To OTC Journal Members:
 

There's Still Plenty of Low Hanging Fruit in MicroCaps

Over the next thirty days I expect the market to be as confused as a California voter. Four of the last five trading days have been down. The perennial September correction may have gotten underway, which generally offers some of the best buying opportunities of the year as October, November, and December generally steam ahead. Hence my September 6th edition on taking out market insurance with some QQQ puts.

Prices have gotten a little ahead of earnings. The September pullback, combined with 3rd quarter earnings results in October, should help us right the ship. A Dow pullback to 9000 and Nasdaq to 1700 would still leave the uptrend intact as measured from the early March low when the new Bull was born.

However, the microcap market is just coming into its own, as evidenced by some recent major wins. Many of these companies are completing a cycle which started earlier this year. Unless you are intimate and experienced in this end of the market, it can be tough to identify this cycle.  I'll define what's happening.
 

When Your Stock Hits Phase IV, You Make Money

The stock market started to collapse in March of 2000 when the bubble burst, but the real recession did not take hold until 2001. The business climate was eroding, and capital for expansion became difficult to find. Equity financing for small companies dried up to zero by 2002 exacerbated by the triple whammy of the bubble bursting, 911, and Enronitis.

Earlier this year, through the stimulative policies of the FED and the completion of the cycle, stocks had bottomed as the endless supply driving markets lower dried up. With the end of the war, the market began to rebound and small companies began to get access to equity capital.

Small companies have been putting that renewed supply of capital to work over the last six months, any by my unofficial poll business is booming for many of those I cover. More importantly, it is beginning to show up in their stock prices.

There will probably an edition published Monday, Tuesday, and Wednesday of next week. I don't like to publish that much, but I have major fundamental corporate events to cover: and I mean Major!! These are business changing events; the kind that push stocks to higher levels.

The cycle goes something like this:

• Phase I: Recession starts, capital dries up, stock prices go down, companies go into "survival" mode.
• Phase II: Growth begins to return, companies get access to equity capital, stock prices bounce off the bottom.
• Phase III: Companies invest new found capital in expanded goods and services, new capital financiers cause excess supply of stock to hit the markets, slowing potential rebound in stock prices.
• Phase IV: Companies implement new business strategies fueled by access to capital; business grows, financiers run out of supplies of stock which have held markets back, and stocks break out as companies announce fundamental progress.

• VirTra Systems (VTSI): The company had access to equity capital over the last three months, and used it to expand their business model. The company delivered the first sale of its revolutionary new product, and investors enjoyed a massive jump in stock price this past week. I first wrote about the company on July 15th at $.10. The stock hit $.29 this week- 190% gain (1140% annualized return).
• StockGroup Technologies (SWEB): StockGroup used equity capital to eradicate all their long term debt this year, but temporarily mortgaged the future of their stock price in doing so and created an excess supply. The stock exploded on high volume this past week and made a new 52 week high of $.40 on Thursday. I reopened coverage on this stock on September 6th, 2002 at $.19. More than a double over the past year. More on StockGroup next week.

I talk to more Presidents of microcap companies than just about anybody. I can tell you in no uncertain terms business is really starting to boom. Several of the companies I have been reporting on are at or near Phase IV, and the stocks are close to the kind of explosions we all enjoyed with VirTra Systems this past week.

Once Phase IV begins you can enjoy dramatic moves in stock price. However, if you don't own the stock before it enters Phase IV, chances are you will miss a lot of the run. (i.e. having to buy VTSI at about $.25 on the opening trade this week after the news).

There's still plenty of low hanging fruit in the microcap world. Based on the news I am hearing, I wouldn't be surprised if we had another major breakout this week as one or two other companies are on the verge of Phase IV breakouts.

NetWork Installations (OTC BB: NWIS), my idea in the red hot Wi-Fi sector, is definitely in Phase III and could make the jump to Phase IV any day now. The company was out with news on Friday after the close.
 

NetWork Installation (OTC BB: NWIS) Inks New Contract for USC

This bar graph demonstrates the anticipated growth in wireless technology for industrial monitoring and control applications. This is another reason I like the future of Wi-Fi; it will continue to grow exponentially for years to come in ways far beyond simple Hot Spots.

NetWork Installation announced another contract with USC after the close on Friday. The company will be installing IP driven surveillance video hardware which will overlook and monitor the construction of the University's state of the art Molecular Sciences Building. You will be able to watch the construction through a live video stream over the USC web site.

Included in the news release was the USC budget for new construction in 2004- the University will be spending $260 million next year. One would expect a campus wide Wi-Fi solution to be in the cards, and NetWork Installation will no doubt be first in line for the award of that potential business.

I have been suggesting accumulating the stock at or below $3 while we wait for the move to Phase IV. The stock has not given any ground during this down week, and continues to trade above $3. It seems unlikely it will get cheaper in the immediate future, so you have to consider accumulating at slightly higher levels.

Here is the complete text of Friday's news release:
 

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