Cedar Creek Partners LLC, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 8.6% was recorded by the fund for the second quarter of 2021, below the NASDAQ Index, which delivered a 9.5% return for the same period. However, the fund outperformed the S&P 500 (SPY) Index’s 8.4% return, and the Russell Micro Cap’s respectable 4.1%. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Cedar Creek Partners LLC, the fund mentioned Nocopi Technologies, Inc. (NYSE: NNUP), and discussed its stance on the firm. Nocopi Technologies, Inc. is a West Conshohocken, Pennsylvania-based document security products developer, that currently has a $13.3 million market capitalization. NNUP delivered a 36.55% return since the beginning of the year, while its 12-month returns are up by 19.13%. The stock closed at $0.1980 per share on July 23, 2021.
Here is what Cedar Creek Partners LLC has to say about Nocopi Technologies, Inc. in its Q2 2021 investor letter:
“Nocopi Technologies (NNUP) is a new holding. On May 6 Eriksen Capital Management, the managing member of this fund, filed a 13D that we owned more than 5% of Nocopi. Nocopi markets specialty reactive inks in the educational and toy markets. Their Rub-it & Color technology can be used for coloring books, activity kits, play sheets, greeting cards, or any paper-based application. It is a very small company. It has four full-time and two part-time employees. In other words, it is almost a royalty company, although they do mix and sell their specialty ink.
Currently there are just over 67 million shares outstanding at a price of $0.20 per share, resulting in a market cap of $13.4 million. The company has no debt and cash of just over $1.7 million. Earnings are better than they appear due to revenue recognition rules. When they signed a four year contract, they booked all the guaranteed revenue in the quarter the deal was signed even though most of it would be paid over the life of the contract. The result is quarterly earnings are about $100,000 more than what is reported. Normalized annual cash flow is roughly $1 million and growing, except due to apparent cost pressures in 2020, and we think the number could be improved.
The problem with the company is the board and CEO. The CEO ran an activist campaign to gain control of the board in 2000. The last shareholder’s meeting was … you guessed it 2000. The guy running an activist campaign basically did all the things he promised not to do. In fact, many of the same people who supported him later filed a 13D against him. He still did nothing. Actually, he changed the bylaws to make it near impossible for shareholders to add a board member and he did give himself a 50% raise. So, we can’t say he did nothing. We are still waiting on a return call request from the first week in May after we filed our 13D. I believe over his twenty years of running the company shareholders are still in the red.
The company has also filed more Form 5’s than we have ever seen. We had to look up what a Form 5 was because we hadn’t run across one is a long time. A Form 5 basically is what you file when an insider buys or sells shares and fails to properly report the purchase or sale to the SEC on a Form 4. We believe there are even more omissions in filings. For example, in their 2020 10-K Director Marc Rash is reported to own 208,333 shares. In the 2021 10-K he is reported as having none, yet he did not file any Form 4 noting any sale orifting of shares, nor a Form 5. Apparently, they magically disappeared.
Here is another unbelievable item, the Audit Committee currently consists of one person, the CEO. That means the CEO is in charge of retaining an auditor to oversee himself and the CFO. At least they admit in their 10-K that the CEO is not a “audit committee financial expert.” It is comforting to know that someone who should not even be in the role of overseeing himself is also not even qualified to be in the role. And don’t get us started on what appear to us as improper insider trading by the CEO right before reporting a near 30% drop in earnings in the December 2020 quarter.
We purchased most of our shares in April at under $0.15 per share, so we had a 30% gain on the position in the quarter. Stay tuned to see how it turns out.”
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Based on our calculations, Nocopi Technologies, Inc. (NYSE: NNUP) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Nocopi Technologies, Inc. (NYSE: NNUP) delivered a 44.90% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
