Hedge fund Founder Steve Palmer invests in micro- and small-cap companies that might grow explosively through successful exploration or development of novel technologies. By maintaining his focus on ground-breaking companies rather than commodities, Steve's AlphaNorth Partners Fund has achieved an extraordinary annualized return of 57.3% for the three year period ending April 30, 2011. In this exclusive interview with The Energy Report, he shares his secrets for targeting growth companies.
Companies Mentioned: Athabasca Uranium Inc. Lithium Americas Corp. Newfield Exploration Company Primary Petroleum Rosetta Resources Inc. U3O8 Corp.
The Energy Report: You focus largely on Canadian companies. Why? Is this a long-term play on the Canadian dollar or against the U.S. dollar?
Steve Palmer: Well, I live in Canada and deal in Canadian dollars. Most of my investors are Canadian. So, that's the logical answer. There's no shortage here of opportunities to invest in small companies that offer very attractive returns. So, I don't need to start going out of my area of expertise and looking for ideas in other countries where I'm not as familiar with the people or how things work.
TER: Are you able to accept accredited U.S. investors in your fund?
SP: No. We can accept international investors from anywhere in the world except the U.S.
TER: Are you still roughly half technology?
SP: Not quite half. It's about 30% technology right now.
TER: And your tech sector is also mainly Canadian?
SP: Yes.
TER: I'm aware that you at times rely on technical analysis. I'm just thinking about your small- and micro-cap space here. Isn't technical analysis much less reliable in some of these very small companies?
SP: Yes, that's true, especially some of the companies that have a much shorter trading history. Some of the companies don't necessarily trade every day or don't have much volume. So, technical analysis is less meaningful in those situations.
But, the primary benefit of our technical work is identifying the appropriate points to sell. I think that's what distinguishes managers when they sell investments. Historically our technical work has added significant value for us in getting out of situations at the right time.
TER: So, its primary value for you is in determining exit points?
SP: Yes. It also provides us a sell discipline. It's easy to marry the stock, but the technical work provides an unbiased viewpoint. So whenever the technical indicators on one of our positions tells me to sell, I take money off the table even if I still like the company's fundamentals. So, I'll sell some with the idea that if I still like it and the stock goes down a bit I'll just buy it back cheaper. If I'm wrong, it'll just force me to take some profits on the way up.
TER: You invest in special situations. Are there any you can talk about?
SP: There are a couple. They're quite small. There are several situations where companies have a special technology. One, for example, upgrades heavy oil more efficiently than the current process. Things like that—unique technologies that can be widely used and have significant value impacts for some larger companies.
But these companies are not proven necessarily just yet. This one particular company I'm talking about is in the pilot plant stage. But, the special situations are just ideas like that—unique technologies that can have a big impact.
TER: Ok. You're not able to mention that company?
SP: No it's too early to mention.
TER: Do you have a theme or some underlying theory for looking at your energy plays?
SP: I tend to focus more on international companies with international assets because they often have much bigger upside potential rather than just a low-risk domestic company.
TER: How are you weighted in energy?
SP: More weighted toward oil. Although I know a lot of people are negative on gas, I like to be contrarian whenever I can so I'm not negative on it. I don't view it as having much downside from here. It's only a matter of time before it starts doing better.
