Wall Street West—Small-Cap Bargain Hunter Buys Stake in Vitamin Firm

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When a private investor plunks down a large wad of cash on a public company, some call it a “PIPE” (Private Investment in Public Equity). But Dan Rubin, of Century City-based Rubin Investment Group investment banking shop, has coined his own word: “SIPO” (Single Investor Public Offering). Whatever the acronym (as if Wall Street needed more), last week Rubin sank a cool $3 million into stock sold to him alone by Century City-based Cetalon Corp., a purveyor of vitamin pills and other health products.

What prompted Rubin’s investment was Cetalon’s increasing presence within giant retailer Sears, Roebuck & Co. Cetalon bills itself as operating “stores within stores,” in which Cetalon retails vitamins and other health supplements to the passing crowd. “They now have outlets in 57 Sears, with plans for another 15 to 25 soon,” said Rubin.

A fan of small capitalization stocks and even microcaps, Rubin likes the OTC bulletin board-listed Cetalon for its rapid growth, which he thinks will allow it to post profits next year. The stock, trading last week in the $1.75 range, is off from its 52-week high of $5, another aspect Rubin likes.

“What you see in this market is a lot of companies that were once mid-caps now trading as small caps,” he said. “They are not down on the fundamentals. They are down with the market.”

Once stocks sink below a certain market capitalization, be it $1 billion or $250 million, they fall under minimum capitalization standards required by many mutual funds. In short, the descent into small-capville becomes a tumble into oblivion.

Rubin, who also runs the RIG Microcap Fund LP (which requires a minimum investment of $1 million), noted that small caps have risen this year, even as larger stocks sagged. And since Sept. 20, small caps have been red hot. Investors are putting money into small-cap funds now, said Rubin, who predicted that 2002 would thus be a banner year for Lilliputian stocks.

“Some of these small-cap stocks will appreciate enough to where they start to get purchased by the big funds again. Then you get a second run,” he said.


Playing for Dollars

The researchers at Wedbush Morgan Securities have liked video game stocks for more than a year, and made some good calls on two local game software outfits, including Calabasas-based Activision Inc. and Santa Monica-based THQ Inc. Both stocks have more than doubled in the last year.

So it was not much of a surprise to learn that Calabasas-based TDK Mediactive Inc., traded on the OTC bulletin board, has retained Wedbush Morgan as financial adviser and investment banker. Terms of the agreement were not disclosed, but insiders say Wedbush Morgan will seek a cash infusion and relisting on the Nasdaq. Vincent Bitetti, TDK Mediactive’s chief executive, said his firm has many new titles ready to launch for the holiday season, including a game called “Shrek,” which is compatible with Microsoft’s new Xbox game-playing hardware.

Though traded separately under the symbol TDKM, the video game outfit is part of Toyko-based TDK Corp., an electronics goods and semiconductor manufacturer. TDK Mediactive is billed as part of TDK’s efforts to move beyond hardware into software and content.


Buyback and Payback

Getting high marks from Hulbert’s Financial Digest, the newsletter that ranks stock market newsletters, is Pacific Palisades-based Buyback Letter, a stock-picking outfit run by David Fried, once known to a previous generation of Angelenos for his clothing manufacturing company, branded “Sitting Pretty.” Hulbert’s ranked the Buyback Letter the No. 1 stock-picking service for risk-adjusted returns. That means Fried delivered good returns without a lot of volatility his portfolio of picks.

Fried tracks publicly held companies that announce, and then follow through on, plans to buy back their own shares.

It’s the follow-through on buybacks that wins admirers. “A lot of companies announce the buybacks, but then don’t execute. Don’t invest in those stocks,” he advises. In general, Fried likes stocks that are undervalued on the fundamentals; that is, they sell for lower price-earnings or other ratios than peer group stocks, or the market as a whole. In that scenario, the company executing a buyback is sincere in its estimation that the stock is, in fact, undervalued.

Last week, Fried made a new recommendation that investors shop for shares in Dayton, Ohio-based Rex Stores Inc., a retailer of electronic consumer goods that serves population centers too small to support national chains. Rex has a tax credit nearly equal to its market capitalization, buys goods on the cheap through second sales, owns real estate and has been buying back its own shares 25 percent of the float in the last year. “This company would liquidate for more than what they are selling for on Wall Street right now,” said Fried.


Invoices

It’s a tough market to raise venture capital, but last week Mark Friedman, chief executive of Santa Monica-based Accruent Inc., confirmed that his shop has received a $10 million equity injection from a pod of venture funds, including Costa Mesa-based InnoCal Venture Capital. In a nutshell, Accruent designs and installs software that helps Fortune 500 companies track their contracts with vendors in an effort to reduce overpayments.

“A typical Fortune 500 company will have between 20,000 and 40,000 contracts, and they are making payments on each one,” said Friedman. “And it is very common for vendors to be very aggressive in the way they send in their invoices.”


Going Hawaiian

Torrance-based King’s Hawaiian Enterprises Inc. sold its frozen-foods unit to Pinnacle Foods Corp., the Florida-based unit of LBO shop Hicks Muse Tate & Furst. King’s Hawaiian, known best for its breads sold in grocery chains nationwide, launched the frozen-foods division in 1993. It is second to Uncle Ben’s nationwide in the frozen bowl meal category, said Bill Shaw of Roth Capital Partners, who handled the sale for King’s Hawaiian. Terms weren’t disclosed, but Shaw said King’s Hawaiian would use the proceeds to expand its core bakery business, with a new 100,000 square foot bakery in L.A.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].

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