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.
Although 2013 was not exactly a financial blockbuster for Liquidmetal with just over $1 million in reported revenue, some great strides were made that could result in meaningful revenue this year. In 2013, eighteen prototype shipments were delivered to customers in the aerospace, defense, medical and other industries. Separately, during the fourth quarter of last year, the company secured a $20 million equity line of credit under a common stock purchase agreement. Utilizing this equity line facility, the company raised $3 million earlier this year and is now debt-free.
As of year-end, Liquidmetal Technologies’ IP portfolio included 53 owned or licensed U.S. patents, with an additional 54 patent applications pending. Its patent applications relate to the composition, processing and application of Liquidmetal alloys. Clearly, with its patent portfolio alone, there is a good deal of value here.
Looking ahead, if even just a few of the prototypes shipped in 2013 are found to live up to their expectations following a battery of field tests, investors can expect that meaningful revenue can be generated this year, for the first time, which would have a profound impact on the stock. Trading at the mid-point of its 52–week range, such news would surely take the Liquidmetal's stock to its year high of $0.41, and likely approach $0.50 rather quickly. Considering it is debt-free and has been largely forgotten, the risk/reward appears to be strongly in the favor of opportunistic investors.
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.
Shaky market environments tend to prompt one of three reactions in the investing public: Individual investors sell holdings, buy on weakness or are too paralyzed by fear to do anything. Since they are managing their own money, the choices they make are their own and they only answer to themselves.
What if they had to answer to other investors such as limited partners in a hedge fund? What would they do? If I were a hedge fund manager today who was not going to change my existing short positions but modify my long strategy, here is exactly what I would do.