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Thursday, August 16, 2012

Sell High-Beta Small Cap Stocks

high beta small cap stocks
During my time on Wall Street, I learned all about high-beta stocks and their sensitivity to the economy and stock market. I inherited a group of them when promoted into a stock-picker’s role as an Emerging Growth Analyst in early 2000. The companies I inherited represented my predecessor’s favorite forays into every hot new technology, and I was the lucky boy stuck holding them just as the dotcom bubble was about to pop. I survived though, and realizing a complete overhaul was going to be necessary, I still managed to beat the S&P 500 that year, despite following the high risk group.

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Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

High Beta Stocks


I see too many risks being realized in the coming months, and have determined to warn you to exit most high beta stocks before the fall, especially undercapitalized small-caps. By fall, I mean decline, not the season, though the two may be interrelated. While I present a list below, I suggest investors review their portfolios for high-beta shares, and inspect the fundamentals of each to determine whether corporate specific operating results will be strong enough to fight a tide that will come against the segment in the coming year. It’s already begun.

So I ran a screen looking for high beta-stocks of 1.5 or higher, trading at a price of $5 or more, with up to $1 billion in market cap and up to $100 million in revenue, but without earnings. Those smaller names without earnings but with high hopes tend to take the biggest hit when capital dries up. It’s because they are dependent upon it before gaining operating traction.

My screen turned up 22 stocks that are listed by beta coefficient below (highest to lowest). A couple came through with positive earnings expectations near-term, so I marked those with an asterisk. I then weeded through the stocks one-by-one to understand where greater risk might lie. For instance, companies with higher debt are at greater risk in downturn and should exaggerate decline even further. I was dissatisfied though with the number of candidates for downgrade, as too few were clear cut calls. So I expanded the hunt to include stocks trading from $4 to $5; that turned up a second table of names below. The reason too few candidates showed up in our first screen is probably because many have already been penalized as the global economy has deteriorated. The price action of these stocks precedes and exaggerates tangible economic changes.

You can see that here in the six-month chart comparing the SPDR S&P 500 (NYSE: SPY) and the Russell 1000 High Beta ETF (NYSE: HBTA). The high-beta group led the decline, exaggerated it and has not recovered with the SPY.

trend chart high beta stocks


This trend likely submerged many of our candidates under the initial $5 per share qualifier starting in the second half of May. Here’s that first list ranked by their beta values.

Company & Ticker
Price
Beta
Debt/Equity
P/S
First Financial (Nasdaq: FFCH) *
12.49
3.2
N/A
3.3
Triangle Petroleum (Nasdaq: TPLM)
6.14
2.7
N/A
21.2
FX Energy (Nasdaq: FXEN)
7.21
2.5
62%
10.3
Blue Dolphin Energy (Nasdaq: BDCO)
6.35
2.4
51%
1.5
OncoGenex Pharma (Nasdaq: OGXI)
14.43
2.3
8%
34.1
Endeavor Int’l (NYSE: END)
8.81
2.2
446%
5.3
Sangamo BioSciences (Nasdaq: SGMO)
5.04
2.1
N/A
18.4
Affymax (Nasdaq: AFFY)
16.71
2.0
9%
6.4
JMP Group (NYSE: JMP) *
5.84
1.9
239%
1.4
Alpine Global (NYSE: AGD)
5.63
1.8
N/A
5.1
Immersion (Nasdaq: IMMR)
5.53
1.7
N/A
5.1
CUI Global (Nasdaq: CUI) *
6.90
1.7
30%
1.9
Nektar Thera… (Nasdaq: NKTR)
8.49
1.7
141%
12.5
IntriCon (Nasdaq: IIN) *
5.28
1.6
66%
0.5
Gladstone Capital (Nasdaq: GLAD)*
8.51
1.6
70%
4.5
OraSure (Nasdaq: OSUR)
10.59
1.6
7%
6.0
Scorpio Tankers (Nasdaq: STNG)
6.38
1.6
38%
2.7
Derma Sciences (Nasdaq: DSCI)
9.63
1.6
N/A
1.9
BroadVision (Nasdaq: BVSN)
8.18
1.6
N/A
2.4
Depomed (Nasdaq: DEPO)
5.10
1.5
N/A
4.8
Rentrak (Nasdaq: RENT)
19.19
1.5
1%
2.3
Alnylam Pharma (Nasdaq: ALNY)
18.44
1.5
N/A
11.6


Since the second list of stocks trading from $1 to $5 per share is too long, I only include stocks trading higher than $4 here.

Company & Ticker
Price
Beta
Debt/Equity
P/S
Agenus (Nasdaq: AGEN)
4.83
1.9
N/A (Neg.)
7.1
Halozyme (Nasdaq: HALO)
4.82
1.6
N/A
9.3
Glu Mobile (Nasdaq: GLUU)
4.71
2.1
N/A
3.9
Array BioPharma (Nasdaq: ARRY)
4.66
1.6
N/A (Neg.)
5.0
The9 Limited (Nasdaq: NCTY)
4.63
2.1
N/A
8.0
Arrowhead Research (Nasdaq: ARWR)
4.62
2.7
20%
36
Mitek Systems (Nasdaq: MITK)
4.52
2.7
N/A
10.7
MCG Capital (Nasdaq: MCGC)
4.49
1.5
87%
4.4
Targacept (Nasdaq: TRGT)
4.33
2.1
2%
1.8
Essex Rental (Nasdaq: ESSX)
4.14
1.7
284%
1.1
GenVec (Nasdaq: GNVC)
4.08
1.7
N/A
3.2
SmartHeat (Nasdaq: HEAT)
4.04
2.5
16%
0.2
Miller Energy (Nasdaq: MILL)
4.02
3.5
8%
4.8
Plures Tech (Nasdaq: MANY)
4.00
5.9
38%
2.4


In the second part of this report, we’ll offer the results of our due diligence into the company specifics of both lists of high-beta stocks. From there we will determine which stocks are the true sell candidates, giving credit to their company specifics. To be notified of the second report via email, follow my column at Seeking Alpha and at our Wall Street news blog.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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