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, November 22, 2008

Cheap Stocks, 11/21/2008 Update

It seems to never end. The markets backed off from double digit losses for the week on Friday, but still ended up with substantial losses. Mutual Fund liquidation, hedge fund, personal fund liquidations, margin calls, tax selling, Q4 earnings warnings.

The DOW was down 5.%, NASDAQ 8.7 and and S+P 500 8.4%. For the year the DOW is now down 39%, NASDAQ 48% and the S+P 500 is down 46%. The Russell 3000 and the Wilshire 5000 are also down about 47% this year.

We had a 6.7% loss last week and are down 50% for the year. Even good earnings and a special dividend barely moved NED last week.

There are a ton of values out there, that, if you assume that our economy will not implode, are once in a lifetime values.

Last week we went 6 stocks up, and 16 down. Since inception we are now 21 stocks up, 23 down and 1 even.

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%
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)
2008-PDLI +9% (company split, and special dividend)
2008-BDAY -39% (long overdue takeover offer-or "take-under")
2008-DTLK +40% (third trip on this one)
2008-ILOG +26% (Buy-out offer from IBM)
2008-PARL +56%

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

Spectranetics (SPNC-Recommended 9/2/2006)
Buy price $8.90 (was $9.40 before adding $10,000,and was $10.65 before double up), Valuation --Suspended.
Up $.23 to $2.49.
They are still predicting at least $107 million in sales for the year, which means Q4will be over $27 million in sales. At the current $72 million market-cap, SPNC is trading at a little over 25% of sales, net of $44 million in cash. Cash includes $16 million of auction-rate securities. Based on what we have been reading, these "investments" will likely turn out OK.
SPNC is suffering from the FDA, ICE raids that apparently eminated from an ex-employee whistle-blower trying to collect so money from the company. Over the last couple of weeks the bottom feeding securities lawyers decided to target the company's cash hoard too. Now the CEO has resigned. Perfect storm.
SPNC has the financial where-with-all to deal with this. Just got to wait this one out.
Some insider buying popping up here. Maybe things are not as bad as the stock price reflects?
The company has $44 million in cash ($1.30 per share), no debt and is trading at about 25% of 2008 revenues (net of cash)and is growing about 25% a year.
Now down 72%. HOLD.

DataWatch Corp. (DWCH-Recommended 2/12/2006)
Buy price $2.41 (was $3.02 before adding another $10,000,was $3.21 before adding another $10,000, averaged down from $3.66),
NEW Valuation $8.12 (was $8.64, $8.47, $8.47, $10.30, $9.28, $9.20, $8.32, $7.50, $7.63, $9.31)
Closed at $1.36, up $.36.
Earnings last week. So the stock jumped a whopping 36% to a disheartening $1.36
Sales fell from $6.9 million to $5.3 million, but they maintained profitability of $.05 a share versus $.14 last year. Cash moved up to $.82 per share, but our valuation fell to $8.12 from $8.64.
Trading at a measly 17% of our valuation.
Now down 58%. BUY

Mediware (MEDW-Recommended 6/4/2007)
Buy Price $6.33, (was $6.52, $6.67 ($10,000 added), $6.98 after double up)
Valuation $11.48 (was $11.47 $10.99, $10.28, $13.32, $12.89, $13.40)
Down $.87 at $3.98.
Cannell Capital filed a 13D on February 19th, disclosing a 12.9% ownership stake. Cannell is pushing MEDW management to sell the company. Meanwhile, Constellation Software, a Canadian public company that has been on an acquisition binge filed a 13D in April, disclosing a 6.1% ownership in MEDW (499,000 shares). Constellation has $243 million in revenues and is profitable.
In early May, Constellation increased its bank credit line to $105 million from $50 million.
On November 14th, Constellation filed a 13D/A. One of their subsidiary officers bought over 300,000 MEDW shares in October, bringing their combined owership in MEDW to 17.9%
MEDW announced a small acquisition in the hospital pharmacy software market last week. Cost about $3.5 million upfront. No revenue details provided.
Looks like something is going to happen here--but when?
Down 37%. HOLD

Candela Corp. (CLZR-Recommended 8/30/2007)
Buy Price $3.74 (was $7.26 before double up), Valuation $5.88 (was $8.63, $9.90, $8.69, $11.51)
Up $.07 to $.46
Earnings out in mid September. Sales down 24% and they lost $7 million pre-tax. Still have $1.29 per share in cash, but burning through it. New valuation is $5.88 per share. They hired an investment banker to sell the company. We'll see. Maybe Palomar will buy it to cut both there legal fees ($3.2 million this quarter for CLZR).
Looks like Palomar's lawsuit against CLZR was "stayed" by the courts last week. Legal expense should drop for maybe a couple of years.
Down 88%. HOLD, we may get lucky and this thing will be sold for North of $1.

MIVA. (MIVA-Recommended 10/21/2007)
Buy Price $1.63 (Was $2.38 before adding another $20,000, $2.62 before another $10,000 and was $3.00 before double up),
Valuation $5.61 (was $6.42, $6.84, $7.58, $7.59)
Down $.02 to $.25.
Blinkx, a U.K. company made an all cash offer to buy MIVA in early August for $1.20. MIVA rejected the offer almost immediately saying it was too low and they think they can do better.
They better, or there will be shareholder lawsuits on this one.
Even though MIVA is a money losing mess, they are at such a low price to valuation that we will hold for another quarter. Hopefully we get a better take-over offer above our cost basis.
MIVA issued a press release in early October. Looks like they may be in active discussions to sell the company. Not a great environment to sell--but there is some hope.
Last week Blinkx came back with a $.55 offer to buy MIVA. The stock jumped a bit--but settled back DOWN $.02! Not much can make a stock go up these days--even a 100% premium take-over offer.
Trading at 5% of our latest valuation
Down 85%. HOLD

Harris Interactive. (HPOL-Recommended 5/25/2008)
Buy Price $1.79 (was $1.82 before adding $10,000, $2.02 before $10,000 added and $2.15 before double up),
Valuation $4.66 (Was $6.00, $5.96)
Down $.23 at $.74.
Earnings out in October, not great. Sales down 9% and they had an operating loss of $3.5 million compared to an operating profit of $1.6 million last year. Basically they failed to cut expenses as the $5 million decline in sales, dropped directly to the bottom line. This is likely why they hired a new CEO and pledged to cut expenses.
Finaciere De Sainte Marine, is a big investor in HPOL. They now own 7,779,000 shares up from 6,640,381 shares just a few months ago, or just over 14% of the company.
Trading at 18% of our valuation.
Down 59%. BUY

IPASS. (IPAS-Recommended 6/1/2008)
Buy Price-$1.90 (Was $2.07 before another $10,000 added and $2.15 before double up), Valuation $4.99 (was $4.30, $4.09)
Down $.06 to $1.54.
Earnings out in early November. Not bad. Sales were flat (dial-up revenues dropped only $600,00 and they had a non-GAAP profit of $500,000--down from $700,000 last year. They still have $1.10 per share in cash. They also announced that they were no longer considering selling the company--rats! New CEO announced also. On the conference call, the old CEO was very curt to Foxhill's pointed questions. Foxhill has been buying more shares (13D/A filed in September for another 272,000 shares). Foxhill now owns 3,844,000 shares or 6.1% of IPASS.
With $1.10 per share in cash (75% of market cap), we feel that this has little additional downside.
Down 19%. BUY

Healthstream Inc. (HSTM-Recommended 8/4/2008)
Buy Price-$2.40
Valuation $4.62 (Was $4.42)
Down $.38 at $2.37.
Company buying back shares, insiders buying shares (steadily)--what's up here.
No news
Down 1%. HOLD

CCA Industries. (CAW-Recommended 8/4/2008)
Buy Price-$5.51 (was $6.14 before $10,000 added, $6.66 before $10,000 added, $7.00 before $10,000 added) (10.8% dividend yield)
Valuation $17.23 (Was $18.36)
Down $.23 to $3.82.
No news.
Down 31%. BUY

Magic Software Enterprises. (MGIC-Recommended 8/18/2008)
Buy Price-$1.93 (was $2.08 before another $10,000 added, $2.00 before $10,000 added at $2.16)
Valuation $4.18 (was $4.15)
Closed down $.32 at $1.28
Earnings out in November. Revenues up 8% to $15.8 million, non-GAAP EPS of $.06 per share. $1.02 in cash also. Our valuation moved up slightly to $4.18 per share.
Formula Systems (NASDAQ-FORTY) filed an amended Schedule 13D in early September. They added 569,000 shares to their position between May and August and now hold 17,605,000 shares of MGIC or 55.4%. FORTY is a long-term investor, but this is a good sign of course.
Down 34%. BUY

Angeion Corporation. (ANGN-Recommended 8/28/2008)
Buy Price-$3.82 (was $5.15 before $10,000 added)
Valuation $13.03
Closed down $1.00 at $2.50
Has $1.80 per share in cash.
Blueline Partners filed a 13D on ANGN on June 23. They own 216,000 shares or about 5.3% of the company. All of their purchases were well North of the current price.
No news to account for the plunge--just the relentless selling going on in all sectors.
Down 35%. HOLD

Noah Educational. (NED-Recommended 10/5/2008)
Buy Price-$3.03 (was $3.00 before $10,000 added)
NEW Valuation $7.98 (Was $7.18)
Closed up $.24 at $2.40
Earnings out last week. Not bad.Sales were $29.8 million, down 18%. They made $.14 per share. Next quarter guidance was a bit weak, but they still expect to be profitable. Cash grew to $3.93 per share and our valuation rose to $7.98 (sorry previous valuation of $13.03 was a misprint). NED also announced a special one-time dividend of $.56 per share (this needs shareholder approval--so I approve)
Down 21%. BUY

Datalink . (DTLK-Recommended 10/12/2008)
Buy Price-$3.02
Valuation $10.26
Closed down $.40 at $2.54
Cash is $2.08 per share--80% of the current market cap.
Down 14%. BUY

Global Shipping . (GSL-Recommended 10/12/2008)
Buy Price-$3.69
Valuation NA-Dividend yield play
Closed down $.52 at $2.48
Current dividend yield--39%
Earnings 2 weeks ago were fine. Fleet utilization is still 98%. Their average ship charter life is around 10 years and the closest-in renewal is at the end of 2012. By then, you will have collected more than the current share price in dividends.
Down 33%. BUY

Middlebrook Pharmaceutical. (MBRK-Recommended 10/12/2008)
Buy Price-$1.16
Valuation-NA-Speculation
Closed down $.10 at $1.16
"Earnings" out in mid November. $2 million in sales and $12 million loss and $83 million of cash left. They expect 2009 sales to be about $40 million and will lose money. Some possibility of profits in 2010 and they think they have enough cash to last until then. Again, this is a speculation. Increased sales in 2009 will drive this stock.
New management and capital investment at $3.90 a share.
Even. HOLD

SonicWALL. (SNWL-Recommended 10/20/2008)
Buy Price-$4.50
Valuation-$11.09(Was $10.44)
Closed down $.09 at $3.37
$3.02 cash per share.
No news.
Down 25%. HOLD

Cynosure. (SNWL-Recommended 10/29/2008)
Buy Price-$9.10
Valuation-$29.49
Closed down $.81 at $7.59
CYNO has $7.33 per share in cash--95% of its market-cap. Cheap.
Down 17%. HOLD

Cutera. (CUTR-Recommended 10/29/2008)
Buy Price-$7.88
Valuation-$ 18.88 (Was $21.07)
Closed down $1.16 at $7.55
Earnings out in early November. Not good. Sales down 32% to $19.1 million. They actually had positive operating earnings of just over $100,000 (adding back $1.3 million of stock compensation BS). Pretty amazing operating performance considering the sales drop.
Cash per share rose to $8.56 per share. Our valuation fell to $18.88 per share.
We think that given the low valuations in this sector, that consolidation is just around the corner. Too much cash, high margins and a declining economy.
Trading at $1 below cash value.
Down 4%. HOLD


OB-abies (Bulletin Board Listed Stocks)

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 $5.66 (was $5.63, $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $.99, up $.34.
Earnings announced late October. Sales up 5% and they made $.05 per share. Pre-tax loss was $204,000 versus $180,000 last year. Even so, our valuation moved up to $5.66from $5.63 per share. This is still way too cheap.
Wake up management--you have a great little company here worth 3X what it is selling for.
Now down 39%. BUY. Still a Huge valuation gap here.

Avatech Solutions Inc. (AVSO.ob-Bought November 28, 2005)
Buy price $.79 (Was $.93, $.99 and $1.19 before adding $10,000-each time),
NEW Valuation $3.30 (was $3.76, $4.00 $3.41, $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.35, down $.10.
Earnings out in mid-November. Sales down 13%, but they remained profitable. Made $.01 versus $.02 last year. Our valuation fell to "only" $3.30 a share. Stock fell 39% last week. Illiquid, tax-loss selling we think.
Some insider buying lately.
Trading at only 10% of our valuation.
Down 56%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask,
Valuation $1.40 (Was $1.29, $1.38, $1.31, $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price up $.01 at $.10. Closed at $.07.
Earnings out mid-November. Nobody cared.
Their VOIP business continues to struggle and lose money--$604,000 in the last quarter--but they did have some revenues--$38,000!
They might have to sell or shut this VOIP business down in our opinion. Just losing too much money, and eroding shareholder value.
Including a $2.85 million patent settlement gain, CTI earned $.05 in the quarter and $.03 for the nine months.
Even excluding the net patent gain, they had positive operating income for the quarter--despite the VOIP loss. Our valuation rose to $1.40
Still an "undercover" company and stock.
This is still trading at only 7% of our latest valuation.
Down 63%. BUY

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up)
Valuation-$2.22 (Was $1.61, $2.28, $2.08)
Closed at $.28, down $.07
As noted last week, earnings were announced.
Sales were up marginally to $16.7 million from $16.6 million LY and they made $.07 per share versus $.05 last year. For the 9 months, EPS is $.13 per share. So looks like we are selling at a bit over 2X earnings. Our valuation spiked back up to $2.22. Hmmm. Unusual legal structure, $70 million factory plan, $17 million land deposit all hang over this company. Stock market stinks, Chinese stocks maybe even worse than most.
Down 67%. HOLD

1 Comments:

Blogger BGS said...

I own MGIC and IPAS. Curious as to your valuation method. Would you be willing to chat?

4:28 PM  

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