Exclusive Look at Confidential Service

05/04/2016 10:00 am EST

Focus: FINANCIALS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

Tyler Laundon is the editor of a high-priced, premium newsletter focused on small caps; as such he never shares his picks outside this exclusive circle. Nevertheless, the editor of Cabot Small-Cap Confidential has offered to share two of his picks with the MoneyShow audience.

Steve Halpern:  Our special guest today is Tyler Laundon, editor of Cabot Small-Cap Confidential.  How are you doing today, Tyler?

Tyler Laundon:  I’m doing great.  Thanks, Steve.

Steve Halpern:  Now, could you give our listeners an overview of the Small-Cap environment and why these stocks should play a role within an overall diversified portfolio?

Tyler Laundon:   Yes, sure.  Well, the basic page for small-caps is that they tend to outperform over the long-term and that has generally been the case over the last decade. 

You know, really currently, we’ve seen a little bit of weakness in small-caps, mainly in 2015, so 2016 I’ve kind of looked at as a bit of a rebound year where I’ve really been expecting small-caps to outperform relative to large-caps. 

To kind of give you a sense of how big that outperformance can be, you know, in 2009, 2010, and 2013, small-caps returned 22%, 22% and 36%, so in 2014 and 2015, they returned 5.8% and negative 2.7%, so 2016, I’m really looking at as a pretty strong year for small-caps. 

I’ve set my target at about a 10% return and they’re up about 4.1% year-to-date so after a pretty rough beginning of the year, I think everybody knows that January and February were pretty rough in the market and particularly rough on small-caps, they’re definitely starting to come back a lot stronger here.

Steve Halpern:  So can you walk us through the general investment research approach you use in order to select small caps?

Tyler Laundon:  Yes, sure, so really what I do is, I’m looking for pure play, small-caps stocks to play a large global or regional growth trend or a recovery trend.

Obviously, we see that with particular companies but also in sectors in oil and lately in materials; but really we’re looking for really specific exposure to a particular trend.

A lot of those are really off the beaten path trend, things like vending machines and water; while something isn’t really off the beaten path, but the angle that we can get at those plays with small-cap stocks are often very, very specific, much more so than you can get with a large-cap diversified play.

And I’m really looking for stocks that will, you know, play out within an 18-month time-frame.  Kind of, my mantra is stocks that have the chance to double within 18 months. 

They all have to pass that, sort of sniff test, in order to be qualified for Cabot Small-Cap Confidential and we pretty much will do, you know, or look for really anything but the areas of focus are certainly emerging technologies. 

We look at a lot of cloud software stocks.  We’re also active in biotechnology and a lot of consumer stocks, but we will branch out into materials and oil when appropriate. 

In terms of the research approach, it’s, you know, we start like a lot of analysts with kind of high-level screens, try to narrow down the field, and you know, there’s thousands of small and micro-cap stocks out there, so try to break that down.

Then we kind of get into the weeds and look at the business model and we do have some highly speculative stocks that we will cover.  Those are about a third of our portfolio.

But we’re really focused on the bulk of the portfolio with companies that have really sustainable business models, so they’re not stocks that are going to keep people up at night wondering, you know, what’s going to happen in the morning. 

We’re looking for companies that really do have the potential for, you know, long-term growth that are going to end up giving us that double or, you know, 400%, 500%, or 1000% return over, you know, maybe even a five to ten year holding period.

Steve Halpern:  Now usually advisors are eager to share information to help promote their newsletters, but in the case of Small-Cap Confidential, you treat this more like an exclusive or private club.  Now, given the proprietary nature of your research, I really appreciated that you’ve agreed to share a couple of your actual recommendations. 

First, let’s turn to Mitek Systems (MITK).  In layman’s terms, could you explain what the company does and why you find it attractive?

Tyler Laundon:  Yes, Mitek is a great little company.  It actually just reported yesterday with a terrific result, which we’ll get into in a minute; but it’s a $230 million market cap company right now and really it’s just a software company.

They’ve developed mobile capture and identify verification solutions, which they sell to large companies and really what they are best known for is mobile deposit.

Most people now are, you know, using their smart phones to deposit checks.  If you go on to your banking app, open that up and then click on mobile deposit and then you go and you can take a picture of your check, you’ll probably see the little Mitek signal on that application, and so Mitek sells this software to the banking customer and they get revenue for that. 

They also get a small slice of each mobile deposit that is processed and so it’s a great little business.  It’s sort of their bread and butter; but I think they also license the technology out to other software providers and so that’s been a great little business for them. 

They’ve also started branching out into identity verification solutions, so again, all of this is really going back to the growth in smart phones and tablets. 

If a consumer goes out to say the grocery store and wants to apply for a new credit card, it’s very easy to do that now over mobile devices; but one of the missing pieces is identity verification and Mitek has developed applications that allow that to happen through a mobile device. 

They can actually take a picture of your driver’s license and it auto-fills in all of the necessary fields, proof that you are who you say you are, and then that information then can be sent on to the financial institution who may be interested in giving you a credit card.  

So that business now, I’m not exactly sure because management doesn’t particularly break it out specifically, but it seems like it’s around 30% of revenues, and so it’s really helping to push top-line growth. 

It’s a higher profit-margin business because these new identity solutions are helping Mitek’s customers land new clients, so they’re really willing to pay up for that and just, you know, the company just reported 50% revenue growth yesterday.

This is a small company.  It’s a $7 stock right now, but we see good things in the future for Mitek and it certainly is in a good little specialized business.

Steve Halpern:  Now let’s talk about a second stock you’ve agreed to share with us and that’s NanoString Technologies (NSTG) and, again, this is a fairly complex industry, so could you give our listeners a brief explanation about the company, as well as an overview of its long-term prospects?

Tyler Laundon:   Yes, so NanoString, again, is another small-cap, as you would expect.  It’s a $300 million market cap right now and it’s basically a medical device company with a consumable component. 

In layman’s terms, think of a desktop printer that we all have at home or in our office and we, you know, we use that for printing paper and then we buy the ink.

So NanoString has developed desktop units, along with some larger units, that analyze human tissue and through some of their consumables, they can tell researchers about the DNA, the RNA, the proteins -- basically everything that’s going on from that human tissue.

That information can be used to help develop treatments for -- usually it’s for cancer treatments -- and so NanoString has not only developed the equipment the researchers are using to help better understand what’s going on in cancer research.

Also the equipment and the consumables that are being used to help companies like Merck (MRK), Medivation (MDVN), Stellus (SCM), to develop diagnostic tests to help figure out what kind of drugs are going to be most effective at treating the types of cancers that that particular patient has.  

So this is really personalized medicine and NanoString is doing great.  Their revenues were up 43% in the last quarter.  They’re starting to develop smaller units that are less expensive. 

One of the really interesting things in this medical device field is that while the cost of drugs is going up, the cost of a lot of this diagnostic equipment is coming down.

So it’s opening up the field to more researchers, more small research labs that are able to use the technology to help fight cancer, and so a great long-term trend.  A really high quality company and they should be reporting next week and we’re looking for a good result.

Steve Halpern:  Again, our guest is Tyler Laundon of Cabot Small-Cap Confidential.  Thank you so much for joining us today.

Tyler Laundon:  Thanks, Steven.  Take care.

By Tyler Laundon, Editor of Cabot Small-Cap Confidential

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