Edward Crawford // Co-Portfolio Manager // Roumell Opportunistic Value (RAMVX)

Comments & Outlook

Bond yields are at their lowest levels since the Great Depression. The question is whether bond prices will collapse once the US government exits the bond market.

Historically low interest rates are contributing to the highest pre-tax corporate profit margins in 60 years. That’s the only reason the stock market looks reasonably valued on a current- year earnings basis. But the cyclically adjusted price-earnings ratio (P/E), which averages earnings over the past 10 years to account for a full economic cycle, shows the market is trading at a roughly 30 percent premium to its post-WWII median P/E. So we advise caution at present.

Investment Strategy

We largely focus on underfollowed small- and micro-cap stocks because that gives us an informational edge. We look for companies with strong balance sheets that have fallen out of favor with the market.

We’re bottom-up investors with pricing discipline. Additionally, we have no mandate to be fully invested. In the absence of compelling investment opportunities, we can idle in cash, which is currently around 20 percent of assets.

Portfolio Picks

Sandstorm Metals & Energy (TSX: SND) is a $130 million company that provides upfront financing to small resource plays. In exchange, they have the right to purchase a percentage of production at a price below the cost of production for the life of the asset. For example, they’re buying palladium at $100 per ounce vs. the market price of $750. Sandstorm is able to extract such favorable terms because the tiny companies it finances have limited access to the capital markets. In particular, the financing market for junior miners is terrible at present.

Our recent investment in teen apparel retailer Aeropostale (NYSE: ARO) is a play on the tendency of corporate margins to revert to their mean. The company’s recent sales performance has been disappointing, but it’s closing underperforming stores to improve productivity.

Aeropostale also has a newer chain that targets a younger demographic. It’s been a drag on margins, but is expected to break even this year and offers further growth potential. Internationally, the company employs a licensing model, which offers substantial margins while mitigating operating risk. Aeropostale has net cash on its balance sheet and has generated free cash flow every year for the past 10 years.

Damon Vickers // Chief Investment Officer // DamonVickers+Co

Comments & Outlook

After 13 years of sideways trading, we’ve finally entered a new bull market. This year could be reminiscent of 1982, when the Dow Jones Industrial Average broke above 1,000 after flirting with that threshold for 15 years. As such, we could see the Dow hit 16,000 in 2013, and 20,000 within two years.

We have companies that are innovating and becoming more profitable. But the market is splintered. On one side are names that are leading the bull market; on the other are those representative of the past. Those in the latter group that appear to be bargains—such as Citigroup, Intel, Cisco, and Microsoft—should actually be avoided.

Investment Strategy

US equities look better now than they have in a long time, though you have to focus on high-quality companies that are in the path of social and economic change.

Over the past 100 years, the companies that performed the best were those benefiting from social change. In the 1920s, it was the auto companies; in the 1990s, it was personal computers; and in the last decade, it was housing.

The winners in this cycle will be companies benefiting from growth in cloud computing and data analysis, those that are changing the way we shop and spend money, and companies that help make us healthier.

Portfolio Picks

Data is becoming available anywhere, anytime. The next frontier is cloud computing, where data resides on the Internet instead of on local devices. This has the potential to kill the personal computer business.

Google (NSDQ: GOOG) is going to play a big part in this new frontier. Its share of the smartphone market based on the number of devices that carry its Android operating system already dwarfs Apple (NSDQ: AAPL) by five to one.

DirecTV (NSDQ: DTV), which provides pay-TV via satellite, is a fantastic company delivering a quality experience to its customers.

We also like specialty retailer Cabela’s (NYSE: CAB), which is doing a great job reinventing the shopping experience for people who love the outdoors. The company is still relatively small and growing, and we expect that trajectory to continue.

We’re also shareholders in Amgen (NSDQ: AMGN) and Mylan (NSDQ: MYL). They’re addressing disease at the cellular level, and that’s where the real progress will be made on making us healthier.