An interview with Kevin Kennedy
Kevin Kennedy’s Coolcat Explosive Small Cap Growth Stock Report, launched in October 1997, has been ranked America’s No. 1 investment newsletter by independent rating service The Hulbert Financial Digest. And no wonder: the newsletter’s portfolios have posted an overall gain for the eight years ending in 2006 of a whopping 440%, or 23.5% on an annualized basis.
Kennedy, a veteran of more than 20 years in newspaper journalism, recently shared his investing philosophy and opinions in an interview with SmallCapInvestor.com, and named his three top small-cap picks.
Explain your investment process and criteria for investments
My focus is finding the strongest stocks in the strongest market conditions and using money management approaches to maximize gains and cut losses short.
The strength of the market can represent up to 50% of the reason for a stock’s gains, so it’s very important to be in sync with the market. I focus on the Nasdaq Composite and look for it to be trading above its 50-day moving average as a basic measure of market strength.
If the market is strong, I will be more aggressive; if the market is weak, I will retreat to mostly cash.
In a strong market I look for the strongest stocks. I am talking primarily about technical price strength as opposed to fundamentals. I look for high relative strength, recent new 52-week highs and strong volume on up days.
I then look under the hood. What is the fundamental story that is driving the price higher? It could be strong recent earnings. It could be in a sector that has been strong. It could have new product news or announcements of new contracts.
I look to buy stocks like this on a modest pullback and then use money management rules to take profits and cut losses. I go into more depth on this process in The Coolcat Guide to Winning Stocks on our CoolcatReport.com website.
What do you believe gives you an edge over other investment experts?
I think it really depends on the individual investor/trader and their approach. I try to provide a variety of options for the momentum investor/trader. The momentum approach can be suitable for many investors, but may be too volatile for others.
I think the fact that I am covering a big slice of the entire market of stock, ETF and mutual funds gives readers a lot of choices and can help them learn and develop their own investing styles over time.
What is your outlook for small-cap stocks for the remainder of 2007?
I am cautiously optimistic. We have had a pretty good run in the past year and are in the part of the year which is typically weak, so I am a little less greedy here and more prone to taking profits when they appear. A late-summer retreat could set the table for another strong fall season.
What sectors do you find appealing right now?
Shipping stocks have been doing very well. I think the solar plays still have some legs. I generally like stocks with a technology or Internet connection, because they tend to expand to more extreme multiples.
What sectors are you avoiding?
Homebuilders and financial stocks are dead money here, at least in the short term. I don’t like biotech stocks much, because they can blow up easily when they have disappointing trial results.
What are your top three small-cap picks, and what attracts you to each company?
Lifeway Foods Inc. (Nasdaq: LWAY) is an immigrant and family business success story, starting in a Chicago basement and building a business valued at more than $200 million. Lifeway Foods makes kefir, a yogurt-like product, as well as other dairy and health food products. A smart acquisition of Helios Nutrition last August and a steady parade of product launches are driving sales that have grown more than 50% year-over-year the past three quarters. A new distribution agreement with food service giant U.S. Foodservice will open a new market and further drive growth (see related story, A corner on kefir, August 1).
Hoku Scientific (Nasdaq: HOKU), a solar energy play, has recently inked two long-term contracts that could yield future payments of up to almost $900 million. It’s made a huge move on tremendous volume, but I think there is still more upside to come.
TOP Tankers (Nasdaq: TOPT), a shipper of crude oil and petroleum products which operates a fleet of 22 vessels, is in the right group. The company is moving into the drybulk sector, a big growth area, with the purchase of three new vessels. It’s done very well, rising in 10 of the past 11 weeks, but it was trading at its lows in March and looks like it could have a lot more upside based on how other shipping companies have done.
What countries or regions outside the United States and Canada do you find attractive for investment purposes? Are you avoiding any specific countries or regions?
In the micro-cap/small-cap area we often find a lot of small Israeli companies that are attractive. Moving further up the food chain we like a lot of Brazilian and Chinese ADRs.
Our ETF Portfolio has been dominated by foreign ETFs for the past three years, with the biggest growth taking place in Asia and Latin America. Europe seems to be cooling off lately.
