Friday, October 03, 2008

Defense! Defense! Defense!

This post starts out sounding more like a cheer at a high school football game - it IS Friday - than investment commentary. Yet defensive tactics have to be the foundation of investment strategies as unemployment reports this week point to the undeniable truth of a recession in the U.S. Europe already admitted the same weeks ago.

So what is an investor to do? After all putting cash under the mattress is the action of a “hoarder” not a bona fide “investor.” An investor must take a position of some kind even in this very difficult economic period.

Holding cash or short-term bonds are at least part plan. Consumer durable stocks, such as food and beverages, could be part of the plan. As noted the September 30th post, “Clear and Present Danger,” companies that are not susceptible to erosion of demand due to macroeconomic conditions are another good choice. That post profiled PharmAthene, Inc. (PIP: AMEX), a developer of vaccines and therapeutics against toxins used by terrorists. The U.S. government is a lead customer and its spending plans are locked in place for two and three years at a time.

Looking through the Crystal Equity Research coverage universe, there are a couple of other names that are worth a look at current price levels.

Conmed Healthcare Management, Inc. (CMHM: OTC/BB) provides health care services in county detention facilities around the country and has recently won a string of new relationships that we estimate will drive strong cash flow growth in the coming year. Conmed is a high quality operation, having never lost a relationship with a county in its 20-plus years of operation and having passed every regulatory audit in its history. The gloomy macroeconomic conditions in the U.S. are not likely to slow the pace of Conmed’s top line growth since the factors that drive demand for their services are not related to the economy at large.

Reed’s, Inc. (REED: Nasdaq) is an emerging producer of distinguishing non-alcoholic beverages and specialty candies and ice creams. It is the only commercial beverage producer in the U.S. to produce and market “brewed” ginger, root beer and cola products. The Reed’s brand can be found on the shelves of specialty gourmet and natural food stores, such as Whole Foods, Wild Oats and Trader Joes. While sales have been impacted by the cutback in consumer spending, Reed’s is on a fairly steep growth trajectory through the addition of new supermarkets to its U.S. distribution network and penetration of new foreign markets such as the U.K., Ireland, France and Singapore.

None of these stocks trade in large volumes. Under other circumstances this could be problematic. However, in these days contrarian investors find it much easier to accumulate shares without becoming their own worst adversary, ratcheting up the price with every bid.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has published research on PIP, CMHM and REED with favorable commentary. Copies of full reports with important disclosures and disclaimers are available at www.crystalequityresearch.com.

No comments: