Bargain hunters wait for opening

Date: Tuesday, January 15, 2008
Author: Shirley Wan, Globeadvisor.com Fund Reporter

Elmwood Capital managers expect under-followed small caps to explode in value.

Hedge fund manager Rick Serafini expects to go bargain hunting later this year for smaller U.S. company stocks.

Stocks are now being pummelled because of liquidations by hedge and mutual funds to meet heavy redemptions, said the manger with Milton, Ont.-based Elmwood Capital Inc.

"Last year, there was a lot of volatility in the markets, and a lot of hedge funds didn't perform," said the manger of the $16.6-million Arrow Elmwood Fund. "So investors are pulling out their money. On the mutual fund side ... they are redeeming as well."

But Mr. Serafini, whose fund is 25 per cent in cash, predicted the mass selling is setting up the stage for a "fantastic opportunity" in the second or third quarter.

He expects a possible 30-to-40 per cent return on the Nasdaq from a trough later this year, to a peak in 2009. The returns are more likely to come from smaller-capitalization stocks as opposed to the big names of this year such as Research In Motion and Google, Mr. Serafini said.

His shopping list of Nasdaq stocks include companies such as AuthenTec Inc., a fingerprint sensor company used to verify identification on computers and cellphones, and also IPG Photonics Corp., a maker of fibre lasers.

The Arrow Elmwood Fund, which he co-manages with Scott Coleman, focuses on U.S. technology, health care and alternative energy names. He also buys Canadian stocks. They typically have a market capitalization of $50-million to $1-billion, and are "below The Street's radar," he said.

The fund is focused on small and micro-cap stocks that have been abandoned by Wall Street analysts after the bursting of the Internet bubble. Mr. Serafini said he believes his firm's research in areas such as U.S. patents give it a "knowledge advantage relative to others investing in this segment."

Stocks are also getting pummelled because a sharp economic downturn is being priced in, he said.

"Anybody who walks down Main Street U.S. knows the United States is in a recession."

The Arrow Elmwood Fund posted a 17-per-cent return for the year ended Dec. 31. That fund, which began in late 2005, is run alongside Elmwood's U.S.-based hedge fund that has posted a 7.8-per-cent average annual return since inception in 2001.

Where he is long:

GeneNews Ltd. (GEN-TSX): The Toronto-based company is developing a blood-based screening test for early stage colon cancer, but its platform can also be applied to prostate and kidney cancer, he said. The test is expected to be on the market in Europe and Canada in 2009, and in the United States by late 2009 or 2010. He expects GeneNews to be a $5-to-$10 stock in two years. The molecular diagnostic industry is fast growing, recession-proof and has lower regulatory hurdles, but the "same upside as drug or biotechnology stocks," he said. The stock closed at 85¢.

Chyron Corp. (CGS-A): The Melville, N.Y.-based maker of graphics systems used primarily on TV news and sports broadcasts is "going through a renewal due to the transition to HDTV," he said. "A lot of broadcasters are buying their HDTV-compliant product so that is causing an uptick in sales. What is exciting about the company is that they are able to take that capability of generating quality graphics ... and focus on the online video market." Broadcasters, newspapers and other clients will head to Chyron for "funky features" that can be put on the Internet, he said. "They are about to enter that market this year. I believe it's a $10 stock [in a year.]" Chyron closed yesterday at $5.26 (U.S.).

Where he is short:

UltraShort Russell 2000 ProShares ETF (TWM-A): The ETF delivers two times the inverse daily performance of the underlying U.S. small-capitalization index and also pays a dividend, he said. "A bearish view on the Russell has been the right place to be in the last six months," he said. "Just last week, we reduced our position, but we are still there." The ETF closed yesterday at $80.85.