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James "the bulldog" Passin is known for his brash contrarian approach to stock picking. Mr. Passin is considered an expert in discovering undervalued small caps in exotic locations. Riots in Egypt, fist fights in Israel, and police raids in Havana night clubs haven't deterred Mr. Passin from his mission of uncovering legal "inside" information for his subscribers. His maverick views on the market and stock picks have been cited in major newspapers around the world. Passin is a regular speaker at financial conferences. Recently, Passin has been commissioned as a Kentucky Colonel.
James Passin is currently a Portfolio Manager with Firebird Management and Contributing Editor to Taipan. Several funds managed by Firebird are shareholders in Lukoil Preferred, Surgutneftegaz, Hurricane Hydrocarbons, Uproar, Aramex, Mosenergo, and Ventspils Nafta. Passin's views are strictly his own and not necessarily those of Taipan or Firebird Management.
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Bullish on U.S. Small Caps
by James Passin
Since 1987, the S&P 500 has left the Russell 2000 Index in the dust. Investors have abandoned small caps in favor of popular big caps. Over the last two years, the Advance/Decline Line has narrowed--despite record high after record high in the broader averages. Investors are rotating into a diminishing number of large cap "momentum" stocks at the expense of the vast majority of stocks.
So why do I keep pounding the table on small caps?
The value is in the small cap market. Many of the "big cap" names deserve to trade at small cap valuations based on prospective earnings or even revenues. Most small caps remain utterly neglected--unless they become magically elevated to Internet status through a rigged Wall Street promotion. I don't believe that the divergence between small caps and big caps is sustainable: either investors will rotate into small caps or the market is doomed.
As retail investors continue to pull discretionary capital out of mutual funds, switching into e-trading accounts, money will flow into small and microcap stocks. Mutual funds are often restricted by their compliance officers from jumping into tiny companies; individuals can buy whatever they want. Of course, retail investors tend to jump on whatever's hot. But if small caps are ever back in favor, retail investors will climb on board. (If the daytraders can jack up the prices of companies with billion-dollar capitalizations, imagine what they could do to microcaps.)
"The January Effect" is very beneficial for small caps. Investors typical dispose of underperforming stocks in the fourth quarter for tax reasons and jump back in during the first quarter. This process as an undue impact on thinly-traded stocks. I strongly recommend taking a close look at high quality small caps towards the end of every calendar year.
The Russell 2000 Index is carving out a modestly bullish technical pattern. After collapsing to a low of 303 in 1998, the Russell 2000 began a classic 5-wave recovery in an uptrend channel. If the Russell 2000 remains within the channel, it should retest the April 1998 record peak of 482.
Historically, small caps have performed well in inflationary environments. Small caps are not able to defend margins by monopolizing markets. When pricing power is robust, small caps enjoy fat margins and rapid earnings growth. The current economic environment should support strong performance in small cap stocks.
Read on... for a look at what I see happening in my favorite Taipan picks.
NOTE: A number of recommendations mentioned in this section do not trade in the U.S. If you need
a good broker for executing foreign stock trades, we recommend contacting Peter Schiff at Euro Pacific Capital, 330 Washington Blvd., Suite 511, Marina Del Ray, CA 90292; tel. 310-448-8000, or 800-727-7922, fax 310-448-8008.
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