Cheap Stocks

We focus on undervalued small-cap stocks. Usually with a large cash cushion. We have developed a valuation formula that has been highly successful, especially on small tech stocks. Since 2006, we have closed out 49 stock positions with an average gain of 37%. 9 stocks have been taken over.

Sunday, February 24, 2008

Cheap Stocks, 2/23/2008 Update

Small rebound in the markets last week (except for NASDAQ). Still, the overall direction is down and good news continues to get no respect (See SPNC update). We are doubling up on SPNC. We have not seen some of these type of valuations since 2002. The sky was falling then to. But it didn't fall. The stock prices rose. If we were not so heavily weighted in DWCH, PARL, ILOG, BDAY and MIVA, we would add more in these also.

All of the major averages have lost all their 2007 gains and then some from 12/31/2006. And we have too.

We were down 4.1% last week on the amazing 34% plunge in SPNC--on a good earnings report, bringing our YTD 2008 loss to 31.8%. NASDAQ was down .8%, the DOW was up .3% and the S+P 500 was up .2%. There are lots of cheap stocks around now, but we keep coming back to the ones we already own as being the best values.

Last week we went 9 stocks up, 5 down and 1 even.

For last week, 2008 year-to-date, and since we started this Blog in January 2006, our model portfolio is -4.1%,-31.8 and +2.0% respectively. Since inception we are now 18 stocks up and 14 down.

So far in 2008 the DOW is down 6.7%, NASDAQ is down 13.2% and the S+P 500 is down 7.8%

The Russell 3000 and the Wilshire 5000 are both down just under 8% this year.

Since inception we have closed out the following positions:

2006-NTCT +44%
2006-ONXS +11% (Buyout offer)
2006-DTLK +41%
2006-CAW +21% (Buyout offer)
2007-IYXI.ob +44% (Buyout offer)
2007-MOBI +47% (Buyout offer)
2007-INFT +11% (Buyout offer)
2007-RITT +62%
2007-MIVA +55%
2007-DTLK +25% (2 weeks)
2007-PDLI + 3% (Waited too long to sell)
2007-QADI +25%
2007-CIMT +50%
2007-BDR +19%
2007-LINN.ob -57% (mortgage business bust didn't help here)
2007-TISA -39% (take some tax loss for 2007 due to disappointing results.
2008-ANGN +26%

The model portfolio assumes $10,000 invested in each stock (unless we double-up--then it is $20,000), less $10 commission each way (TD Ameritrade rate).

For the 16 stocks that we closed out in 2006, 2007 and 2008 the average gain was 22%.

Spectranetics (SPNC-Recommended 9/2/2006)
Buy price $10.65, Valuation $20-$22
Down $4.28 to $8.42.
What a disaster. SPNC reports a sales increase of 35% and the stock plummets. They lost $89,000 for the quarter--after a 114% non-cash tax provision, non-cash stock compensation expense (not disclosed) and duplicate facility costs for their new manufacturing plant (not disclosed). "Talk" is the stock plunged because they missed analysts $.02 earnings guess ($600,000), or that their guidance for 2008 (25%--33% revenue growth was disappointing. No one really knows, but the panic hit SPNC hard--$134 million of market value lost last week alone.
The company has $54.4 million in cash ($1.73 per share--21% of the current share price), and is trading at about 2 times 2008 revenues (net of cash). This is stupid. We are doubling up here (another $10,000 investment).
Obviously SPNC management did not manage street expectations AT ALL. Otherwise this would not have happened.
New avg. Buy price will be $9.40.
Now down 21%. HOLD.

DataWatch Corp. (DWCH-Recommended 2/12/2006)
Buy price $3.21 (averaged down from $3.66), Valuation $9.03 (was $10.30, $9.28, $9.20, $8.32, $7.50, $7.63, $9.31)
Closed at $3.61, up $.03.
DWCH is now trading at 39% of our valuation.
No news.
Now up 15%. BUY

Parlux Fragrances (PARL-Recommended 11/30/2006)
Buy price $4.78 (was $6.12 before another $10,000 added, $6.65 before double up), Valuation $11.24 (Was $10.80 $9.20, $8.63, $13.77)
PARL closed at $3.57, up $.12.
Latest earnings were very good. Stock is down. The market in general is anticipating that the bottom will fall out of everything.
Now trading at 31% of our valuation.
The new management has 2.0 million reasons to make this stock go up. Glenn Nussdorf paid $6 for his shares.
Down 25%. BUY.

ILOG SA (ILOG-recommended 3/26/2007)
Buy price $12.08 (was $12.92 before another $10,000 added, $13.60 before double-up), Valuation $24.67 (was $20.51, $23.22, $20.99, $20.52)
Closed at $9.34 up $.30.
Our valuation moved back up to over $24 per share.
No one cares in this market. ANY negative comment, or lack of positive comment weighs on share pricing these days.
For FY2008 (this year) they are STILL projecting another 20% increase in sales but revised their earnings projections down. They still have $3.39 a share in cash.
A buy-out is a decent possibility here.
Down 23%. HOLD

Celebrate Express (BDAY-recommended 4/17/2007)
Buy Price $8.38 (was $8.82 before double-up), Valuation $15.51 (Was $17.85 $18.18)
Up $.10 to $5.23.
There will be no more birthdays or halloween. BDAY is not burning it up, but this is stupid.
Trading at 33% of our valuation.
The "turnaround" is not yet done.
Down 38%. BUY.

Mediware (MEDW-Recommended 6/4/2007)
Buy Price $6.52, (was $6.67 ($10,000 added), $6.98 after double up) Valuation $10.28 (was $13.32, $12.89, $13.40)
Up $.26 to $6.42.
Cannell Capital filed a 13D on February 19th, disclosing a 12.9% ownership stake. Most of this was purchased from Penninsula at $7.03 a share. Cannell is pushing MEDW management to sell the company. It seems the only was any stock can go up these days is on a buy-out.
Down 2%. HOLD

Candela Corp. (CLZR-Recommended 8/30/2007)
Buy Price $7.26, Valuation $8.69 (was $11.51)
Down $.24 to $3.47
No much going on here.
Down 52%. HOLD

MIVA. (MIVA-Recommended 10/21/2007)
Buy Price $2.38 (Was $2.62 before another $10,000 and was $3.00 before double up), Valuation $7.58 (was $7.59)
Up $.09 to $1.76.
Trading at 23% of our valuation
Down 26%. BUY

PDL Biopharma. (PDLI-Recommended 10/21/2007)
Buy Price $16.53 (was $20.04 before double-up), Valuation $24.00 to $30.00
Up $.12 to $15.75.
PDLI announced the sale of of their manufacturing assets last week for $240 million.
So total cash deals are $525 million (about $5.25 per share). They are still trying to sell their royalty stream.
After the market close on Friday DNA announced the FDA appoved Avastin for treatment of breast cancer. This just increased the value of the royalty stream.
We guess their royalty stream just based on the current marketed products is worth at least $1.5 billion, so this, plus the sales above, are more that the current market cap. Their pipeline, know-how, and remaining assets just add to this.
No matter, they are still trying to sell the company.
Down 5%. HOLD

Datalink. (DTLK-Recommended 10/31/2007)
Buy Price $4.28, Valuation $10.66 (Was, $9.39)
Up $.02 to $3.98.
No news.
Trading at only 37% of our valuation.
Down 7%. BUY

OB-abies (Bulletin Board Listed Stocks)

Interestingly, our OB-abies have held up better than the "higher-quality" stocks so far this year. They are down about 9% on average, compared to almost 18% for the stocks above. At least so far.

ARI Networks (ARIS.ob-Recommended 8/19/2006)
Buy price $1.61 (Was $1.78 before another $10,000 added, was $2.06 before double up), Valuation $5.71 (was $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $1.85, up $.05.
Earnings announced last month were great. Sales up 21% and they made money. This market just stinks for mini/micro caps, and ARI does little to get any investor attention. Wake up management--you have a great little company here worth 3X what it is selling for.
Now up 15%. BUY. Still a Huge valuation gap here.

OPTIO Software Inc. (OPTO.ob-Recommended 3/22/2006)
Buy price $1.25, Valuation $2.74 (was $2.34, $2.28, $2.89, $2.89, $2.54 and 2.88)
Closed at $1.18, down $.02.
OPTIO has cash of $.41 per share--35% of the market cap.
In June 2007, OPTIO announced they had hired an investment banker to help them review the "Strategic Alternatives" related to their Healthcare software division.
It has been over 8 months now since their announcement--with no announcement. We have to assume there will be no deal here. Management is derelict in making no announcement.
Still hoping we will see north of $2.00--but may not happen now unless next quarter rebounds with some decent profit numbers.
Down 6%. HOLD.

Avatech Solutions Inc. (AVSO.ob-Bought November 28, 2005)
Buy price $.93 (Was $.99 and $1.19 before adding $10,000-twice), Valuation $3.41 (was $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.83, down $.01.
Earnings out in early February. Sales up only 4%, but earnings up 69%!. EPS was $.04 compared to $.02 last year. Pre-tax earnings were up over 100%. Our valuation rose to $3.41. Stock goes down. Who can figure.
Now down 11%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask, Valuation $1.17 (Was $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price unchanged at $.34. Closed at $.24.
Maybe these guys will wake up and create some shareholder value in 2008.
This is still trading at only 30% of our latest valuation.
Up 26% based on the ASK price. BUY

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.95 (Was $1.08 before double-up) Valuation $2.08
Closed at $.81, down $.03.
LTUS announced an earnings restatement 2 weeks ago--OH NO!--but wait--they are restating their earnings UP--so the stock falls. This is all part of the market irrationallity right now.
Looks like they are catching up on their restatements per their SEC filings last week.
Down 14%. BUY


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