Working in the small-cap markets does not carry the glory and honor associated with Blue Chips, the major leagues of the capital markets. Small-caps are laden with the injured, the weak, and the dying remnants of companies that went public too early with the wrong management, the wrong financing, and the wrong business model. And just as the best and brightest “pros” at Smith Barney, Merrill Lynch, Bear Stearns, and other White Shoe top-tier firms have been fooled and trapped by the pronouncements, the projections, the greed and mismanagement of Ivy League CEO’s, we who live and breathe small-caps witness more than our fair share of plundered companies and plummeting stocks.
I strongly supported Universal Guardian (OTCBB: UGHO) months ago, saying that the stock had bottomed out in the 50 cent range, but I was wrong. The Company’s U.S. operations had been hemorrhaging losses for years, yet management assured us that they were turning things around; they assured us that there were huge contracts in the making and, indeed, there were news announcements that gave us great hope. But the best laid plans of mice and men often go awry. A few short months after my blog on UGHO, the CEO resigned, the U.S. operations were closed down, and today we are left with a 5 cent stock…And, I had thought one day they might qualify for the RedChip Independent Research Index and be welcomed into the company of such RedChip stars as LKQX, NOEC, OXPS, SRVY, PVSW, ZHNP, all of whom have performed up to and beyond our expectations in 2007.
Answers.Com (Nasdaq: ANSW)
In one of my earliest blogs this year, I set forth reasons that Answers.com (Nasdaq: ANSW) was overvalued at $12.00 and said that it should be traded in the range of $5.00-$6.00. I also said that in a market correction that Internet companies losing money would be hit hardest. Today, ANSW is trading at $6.40 and has dropped as low as $5.50. They continue to hemorrhage losses.
Century Casinos (NasdaqCM: CNTY)
Meanwhile, Century Casinos, Inc. offers a compelling value play in the Gaming sector. Century functions in an expanding $100 billion industry; it owns and operates casinos, casino lodging and restaurant facilities in the U.S., Canada, South Africa, and Poland. They also provide casino management services and operate casino operations on international cruises. For the past five years, CNTY has recorded average top-line growth of 13.8% and average bottom-line growth of 14.1%. The company also has an attractive long-term debt to equity ratio of 0.49 compared to the industry average of 2.40, which could make it a takeover target for private equity investors looking to expand into new markets. Trading at a P/E multiple of 19.6x in an industry that trades at 32.6x, CNTY is clearly undervalued. We have a 12-month price target of $9.00 based on 28.1x FY 2008 EPS of $0.32. (View report excerpt: http://redchip.com/files/redchipreports/samples/CNTYInitialReportSample.pdf)
Vertical Branding: (OTCBB: VBDG)
Another company I like, which we recently moved over to our Independent Index from our Company Sponsored (paid for research platform), is Vertical Branding, Inc. (OTCBB: VBDG). RedChip Investor Relations still performs IR services for the company (see disclosure), but with over 90% revenue growth year-over-year, and near-term profitability, their performance warrants inclusion in our Independent Index. The management team is exceptionally strong with CEO Nancy Duitch, a star veteran of the direct marketing industry, driving the train. I like to call her the hardest working girl in show business. Her business acumen has been fined-tuned over 30 years of industry experience.
Under her leadership, Vertical Branding, which sells niche products that make life easier for consumers, such as the E-Z Foldz step stool and the Hercules Hook, for easy one step picture hanging, sold through mega retail chains such as Wal-Mart, K-Mart, and Walgreens, has produced revenue per employee of $1.8M (ttm) and net income per employee of $642K (ttm). Third-quarter revenues were $9.1M, up 71% over the same quarter in 2006. For the nine months ended September 30, 2007 revenues were $30 million, and the company is at break-even for the year. They are fully funded and well-positioned for strong top- and bottom-line growth. We are projecting revenue of $40 million in 2007, as compared to $23 million in 2006. After raising $5.5 million 18 months ago, Nancy Duitch drove sales from under $2 million to $23 million in one year and from $23 million to $40 million the next year. Currently trading at a P/S multiple (ttm) of .38x, which is significantly lower than the average of its industry peers, our analysts are projecting a 12-month price-target of $1.70, offering a potential upside of over 200%. With $4 million in cash, nearly 100% revenue growth and profitability, this stock is a low-risk, high-reward opportunity. The reason the stock is currently trading at 50 cents is because of overhang in the market from previous financings and short-term players. The numbers speak for themselves: “Buy.” (View report excerpt: http://redchip.com/files/redchipreports/samples/VBDG_Q3_2007sample.pdf)
Worldwide Manufacturing USA, Inc. (OTCBB: WWMU)
WWMU, a China-based manufacturer of electronic components for the aerospace and automotive industry received its initiation into the RedChip 80% Appreciation Club, closing at $8.60 on December 26th. RedChip signed WWMU as an Investor Relations and Sponsored Research client four months ago when the stock was trading at $4.50. The stock hit a 52-week high under RedChip. The company experienced 25% plus earnings and revenue growth in 2007. With only 300,000 shares in the float the stock does not have the liquidity needed for large position builders, but that should change in the first quarter of 2008. We expect continued annual revenue and earnings growth in excess of 25%.
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