sports a dividend. Due to the increase in price, the yield has dropped from 5% to about 2.4%. That yield is still higher than the market averages. At a time when interest rates are under pressure and the stock market is priced dearly, an above-average yield is an attractive feature for the stock.

While the very recent price action is a bit scary due to the nosedive since late January, the stock is oversold. Earnings are scheduled for early March. That’s the biggest factor in the direction of the stock going forward.

Action to take: Buy shares of PCTEL, Inc. (Nasdaq: PCTI)

Happy trading,

John

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