Newsletter Watch: More speculative picks for 2008
This week, we continue our look at small-cap stocks that were selected by newsletter advisors as their favorite stocks for 2008.
Although the three investment vehicles discussed today operate in very different markets — mining, China and nanotechnology — all three have one factor in common: each of these companies earns its income from a combination of equity investments, financial and management services or royalties from other companies within their respective markets.
"International Royalty Co. (AMEX: ROY), with a market cap of $359 million, is my top speculative idea for 2008," says Adrian Day, editor of The Global Analyst.
"Mining is a tough business, with high capital costs and one in which, as the old saw has it, 'Murphy works overtime.' One way to mitigate the risk while remaining exposed to upside in resource prices is through royalties. Royalties come in all shares and sizes; they can be net or gross; fixed or sliding scale; and so on,” Day says.
International Royalty Co., he observes, has put together an extensive portfolio of over 60 mining royalties, most of which are on properties not currently in production.
Its "crown jewel," accounting for half the company's net asset value, he points out, is from royalty on the world-class Voisey's Bay nickel mine in Labrador, Canada. He adds that many of its other royalties are on gold projects, including its second most important asset, the royalty on Barrick' s Pasuca mine in Chile.
"The stock sold off recently after the company raised money for a potential purchase of the royalty division of Newmont Mining; instead the division was effectively IPO'd," he says.
But this decline, he suggests, makes ROY very inexpensive for a low-risk royalty company.
"The stock is selling at just over 10 times next year's estimated cash flow, much less expensive than other royalty companies," Day says. "As metals prices continue to advance and more of the properties on which ROY holds royalties come into production, ROY will benefit tremendously, making it a solid long-term growth story as well as ripe for a rebound from oversold levels."
Jim Trippon, editor of The China Stock Digest, says, "Our top speculative idea for 2008 is China Direct (AMEX: CDS).
"China Direct is an aggressively expanding U.S.-based firm which has created a strategy to assist in the development of the Chinese economy and to profit handsomely in the process."
The company, he notes, has grown "exponentially" over the course of the past year from being a "start up with meager profits to a thriving concern with a sharp revenue growth curve."
China Direct, he says, gives U.S. investors an opportunity to take a position in a small number of carefully selected companies on the cusp of major expansion.
"Its management division acquires controlling stakes in Chinese companies and then provides investment capital and active management. Its consulting division assists other companies in China and the U.S. in establishing and maintaining a presence in the U.S. capital markets," Trippon says. "The company serves as a vehicle allowing investors to directly participate in the rapid growth of the Chinese economy in a diversified and balanced manner."
He says that the company credits its sharp rise in revenues to three recently acquired Chinese companies, Chang Magnesium, Lang Chemical and CDI Wanda. Most recently, he adds, the company acquired 100% of Xiangxi Autonomous Prefecture Jixiang Mining Industry Co., Ltd, a business which mines, processes and distributes concentrated zinc and lead.
"The firm has established an admirable track record for bringing small- and mid-sized Chinese firms to American markets,” he says. “And the addition of new manufacturing operations is likely to enable China Direct to generate healthy revenue and net income growth in the forthcoming few years."
Josh Wolfe, editor of the Forbes Wolfe Emerging Tech Report, says, "Our favorite idea of mine for 2008 is PowerShares Lux Nanotech Portfolio (AMEX: PXN), which has net assets $122 million.
"The past quarter's liquidity crunch has hurt small-cap companies and the PowerShares Lux Nanotech Portfolio has seen a significant decline with its small-cap constituents.
"A year ago I liked it because it was a representative diversified index of companies that derived value from incorporating nanotech into their product lines,” he says.
Today, he says, "The exchange-traded fund is on sale and if you want exposure to this long-term secular trend of advanced materials and nanotech and you're willing to be a long-term holder, I'd make it a piece of a broader portfolio." (For full disclosure, Wolfe notes that he is a shareholder in Lux Research, which partnered with Powershares to form the nanotech index.)
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