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Home > The Sophisticated Investor - Articles & Interviews > Interview with Bill Mathews of The Cheap Investor

Interview with Bill Mathews of The Cheap Investor

Interview with Bill Mathews of The Cheap InvestorBill Mathews, an authority on microcaps and turnaround stocks, and publisher of The Cheap Investor, is an often-quoted expert whose market outlook has been featured on many financial broadcast programs, including those on CNBC. He recently invested some of his own time with us, giving us some recommendations and talking about the evolution of this popular, readable resource for today’s savvy market-watchers.

How did you get into publishing The Cheap Investor?

I was teaching investments for Triton College after I got out of school in the mid- 70s … and I was going to write a book. And then I basically came across the newsletter business and I said maybe we will wind up doing a newsletter instead of a book. And that was in about 1980. In August of 1981, when the Dow was at 750, we started the Cheap Investor.

From the beginning it was covering small stocks?

Exactly. That’s what my area of specialty was. And it has always been small stocks. I believe that individual investors can make far more money investing in quality small stocks than they can in blue chips. And what I saw over that time, there wasn’t much information out there on small stocks. And you know I wanted to change that.

What is your investment discipline when you are working for small stocks?

We believe in the basic “Buy Low, Sell High” philosophy. We are looking for companies with increasing revenues, and earnings, but selling at or near their 52-week low.

When you stand back and finally realize that the way to make money is to buy low and sell high, that’s where you all of a sudden start looking at the 52-week lows. We usually have more big winners than anyone else out there for the simple reason we get our people in at the lowest price possible.

Are there any particular sectors that you prefer?

In each issue, we have four recommendations and usually there are probably four different sectors. What we have done since then is we have broken down our diversification into price criteria. In that we find the stock -- say from 10 cents to a $1 trade -- as a group themselves. The stocks from $1 to $3 generally trade as a group and the stocks from $3 on up trade as a group. We try to get our people to diversify into the different groups. For example, say you invest in 4 different companies between 25 and 50 cents, and you see all the other stocks moving except for yours. The reason they are not moving is because … even though there are four different stocks and four different industry groups they trade similarly because they are [all] in the same price group.

We found out that stocks in different price ranges trade alike. For example; today we are starting to see some of our stocks in the $1 to $3 levels moving. Meanwhile the penny stocks are doing nothing. They are usually the last in the cycle to move.

What current recommendations do you have for our readers?

A pretty hot stock would be Smith & Wesson (AMX: SWB), which just had a run up to $6.96. It's currently trading at $5.85. Our last recommendation on the stock was $1.96. There was just a little run up to $6.96, and then it fell back to the $5 support level and now it’s starting to move up again. We liked the company. We think this stock has a potential of moving much higher. When we were recommending it at $1.96, you know there was no Wall Street analyst that liked it. But you know between 6 and $6.96 all your momentum buyers were buying it. That’s really the difference between us out there. We would like to get people in at a good low price and let the market move the stock. The momentum buyers let the market move the stock, hit new highs and then they like to buy it.

Argosy Gaming. Now in the high $40s, we recommended this stock at $1.25. I think that’s a classic example of what separates us from the Wall Street momentum buyers is that we are in basically when no one wants it. We look at the fundamentals and after it’s on everyone’s “buy” list, they make us look good.

New York Exchange Milacron Ink’s stock symbol MZ selling at $82. We have that as a buy recommendation, they have good increasing sales and much lower losses. They are not profitable but have good assets. I think somewhere down the road companies like these are going to do well.

Fonar with stock symbol FONR. We have recommended the stock over the last 6 years every time it hits a dollar or below. Stock just recently fell down to $1.04. They got a very interesting standup MRI. A little $1 company that’s profitable, has good revenues. They have technology no one else out there has. What makes them interesting here is, individual investors are selling but institutions are buying.

One of things that we follow is where you can go and get all your institutional holdings. As of Dec. 31, the institutions owned 2 million shares of the company. Now, six months later they own roughly 6 million shares of the company. These are the little things that you know that we try to follow. Fonar, over the last 6 years, basically has cycled between a low of the dollar level. I think the all-time low is like 84 cents. The high was as high as $5. I think the last 3 years’ high is about $3. But it’s an interesting cycle. We would like to get people in stocks at good prices and let the market move them. I know a lot of newsletters recommend one stock. We go way out of our way to recommend much more than that because I don’t want to move these stocks. What I want to do is to get my people in good prices and let the market move them.

Who are the people you looked up to when you got into this arena? That you felt “Boy, these guys know what they are doing. I want to be like them.”

John Templeton. He came back from World War II [and] there’s a story where he went out and bought all the stocks on the New York Exchange. I don’t remember if it was under a dollar or under 50 cents. And they did tremendously well.

I think you know Peter Lynch of course, he is a value player. He likes to buy at low prices. One of the philosophies with Peter Lynch is never get scared out of a stock. And one of the reasons I like that philosophy: small stocks take more patience than blue chips do.

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