In a volatile macroeconomic world, micro caps can offer some immunity as they move based on company news rather than front page headlines. But you have to pick your companies carefully. In this interview with Streetwise Reports' Special Situations, Jim Collins, founding partner of The Portfolio Guru, shares the names of a handful of companies he found in his travels to the LD Micro Conference and beyond.
Special Situations: You're a big fan of micro caps. Why is small better in a world that, according to your recent The Portfolio Guru Post newsletter, is experiencing weak global aggregate demand?
Jim Collins: I think small is better because small-cap company stocks move based on factors that aren't necessarily driven by global macroeconomics. That is particularly important in today's volatile market.
SS: Do you see the recent fall in the stock market as a temporary blip because of headline news out of China, or are we shifting to a new stage in the world market?
JC: I don't think it's a blip. I think it's a correction to more reasonable levels of valuation. A lot of people expected that China, India and the other emerging markets would generate marginal demand to soak up excess supply from the u.s. and Europe, but that was too optimistic. All markets are growing at much lower rates than the historical averages, and it is very risky to depend on a market devoid of any middle class to pull the world out of recession. We are seven years past the Lehman Brothers collapse but we haven't come very far.
SS: Last year, you called the LD Micro Conference “a micro-cap love-in,” and shared the names of five companies that sounded interesting as a way to gain portfolio immunity to larger market volatility. You went back again this year. Was it just as alluring?
JC: The conference took place in the first week of June in the midst of very strong national market performance. The Russell 2000, which is generally looked at as the index for small- and micro-caps, was outperforming the major market averages. At LD Micro, people were very optimistic, which means there probably weren't as many bargains as the year before. The Russell has since moved into correction territory, as people are selling all stocks.
SS: Can you update us on some of the companies from last year?
JC: Torchlight Energy Resources Inc. (TRCH:NASDAQ) was just shifting to the operator role on its project in Texas when we talked. The company is very optimistic. It drilled its first well on the Orogrande, but instead of going to full production, it is collecting data. This is a large prospect, 180,000 acres. Last week Torchlight announced a definitive agreement with Founders Oil and Gas LLC. Founders will provide $5 million ($5M) in project reimbursement costs and an additional $45M in development capital in exchange for a 50% working interest in the project. Founders will also become the operator of record.
