Why 2014 may be a better year from my small cap holdings

By Gerald GehmanCovestor

This has not been a good year for my investments in small cap stocks or the Covestor Undervalued Growth Companies portfolio. All of the 11 stocks in the portfolio have been performing poorly all year. However, their time will come in my opinion.

All of the companies in my portfolio are building a good “business base.” I believe it will take a little longer for the market to reflect their value in stock prices.

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On December 3 and 4, I attended George Gilder’s New Telecosm Summit at the Penn Club in New York City. The theme revolves around George’s recent book Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World. The book is very valuable reading in my opinion.

The theme is that information (creativity) is “surprise.” Great profits are made when surprises are introduced. The entrepreneur requires a system of rules, disciplines, and formalized government so that creative people can generate new knowledge.

A successful capitalist society, then, is not one of “incentives,” but one in which creative people can create knowledge – or surprises.

George Gilder manages a venture capital fund. He invited a number of his entrepreneur friends, and venture capital companies to discuss the ways that knowledge and information flow at the speed of light.

I spoke with the management of EZChip (EZCH) my largest holding. The stock is under pressure, but EZCH is developing processors that are years ahead of any mercantile (commercial) competitors in my opinion.

In my opinion, EZCH develops the most sophisticated and most expensive Net Processing Units that speed the flow of information through the edge routers on the Internet. Their chips are used at the high end applications.

EZCH’s competition comes from processors that are developed “in-house” by router makers. These processors can fill in at lower capacity areas, but EZCH controls the high-end market.

As carrier spending increases for edge routers, the demand for EZCH processors continues to grow in my view.

EZCH is also developing a new conceptual chip – the NPS – that may revolutionize the flow of information through the internet.

As per the George Gilder book, we need EZCH to surprise us with a “blow out” quarter of sales, or a serious commitment from a new account to commit to their new NPS. This might happen. Obviously, I have no way of knowing for sure, but I believe the stock is extremely cheap and could be trading significantly higher in a short period of time.

Wave Systems Corp. (WAVX) also presented at the Conference. Bill Solms is the new CEO. The company has been developing cutting edge software for data protection for many years. The company was founded in 1988.

WAVX has made some large sales to General Motors (GM), (BP), Price Waterhouse and some other companies, but has never been able to develop any sales momentum.

Bill Solms is streamlining the organization and developing a strong, disciplined sales system.

The new slogan is:  “Ultra Secure Network Access.”  Only known and trusted devices and can touch “your” network.

Bill is confident that he can make the company profitable within a reasonable amount of time. I believe that he can. (Disclosure: I sold this stock in November.)

My wife and I wish everyone a Very Merry Christmas and a very Happy Holidays.

DISCLAIMER:  The investments discussed are held in client accounts as of November 30, 2013.  These investments may or may not be currently held in client accounts.  The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.  Past performance is no guarantee of future results.

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