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.

Saturday, April 12, 2008

Cheap Stocks, 4/12/2008 Update

We came roaring back last week, up 8.4% on the back of nice gains in PDLI and DWCH. The markets slumped again last week as all the major indices were off about 3%.

We are recommending selling PDLI for a gain of 9% at the closing price of $13.84. We think it has more upside over the next few years, but in this market we will take a gain when we can get it.

NASDAQ was down 3.4% last week, the DOW was down 3.0% and the S+P 500 was down 2.7%.

Last week we went 8 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 +8.4%,-28.5 and +7.0% respectively. Since inception we are now 19 stocks up and 13 down.

So far in 2008 the DOW is down 7.8%, NASDAQ is down 13.7% and the S+P 500 is down 9.2%. The NASDAQ is now down a whopping 19.9% since October 31, 2007.

The Russell 3000 and the Wilshire 5000 are both down just about 9% 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%
2008-OPTO.ob +40% (Buy-out offer)

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 18 stocks that we closed out in 2006, 2007 and 2008 the average gain was 23%.

Spectranetics (SPNC-Recommended 9/2/2006)
Buy price $9.40 (was $10.65 before double up), Valuation $20-$22
Down $.50 to $8.53.
The company has $54.4 million in cash ($1.73 per share), and is trading at about 2 times 2008 revenues (net of cash)and is growing about 30% a year.
No news.
Now down 9%. BUY.

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 $4.15, up $.50. DWCH is now trading at 46% of our valuation.
No news.
Now up 32%. HOLD

Parlux Fragrances (PARL-Recommended 11/30/2006)
New Buy price $4.14 (was $4.78 before $10,000 adder, $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 $3.21, up $.14.
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 29% 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 22%. 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 $9.45 down $.55.
No news, just lack of interest.
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 30%. HOLD

Celebrate Express (BDAY-recommended 4/17/2007)
NEW Buy Price $6.15 (was $8.38 before $10,000 adder and $8.82 before double-up), Valuation $15.51 (Was $17.85 $18.18)
Up $.32 to $5.60.
Lots of action here. Buy-out offer, very bad quarter.
BDAY had a miserable quarter. Still struggling with their new computer systems, etc.
Sales down, big loss. Our valuation fell to $7.82.
BDAY also pulled their earnings announcement last week as they apparently received interest from someone on a buy-out. Were it not for this, we would pack up the truck and sell this one as their struggles are more than we thought (and they thought too).
Trading at 72% of our valuation.
Hold for a while until this "take-over" think flushes out. We are hoping it happens, but $9 a share looks like the most they could get.
Down 9%. HOLD.

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 $.29 at $5.73.
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. Hopefully they are working on this
Down 12%. HOLD

Candela Corp. (CLZR-Recommended 8/30/2007)
Buy Price $7.26, Valuation $8.69 (was $11.51)
Down $.39 to $2.83
This really stinks.
No news.
Down 61%. 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 $6.84 (was $7.58, $7.59)
Up $.12 to $1.79.
For 2008 they are projecting revenue of $145-$150 million and EBITDA breakeven. But it sounds like this will not happen until the second half of 2008. If they can turn this around-a double or triple from here is possible.
Our valuation dropped to $6.84. If they can do what they say in 2008, a valuation of close to $8 is possible.
Trading at 26% of our latest valuation
Down 25%. BUY

PDL Biopharma. (PDLI-Recommended 10/21/2007)
Buy Price $12.69 (was $14.15, before $10,000 adder, $16.53 before $10,000 adder, and $20.04 before double-up), Valuation $18.00 to $20.00
Up $2.71 to $13.84.
Up 3 weeks in a row!
PDLI announced a $4.25 special dividend, and a spin-off of their biotech business. So we will get cash, a royalty company and a R+D biotech company with $375 million in cash. Hard to value all that but our understanding is that the royalty company will have a bit of cash, and a $250 million revenue stream for at least the next 6 years. It has to pay off the PDLI debt of say $500 million though and we are not sure of the tax situation yet either. So say, $4.25 for the dividend, $8 for the royalty stream, net of expenses and taxes, and say $4 for the biotech spin-off=$16.25 total. We think there could be quite a bit of upside here over the next few years, but we recommend cashing out here unless you have a long-term horizon.
Up 9%. SELL

Datalink. (DTLK-Recommended 10/31/2007)
Buy Price $4.28, Valuation $10.66 (Was, $9.39)
Up $.05 to $3.90.
Earnings out Wednesday, April 16th, after the close.
Trading at only 37% of our valuation.
Down 9%. 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 10% on average, compared to 21% for the stocks above. At least so far. As proven by OPTIO, patience is necessary with these stocks.

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 $5.61 (was $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $1.50, down $.15.
Earnings were great, stock goes down. 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 down 7%. BUY. Still a Huge valuation gap here.

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 $.90, up $.04.
Earnings were 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.
Now down 3%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask, NEW Valuation $1.31 (Was $1.31, $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price up $.02 at $.29. Closed at $.22.
Earnings out at the end of March. Not bad at all. Q4 revenues were $4.8 million, gross margin was 72%, and excluding a $200,000 impairment charge, CTI actually made about $77k of income. Net cash (net of debt) grew by $350,000.
Our valuation went up to $1.31 per share.
Maybe these guys will wake up and create some shareholder value in 2008.
This is still trading at only 22% of our latest valuation.
UP 7%. BUY

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up) Valuation $2.08
Closed at $.66, up $.07.
No apparent reason for the recent decline. More sellers than buyers.
LTUS announced a $5 million private placement of stock in late February. 5,547,000 shares and warrants to purchase another 2.9 million shares at $1.20. Also in the agreement, the current big holders have to put up a chunk of their personal stock in escrow, which will be released on hitting certain earnings target. The target for 2007 is $8.5 million. For the 9 months ended September 30, they made $6.1 million. So this should make $2.4 million Q4 earnings a slam dunk--$.05 per share. Target for 2008 is $13.8 million (about $.28 a share) and 2009--$17.5 million or about $.35 per share.
Earnings should be out soon.
This is still a BUY.
Down 21%.

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