Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.
It was a great weekend around the confines of Chez Melvin. The family was in for the holiday dinner on Sunday, with the usual raucous results. The Orioles started the year off with a bang, including a near no-hitter on Sunday. The wife is off work this week and I will spend at least a couple of days working from the beach. All in all, it's a great start to the week, and I am in an unusually cheerful mood.
With that backdrop in place, I thought I'd do something this week I never do -- offer a peek at some of the smaller companies I own as part of my core value portfolio. Heck, if we sweep the Yankees starting tonight, I may be so giddy I start talking about my micro-cap banks!
If you are looking for super-hot sexy micro-cap stocks, you are probably going to be disappointed by my holdings. They tend to be older, established companies in less-than-exciting industries. What is sexy about them is that they are very cheap, and I think they are also very safe as well.
Wall Street tends to think that smaller-cap stocks are riskier than their larger brethren, but I really don't think that's the case with my holdings. They are not in the tradable indices and to steal a phrase from Louis Navellier, they tend to be bunny stocks -- they sit still for weeks or months at a time then leap forward on news or fundamental improvements.
Keep in mind that they are smaller stocks and can trade thinly at times. No matter how cheap they may be, if you enter a large market order in one of these stocks, you will not like the result. Use limit orders and trade these carefully. I own all of the stocks that I will mention this week and would prefer you not run them to the roof just yet with sloppy trading and order placement.
One of my favorite small stocks right now is Lakeland Industries (LAKE). The company makes safety garments for a range of industries and uses. Products include such exciting things as heat-resistant garments, chemical protection suits and disposable garments. It's not very exciting until you realize how many industries use the company's products -- Lakeland sells to the chemical, petroleum products, drug, high tech, construction and automobile industries -- basically anyone who needs protective or static-free clothing for workers. It also sells to government agencies for fire, police and defense usage. Lakelands' protective and safety garments may not be the core of their customers' business, but they are absolutely necessary for the process of manufacturing products and running the business.
The company is growing as well. Lakeland has expanded outside the United States and is seeing rapid growth in emerging markets such as China and Brazil. Last year the company saw strong sales gains from its overseas operations; revenues from outside the U.S. grew to 47% of total revenues, up from 37% in 2010. The company has also concentrated its capital expenditures outside the U.S. by increasing capacity in its Mexican and Brazilian operations. I don't like investing in opaque emerging-market companies; this type of stock allows me to benefit from rapid emerging-market growth, yet gives me peace of mind, knowing I'm investing in a company headquartered and regulated right here at home.
Although the stock has moved up in the past year, the shares are still very cheap. Net current assets are more than $8 a share, although most of that is inventory. Management believes that maintaining high inventory levels gives the company a competitive advantage, and it's hard to argue with the results. Although the stock trades close to 52-week highs, the shares are still valued at less than 90% of tangible book value. I normally prefer to buy near the lows for the year, but given the solid growth potential of Lakeland I would not hesitate to initiate a position at current prices.
Management has not hesitated to buy the stock. Lakeland has been actively buying back stock in the open market during the first quarter. The chairman of the company, Stephen Bachelder, took advantage of price weakness in the fourth quarter of 2011 to add to his stake.
Lakeland is not going to have any breakthrough technologies or discover life-changing drugs. But it will sell protective clothing to the companies that do -- and it'll grow along with the economy. The company has substantial exposure to the most exciting emerging markets without all the regulatory and political risk of direct investment in those nations. It is an established company (in business since 1982) and has been profitable every year since 1994. The stock is cheap and the company has solid growth potential: a winning combination if you're a patient, long-term investor looking for profits measured in multiples, not percentages.