A Must Own Small Cap During These Volatile Times

Income investing has a place in every investment portfolio, and can be used as a strategy for diversification.

Just as importantly, these investments can provide a healthy source of income in periods when the stock market is moving sideways. And contrary to popular belief, investors can reap big profits in income generating investments - including fixed income securities such as bonds.

Given the current market volatility, "safer" income-generating investments are increasingly considered by smart investors.

Many investors think they are diversified with a mixed portfolio of equities, including stocks, mutual funds, and ETFs. However, real diversification can only happen when an investor owns more than one asset class and has exposure to real estate, hard assets such as gold, and fixed income securities including corporate bonds, municipal bonds, and Treasuries.

Many Americans have exposure to real estate through their home ownership, which is often their single largest asset. But many investors overlook the importance of income investments, since they are attracted to the historically superior, long-term gains of stocks.

This is a mistake. Classically balanced investment portfolios are typically allocated 60 percent to equities (stocks), and 40 percent to fixed-income (bonds). The exact allocation may change based upon individual circumstances including age, number of dependents, financial goals, and the number of years to retirement.

While most investors know that income-generating investments should be included in their portfolio, they may not know where to start.

Here is one such company that I mentioned several months ago to my Small Cap subscribers and I still think it is a wonderful income play.

Collector's Universe (Nasdaq: CLCT) deals in the relatively obscure business of collectibles, memorabilia, and authentication. But while the industry is obscure, this company is anything but. It owns some of the most recognized brands in the industry, including:

  • Professional Coin Grading Service (PCGS): Third-party coin grading service at: www.pcgs.com
  • Professional Sports Authenticator (PSA/ADN): Third-party sports-card grading service and autograph authentication provider at: www.psacard.com
  • Professional Stamp Experts ( PSE ): Leading third-party stamp grading service at: www.psestamp.com

With this suite of services, Collectors Universe authenticates and grades coins, tickets, memorabilia, stamps, and trading cards. In addition, it also pulls from its vast knowledge base to publish authoritative price guides, operate the online dealer-to-dealer Certified Coin Exchange (check it out at: www.certifiedcoinexchange.com), and hosts conventions.

If you own any collector, or numismatic coins, you've probably bought coins authenticated by PCGS. There are very few competitors in this field, and with gold and silver prices on the rise, the authentication process for rare collector coins should continue to experience growth.

Collectors Universe made the difficult decision to suspend its dividend payment on September 26, 2008. The root of this financial issue was primarily the credit crisis, and an unprofitable jewelry business that was discontinued in March of 2009. After the worst of the crisis passed, and management had made significant progress on the implementation of its strategic plan (which included getting out of the jewelry business) the Board of Directors approved a $0.25 per share dividend - this was subsequently increased to $0.30 per share in the company's 4th quarter of 2010 and again to $0.33 in the 2nd quarter of 2011. Each of these represented dividend increases of 10 percent or more.

While no dividend is 100 percent secure, the decision to divest the jewelry business and focus on the less capital intensive collectibles grading and authentication businesses has thus far proven to be the right move for Collectors Universe. The company was able to buy back nearly $9 million of its own stock in the first quarter of 2010, stop bleeding money, and start making it instead.

In the third quarter of 2011 (ending March 31, 2011) Collectors Universe recorded revenues of $12.6 million, a 17 percent increase over the third quarter of 2010. Net income was $1.97 million, or $0.25 per diluted share.

With this company back on track, it has been able to focus on its coin grading business which grew by 21 percent in the most recent quarter. At the end of the quarter it was sitting on $21.2 million in cash and no long-term debt, and it continues to wind down lease obligations leftover from its discontinued operations - thus freeing up even more cash flow.

Despite a tough couple of years, Collectors Universe seems to have been able to emerge a stronger, more focused company. It is still a tiny small cap stock, but its beta of 1.0 is an indication that this stock is not as volatile as most in this asset class. And the strengthened financial position leads me to believe that the dividend is secure for coming quarters.

Trading volume in this company is thin, only around 33,000 shares a day. And there is zero analyst coverage so if you buy shares you will need to be comfortable doing your own research. But if you are, this one is worth taking a close look at since it offers a fat dividend, reasonably stable stock price, and double digit growth.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.