Perhaps I am in the minority on this topic, but I believe that the bull market as we know it is over. This statement should not be inferred as the end of the bull market. Rather, the type of bull market we have enjoyed for the past few years, which has been long on momentum and plays and short on fundamentals, has shifted. This means that stocks exhibiting more traditional and fundamental valuation characteristics will likely rule the day for the foreseeable future. One interesting example of a stock that could benefit from the trend is a microcap stock with the generic name TeleCommunications Systems Inc. (NASDAQ – TSYS - $2.64). It is trading at a discount to the market’s average P/E and its own EPS growth rate.
Telecommunications Systems, Inc. (TCS) is a world leader in highly reliable and secure mobile communication technology. In fact, the TCS infrastructure forms the foundation for market-leading solutions in emergency 911 calls (E9-1-1), text messaging, commercial location and deployable wireless communications. TCS is at the forefront of new mobile cloud computing services, providing wireless applications for navigation, hyper-local search, asset tracking, social applications and telematics. Millions of consumers around the world use TCS wireless apps as a fundamental part of their daily lives. Government agencies utilize TCS' cybersecurity expertise, professional services and highly secure deployable satellite solutions for mission-critical communications.
With over $350 million in annual sales and 349 awarded patents, it is easy to see that this $150M market cap stock is no small player. The company weathered a difficult 2013 that saw a drop in its key government business line and subsequent write-offs and restructurings. However, beginning late last year, TCS was awarded a number of new E-911 and military contracts which should begin to kick in this year. Moreover, the environment for government sales appears to be more favorable now than a year ago and the restructurings will enhance profit margins.
What makes TSYS a unique opportunity is the fact that it can appeal to a wide range of investors. These include turnaround players, technology investors, GARP (Growth at a Reasonable Price) investors and those who are strict adherents to technical analysis. The Street is projecting the company's EPS will leap from $0.09 in 2013 to $0.15 this year and to $0.22 in 2015, despite only a modest rise in revenue growth. Higher margins are clearly the key driver here and at current levels, the stock trades less than 18x FY14 EPS, which is a nearly 20% discount to the FY14 P/E for the Russell 2000 Index and well below its projected EPS growth rate. Plus, as one of the few stocks trading solidly above its 20-day, 50-day and 200-day moving averages, the technical aspects of its shares are also appealing.
While Telecommunications Systems is at risk of potentially announcing a soft Q1 on May 1, I believe that new contract wins, greater operating performance, low valuation and its strong yet uncorrelated technical trading qualities will drive the shares toward the $4-a-share mark by year-end.
When a company with a ground-breaking technology takes a long time to evolve as a revenue-producing entity, its stock tends to drift lower over a prolonged period as investors seek better opportunities elsewhere. The net result is that the stock either drifts to oblivion or is essentially left for dead, allowing management the time to right the ship and perhaps the stock as well. While I do not typically recommend fishing in this bottom-feeder arena, some real bargains can be found, especially if the company is in a non-sexy, boring business.
A great example is Liquidmetal Technologies, Inc. (OTCQB – LQMT - $0.21). The stock has clearly been left for dead, despite its strong trading volume. But, with just a little bit of good news, these shares could be a double from here.
Liquidmetal Technologies is the leading developer of bulk alloys and composites that utilize the performance advantages offered by amorphous alloy technology, which is billed as "the metal of the future." Amorphous alloys are unique materials that are distinguished by their ability to retain a random structure when they solidify, in contrast to the crystalline atomic structure that forms in ordinary metals and alloys. Liquidmetal Technologies is the first company to produce amorphous alloys in commercially viable bulk form, enabling significant improvements in products across a wide array of industries.
Despite stock market gains in recent days, investors of all shapes and sizes are still spooked. This is especially the case for small-cap investors that have seen stocks wipe out big gains garnered earlier this year. After performing some broad-based due diligence, we have uncovered some interesting historical occurrences following small-cap selloffs. In many cases, the selloffs are directly followed by gains in bonds and small-cap value stocks and I believe this phenomenon is poised to repeat itself.
For example, the last time that U.S. small-cap stocks outperformed all other asset classes was in 2010. The following year, bonds, including 20-Year U.S. Government Bonds and U.S. TIPS outperformed all asset classes. In 2013, small-cap stocks were the clear asset class winner so it stands to reason that these bonds may be the best-performing asset class in 2014. Interestingly, we proffer that with a low interest rate environment and few real options for one’s money, ETFs mirroring the high yield bond sector, which is essentially the corporate bonds’ version of small-cap stocks, might be an even better option in the near term. This is especially the case considering we are in the early stages of an improving economy.
The doomsayers live for big down days in the market. So do those whose glasses are half-empty.
What's more, the uber-rich investors employ strategies far beyond our ken. The Average Joe investor may not have the access to alternative investments that enable them to succeed during corrective phases or bear markets like the ultra-wealthy, but one can still persevere during this period. It just requires some changes in your investing approach.
Step 1: Reduce Your Risk
Many small stock growth investors may not be accustomed to using options in their long positions since the availability of options in small-cap and microcap stocks is slim to none. If you wish to keep certain long positions or engage in new ones that you believe will withstand the current onslaught, you should consider selling short-term, slightly out-of-the-money calls and pocket the premium associated with the transaction. In situations where you are not married to a stock, or already have meaningful built-in returns, sell a short-term in-the-money call. The premium will be higher and if it gets called away, so be it. Rest assured it is probably an unlikely event anyway.