Numbers don’t lie. Good or bad, number don’t lie, which is why serious investment allocators (which isn’t a word, but you get the idea) should be keenly interested in today’s look at which styles - growth or value - and which market caps - micro cap through large cap - have been leading or lagging since the March low. We’ll give you a hint about the leader…. let’s just say we’re glad this site’s focus is what it is.

Take a look at the nearby table though - let’s let the data do the real talking.

Just add a little extra clarity, that relative ranking (micro caps on top, large cap growth on the bottom) has pretty much been the way things have stacked up since the March 9th low.

If you’re less of a numbers person and more of a visualizer, here’s the same data in the form of a percentage change chart… with a starting point of March 9th, 2009.

Just history? Doesn’t mean anything going forward? Don’t be so sure.

While it is true that the past doesn’t dictate the future, there’s an alarming similarity to the bull run from mid-March of 2009 to the new bull market that materialized in mid-March of 2003 (aside from the fact that both started in the middle of March).

Take a look at the same cap/style ranking table we examined above, only this time let’s change the start date to March 12th, 2003. And, this time we’ll also show you how that story ended when it was allowed to play out to the very end of the bull market… July 17th of 2007. The first checkpoint is the same five-month mark or so.

Again, if you’re more of a visual person than a numbers-cruncher, here’s the actual percentage change chart. Don’t worry if you have to double-check to make sure it’s not the same chart shown above…. the two are amazingly similar.

The point? There are a couple.

First, if the March low was truly not the end of the bear market - as many people have argued it’s not - then this is one incredible coincidence. See, all the leaders of early stages of a bull market are where they should be, and all the laggards (large cap, and large cap growth in particular) are also where they’re supposed to be… at the bottom.

Second, though we’re advocates of sector and style rotation, the lesson we learned in 2003 was that once a style or cap takes a position, it tends to stay in the position for a while - possibly the entire bull market. For instance, large cap growth lagged early and lagged late between 2003 and 2007; micro caps and small cap value led the entire time.

It begs the rhetorical question…. where the heck is the ‘growth’ in the large cap growth group? For that matter, when does being a big company actually benefit shareholders? Large cap growth not only trailed in the prior bull market, but didn’t fare any better than other groups during the bear market.

In any case, this should help provide some framework for the coming months, and hopefully years.

If you want the ‘good stuff’ - the stock picks that stem from this kind of strategic framework - then you absolutely must sign up for the free Micro Cap Press newsletter. We talks about stocks and trends before anyone else even sees them coming.

This week’s already been an eventful one in terms of economic data. Today we heard July’s home sales were up 9.6% (from June’s levels), and yesterday the Conference Board said the August consumer confidence reading came in at 54.1, halting a two month dip in the optimism measure.

We’re not going to rehash the news here; you don’t need or want us to. Just know that both pieces of data were taken at face value… hints that the economy continues to mend.

What we’re going to do is put those two pieces of information into perspective for you - something the other media sources failed to do.

As usual, this means a chart…. at least for the confidence data (no historical data exists for the housing data). While a chart doesn’t tell the whole story, neither does a mere write-up about the latest conference and home sales updates.  Between the two, however, investors should be able to gather a complete picture of what’s going on.

Enough rambling… on with the explanation.

Consumer Confidence

Readers who’ve been around since the beginning of the year will know that consumer confidence levels are a real hit button for us, not because each month’s data means a lot (because it doesn’t), but because the immediate response to each month’s announcement is usually somewhere between overblown to downright errant.

In any case, the chart below puts it all into perspective pretty well….

The confidence trend - not the latest month’s data but the trend - is positive for the first time in years (2003, to be exact). As such, the data suggests the new bull market is underway, as has been the case with recent (past couple of decades) trends.

The idea flies flat in the face of the bearish pundits who saw the confidence declines in July and June and said ‘aha - told you so’. As we’ve said about nine million times in the last few months though, one month of confidence data is meaningless, since confidence is fickle.

Undoubtedly, confidence will ease back in the foreseeable future, and the bears will come out of their woodwork again. As before, don’t worry about it - the trend is all that matters.

Score one for the market.

Home Sales

When the Commerce Department announced home sales were up by 9.6% in July, homebuilder stocks went ballistic. After all, that was the fourth straight month of increases, and the best single-month increase since September of 2008 (which was, ironically, right before the credit market imploded). July’s sales were about 30% better  than January’s (which was the lull… so far).

That’s a start to the end of the suffering, though the light at the end of the tunnel is still distant. See, though sales were up, the average home sale price is about 11% under levels from a year ago, which still isn’t bad considering the last twelve months. Even worse, prices are still 30% under their mid-2006 peak.  Even worse than that, home sales - in terms of units - are still at 70% under the peak hit four years ago.

Point being, it’s a glass half empty/half full proposition.

The interesting (ok, odd) part about all the news coverage of the home sale data was that little attention was paid to the most compelling aspect of it. New homes for sale were down 3% from May’s levels. There is ‘only’ a 7.5 month supply of news homes on the market, which is the lowest reading since April of 2007. Granted, it took the industry’s decimation to get there, but a reasonable balance between supply and demand is in sight.

Despite so many lingering hurdles, investors have plowed into homebuilder stocks like it’s 2003 again. Big mistake.

Yes, home sales will eventually improve, and yes, somebody will have to build news ones. However, there were too many builders even in housing’s steroid-driven boom….  how can a partial recovery - let alone a full recovery - support them all?

We still firmly suggest investors of the homebuilding industry require a very specific reason to own a specific stock, and not simply purchase one randomly. It’s a game of musical chairs.

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As our regular readers will know by now, the Micro Cap Press agenda is simply to find the next big trends from micro cap names - or any size stock, really, since an opportunity is an opportunity regardless of the size. It just so happens that telecom stocks are one of the areas we feel is undervalued, and ripe for a rally.

Telecom? But hasn’t telecom been the market’s biggest laggard since the March low?

If you’re using investable instruments like the Telecom HOLDRs Fund (TTH) as a proxy, then yes - the fund is only up about 21% since March’s low. In comparison, the S&P 500 Index Spyders (SPY) have returned of 51% for the same period.

With that kind of persistent lagging, what’s to like about the sector?

You might recall we dropped a hint about telecom back in the July 30th newsletter. Well, the discussion below is what we had in mind…

Unfortunately, this is a scenario where the market is coming to the wrong conclusion about a sector based on an ETF’s results; this ETF doesn’t even come close to representing the telecom sector’s full range of opportunities.

See, TTH’s make-up is alarmingly unbalanced. Nearly 55% of its value comes from AT&T Inc, (T), and 29% is held in the form of Verizon Comm. (VZ) shares. Needless to say, it’s nearly impossible to say an ETF is a ‘basket of related stocks’ when two stocks alone make up nearly 84% of the ETF

Yes, those two companies make up 84% of the telecom market, but that’s not the point…. not the main point anyway. If an ETF is supposed to be packaged diversity, then the Telecom HOLDRs ETF fails at its job… a flaw that’s been exposed because both companies have been shrinking the bottom line in an effort to pump up the top line. All well and good, but not all telecoms are guilty of the same…  though they’re all being indirectly punished.

Care to guess which telecom stocks have been doing quite well not just in terms of corporate performance, but also in terms of their stock’s gains? You guessed it - the small and micro cap telecom names.  

The nearby table tells the tale pretty well. AT&T and Verizon have modest numbers, but each of those numbers are topped by several of their competitors. Indeed, several of the smaller competitors top AT&T and Verizon on several fronts.

Bottom line? Telecom’s not a categorical liability. It’s just that certain large cap telecom names that are dead weight thanks to rampant spending. If you’re seeking dividends and/or growth, large caps and the ETF are clearly not the way to go. Focus on the small and micro cap telecom names…. you may find a surprisingly low-risk, high-payoff holding in the bunch.

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In our ongoing quest to uncover interesting investment ideas before anyone else finds them, we found four over this weekend worth further review…. Sinobiopharma, Inc. (SNBP.OB), Capital Trust, Inc. (CT), CopyTele Inc. (COPY.OB), and Kendle International Inc. (KNDL). Here’s a closer look at the pros and cons of each.

Capital Trust, Inc. (CT): As we’ve seen with so many REITs, the past year has been a disaster. Even last quarter was ugly for Capital Trust as well as its peers; the company lost $6.4 million (-$0.29 per share)… a virtual truckload for a stock trading at $2.33.

Yet, no amount of bad news or dismal performance seems to be able to keep CT shares down. The buyers keep coming back for more, and today’s high-volume rally is the biggest helping they’ve spooned out for themselves yet.

The core of the reason is the obvious one… investors really believe the worst is over for the economy, and they really think REITs are going to be among the first to show improved numbers when green shoots start to turn into green plants.

Though we’ve documented how some of these green shoots are overestimated, others are not. So, considering Capital Trust is down more than 90% from 2007’s highs and now priced as a penny stock, maybe there really is some value here. The chart sure says someone thinks so.

CopyTele Inc. (COPY.OB): If the name rings a bell, it’s because CopyTele was off and on our penny stock trading watchlist a few times over the past four months. Today’s explosive 23% rally has rewarded traders with more patience than us.

Though we expect COPY shares to be reeled in a great deal after an excessive runup, it’s worth mentioning that CopyTele shares have been making higher lows and higher highs since February. Meaning? Buy when support is tested, and sell when resistance is tested. With the resistance line being tested as of now, the odds favor a pullback rather than more follow-through in the near future.

Today’s rally prompt came from the announcement that CopyTele had come to an agreement with ZQX Advisors to jointly develop the company’s E-Paper technology.

No details about expected revenue were provided, though as was said above, odds are low that any possible revenue from the partnership could justify COPY shares instantaneously moving to 47 cents.

Longer term, there’s a lot of recovery potential with CopyTele.

Sinobiopharma, Inc. (SNBP.OB): Another penny stock, Sinobiopharma is up firmly today on no news, though this is more of a volume story than a news story…. for now anyway.

Today’s 354K traded shares is the highest volume day we’ve seen since the stock took a turn for the worst in late May. However, it’s not just today’s volume that makes Sinobiopharma so compelling. The buying volume has clearly picked up since the 11th, even though there’s been no news.

While it may not be clear what’s going on, clearly something’s going on.

The trouble with jumping into what could be the early stages of a breakout move is simply that we rarely - if ever - hear from the company. The last we heard was that Sinobiopharma’s anti-hypertension drug Yitai had been approved. We can only assume it’s getting sales traction the way Kutai did.

Kendle International Inc. (KNDL): What are the odds of finding a micro cap biotech company that’s not only profitable, but highly profitable? The forward-looking P/E of 8.86 is plausible considering the trailing twelve month P/E ratio is a mere 8.3.

Actually, so say Kendle is a biotech company is a little misleading. Kendle provides clinical research and testing services to biopharmaceutical developers. There’s no “homerun drug” potential, but there’s no real risk either. Kendle just does the R&D work, for a fair price.

Consistent historical profits are attractive here, but with the market lighting a fire under biotech’s you-know-what over the last five months (thanks to swine flu and success with several cancer vaccines), Kendle may soon find more demand for their services than anybody could have expected a year ago.

Kendle topped expectations in three of the last four quarters, and has been profitable since 2006.

If you’ve got any additional insight or opinion about any of these four micro cap stocks, please chime in below.

By the way, the best way to learn of any important updates for these four companies is to sign up for the free Micro Cap Press newsletter.

Can you recall the last time you saw an IPO from a company that was already running a profitable operation? From that perspective alone Emdeon Inc. (NYSE:EM) is somewhat novel.  The company netted about $157 million via the sale of 10.7 million common shares at $15.50 a pop in this week’s IPO. Not bad, considering the company generated a net income of $13.6 million in the first six months of this year.

The excessive hype and disinterest in the company’s historical numbers were just as prevalent with this IPO as they are with most initial public offerings. Rosetta Stone Inc. (NYSE:RST) and OpenTable Inc,. (Nasdaq:OPEN) are two examples. Both IPO’d a few weeks ago and the stocks have done well on hype, though neither boasts compelling outlooks just yet.

In any case, Emdeon’s stock is trading at $17.31 as this is being written, meaning the market cap - with a little more than 88 million shares outstanding now as indicated by the prospectus - is well over $1 billion (yes, with a ‘b’). The top line revenue of $444 million in the first half of 2009 is in line with Emdeon’s new market cap even if income isn’t.

As for the stock’s possible ‘value’, the company’s income statement actually looks pretty normal, save one line - interest expense. The company paid out $35 million in interest payments through the first half of this year…. which is what happens when you’re sitting on $860 million in debt.

Even if all the IPO funds were used to pay off Emdeon’s debt, interest expenses would still chew up what could otherwise be income; that’s the only pitfall with the company. It’s mostly trumped by the upside though.

From an annualized P/E perspective (the market cap divided by two times the $13.6 million in income from the first half of the year), EM trades at 54 times earnings. From a growth perspective though, Emdeon’s on pace in 2009 to roughly triple last year’s bottom line.

For comparison, Emdeon’s competitor Cerner Corp. (Nasdaq:CERN) trades at 25 times earnings (TTM), and has averaged an annual EPS growth rate of 30% over the last five years…. encouraging numbers.

Given Emdeon’s history of success, the company will almost certainly use the IPO proceeds intelligently and profitably, particularly with the healthcare digitalization push from the White House. The opportunity is very real, and the company is historically profitable even if the P/E feels high.

Bottom line: Behind all the noise and IPO euphoria, there’s actually a reasonably-priced growth stock. It’s an expensive stock, but sometimes growth comes at a price.

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In this morning’s edition we painted a somewhat-bullish picture of upcoming IPOs Emdeon Inc. and Cumberland Pharmaceuticals Inc. There’s another IPO slated for launch this week, but we didn’t mention it in the newsletter for one simple reason…. it’s probably not one you’d want. In fact, you may want to make a point of steering clear of it.

Starwood Property Trust’s prospectus offers the same alarming fine print you’d find with most REITs - a major conflict of interest exists between the manager and the REITs investors, in that there’s a very lopsided compensation plan in place in favor of its manager, Mr. Sternlicht. That’s  the norm though, as far as REITs (not to mention MLPs) go. Get used to it.

What pushes this potential IPO past the point of palatable is simply that (1) its manager has no experience in the Trust’s target market, and (2) the REIT is counting on the Federal government’s TALF program and support for CMBS and RMBS to continue supporting an economic recovery.

In case you’re wondering, yes, this is the same Mr. Sternlicht and the same ‘Starwood’ group of real estate trusts that have put together several other investment vehicles in the real estate space. However, this is Mr. Sternlicht’s first venture into a real estate arena that is still so incredibly subject to the government’s treatment of EESA, HERA, TALF, and PPIP programs. One piece of the wrong legislation could change the crucial workings of any or all of these initiatives, and bring the REIT down with them. See, TALF is an ever-changing government plan that may end up being nothing like what Sternlicht thinks it will be.

And, even if Sternlicht’s perception about real estate’s rebound is correct, this is still an area where lawyers and lawmakers are probably better suited to handle the headaches - it’s not as simple as “just buying some mortgage loans for pennies on the dollar”. 

The fact that a similar REIT - Sutherland - just canceled its IPO forces us to ask if there are some bigger problems with the whole ‘devalued RMBS and CMBS’ premise.

Bottom line: Maybe this new Sternlicht/Starwood ventire will be just fine, meaning our paranoia is unjustified. Considering the risks though, and considering there are already similar REITS in existence with possibly better-suited managers, this new IPO’s risk seems tough to justify. Just something to think about.

Here’s the prospectus:
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001465128&owner=include&count=40

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Though all micro cap companies have to stand on their own merits eventually, we’d never deny that it’s easier for a stock to find investors when you’re stock is traded on the floor of one of the major exchanges (NYSE, AMEX, or NASDAQ) as opposed to trading on the pick sheets or as a bulletin board equity.

With that in mind, here’s a list of some of the stocks that recently graduated from the OTC bulletin board and moved uptown to a senior exchange.

This status upgrade still doesn’t guarantee success. However, we have observed time and time again how this move can accelerate a penny stock’s growth.

• As of 8/03/2009 China Ritar Power Corp. (CRTP), formerly trading under the ticker CRTP, is now traded on the NASDAQ.
• As of 7/29/2009 Interstate Hotels & Resorts, Inc. (IHR), formerly trading under the ticker IHRI, is now traded on the NYSE.
• As of 7/20/2009 China Education Alliance, Inc. (CEU), formerly trading under the ticker CEUA, is now traded on the NYSE.
• As of 7/17/2009 Deer Consumer Products, Inc. (DEER), formerly trading under the ticker DCPD, is now traded on the NASDAQ.
• As of 7/15/2009 Conmed Healthcare Management, Inc. (CONM), formerly trading under the ticker CMHM, is now traded on the NYSE.

All of them are still of interest to us, as each stock is still technically a micro cap as well as a penny stock. We’ll keep tabs on all five and if one looks particularly compelling, we’ll post an update here or in the newsletter. In the meantime, it may be worth checking out a quick chart for each of these names.

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