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, August 14, 2010

Cheap Stocks, 8/13/2010 Update

Markets plunged again last week, and all the averages went negative for the year again.

We were down 2.8% last week, which was good compared to the indices.

Our lead over the markets averages actually increased last week to 11-14 points depending on the index.

EXTR, BVSN, AVSO, IPAS, NINE, HPOL and LTUS.ob are our favorites.

CTI.ob,DWCH, AEZS and GSL earnings last week.

We are up 9.5% so far in 2010.

The DOW was down 3.3, NASDAQ was down a whopping 5% and the S+P 500 was down 3.8%. The Russell 3000 and the Wilshire 5000 were both down 4.1%. For the year the DOW is down 1.2%, NASDAQ is down 4.2% and the S+P 500 is down 3.2%. The Wilshire is down 2.7 and the Russell is don 4%.

Last week we went 3 stocks up, 14 down and 2 even. Since inception we are now 39 stocks up and 18 down for a 68% winning percentage (80% is our target win %).

Since our beginning, 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%
2009-MBRK +67%
2009-SNWL +14%
2009-CYNO +25%
2009-DTLK +33%
2009-NED +46%
2009-CUTR +13%
2009-HSTM +67% (continued good earnings)
2009-RNWK +36%
2009-OPK +116%
2009-CLZR -32% (a loser even on a buy-out)
2009-DTLK +28% (our 5th profitable trip on this one)
2010-HPOL +110%
2010-DIVX +25%
2010-CHRD +37% Buyout (2 weeks after we recommended it)
2010-HPOL +30%
2010-MGIC +82%

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 39 stocks that we closed out since 2006 the average net gain was 33%. 7 of our current stocks are down less than 15%.

Harris Interactive (HPOL-Recommended 8/9/2010)
Buy Price-$1.00
Valuation $2.85
Closed down $.11 at $.89
We were a little early on this one.
Down 11% HOLD

Performance Technolgy (PTIX-Recommended 3/30/2010)
Buy Price-$2.70
Valuation $5.03-(was $5.98, $7.13)
Closed down $.08 at $2.24
Earnings out in July. Nothing to write home about. Sales were up 15% from last year to $7.4 million, but they lost $1.9 million or $.18 per share as they "invested" in sales and marketing. This, plus a bunch of new product announcements will hopefully boost sales and get some attention. Cash per share fell to at $2.39, and our valuation fell to $5.03 as cash and margins fell.
Down 17% HOLD

Extreme Networks (EXTR-Recommended 3/22/2010)
Buy Price-$3.04
Valuation-$7.32 (was $6.82, $6.81)
Closed down $.25 at $2.66
Ramius fund filed a 13D/A on July 20th. They own 5.9% of EXTR and are starting to make some noise. Good catalyst.
Earnings out in August. Revenues up about 5% to $85 million and they made $3.4 million. Cash rose to $1.47 per share and our valuation shot up to $7.32 per share. Still a cheap stock.
Down 13% BUY

Broadvision (BVSN-Recommended 3/16/2010)
Buy Price-$13.50
Valuation $21.77-(was $23.37, $27.15)
$13.61 per share in cash.
Closed down $.28 at $10.33.
Earnings out in August. Revenue dropped from $8.2 million to $5.7 million and they lost $2.4 million. Cash per share fell to to $13.61. Our valuation dropped on the sales drop to $21.77. Trading well below cash value.
Down 24%. BUY

Ninetowns Internet Technology (NINE-Recommended 1/25/2010)
Buy Price-$1.53
Valuation-$3.54 (Was $3.19)
$2.80 per share in cash
Closed down $.05 at $1.50.
Second half 2009 earnings announced in June. Cash rose to $2.80 per share and our valuation rose to $3.54. Only doing about $15 million a year in sales, but still trading way below cash value and didn't lose any money.
Down 2%. BUY

Gravity Company Ltd. (GRVY-Recommended 1/18/2010)
Buy Price-$1.68
Valuation $4.44-(Was $5.15)
Closed up $.01 at $1.58.
Earnings out in June. Not bad. Has $2.26 per share in cash and they were slightly profitable ($.01)-despite a 33% drop in sales. Our valuation plunged due to the sales decline and contracting margins to $$4.44. Have to keep an eye on this, but GRVY is still trading at $.58 below cash value and they are keeping their noses in the black.
Down 6%. HOLD

AEterna Zentaris (AEZS-Recommended 6/20/2009)
Buy price $1.42 (was $1.78 before adding another $10,000, $1.82 before double up)
Valuation --Speculation.
Closed down $.08 at $1.08.
Earnings out last week. Revenues were $5.6 million and they lost about $4.5 million or $.06 per share. Hey, at least they have real product revenues. The pipeline is what it is all about. With the recent capital raise, cash was about $45 million and they say their burn rate is about $ million a quarter, so they have about 2 years to make this a $10 stock!
Fonds de solidarite des travailleurs du Quebec filed a 13G in mid-June disclosing they had reduced their holding down to 2.6% and Société Générale de Financement du Québec filed a 13D diclosing that they have been steadily reducing their holding from over 10% to under 5%. This dumping by these Canadian funds has been weighing on the market. We need some good news, or these guys to finish selling for the stock to go up.
Riding the tail of Kerx and perifosine, new orphan drug apporval from the FDA and a lot of investor interest in their pipeline of cancer products.
Speculative for sure.
Down 24% HOLD

Spectranetics (SPNC-Recommended 9/2/2006)
Buy price $5.68 (was $8.90, $9.40 before adding $10,000,and was $10.65 before double up), Valuation --$15.00
Closed down $.30 at $5.10.
Earnings out in July. Sales up 3% and they actually made a profit! Not enough to round up to a penny a share though. The market yawned. No one follows this stock. Only a buy-out will make us money on this one.
Wells Fargo filed a 13G in early February disclosing that they had upped their stake to 5.3 million shares or about 16%--up from their previously disclosed position of about 11.6%.
The company has $30 million in cash ($.90 per share), no debt and is growing about 10% a year.
Down 10%. 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 $7.20 (was $7.17, $5.86 $7.17, $7.46, $8.12, $8.07, $8.12, $8.64, $8.47, $8.47, $10.30, $9.28, $9.20, $8.32, $7.50, $7.63, $9.31)
Closed down $.29 at $2.59
Earnings out last week. Not bad again. Sales down 4% to $4.6 million and they made $.04 per share. They have $1.00 per share in cash. Our valuation rose a tad to $7.20.
Still trading at only 32% of our valuation.
KVO Capital management filed a 13D in September 2009. They own 402,000 shares (just under 7% of the company). Purchases were all in the second half of August from $1.66 to $2.74 per share.
Down 5%. HOLD

Mediware (MEDW-Recommended 6/4/2007)
Buy Price $6.33, (was $6.52, $6.67 ($10,000 added), $6.98 after double up)
Valuation $14.35 (was $12.13, $12.57, $12.29, $11.90, $11.30, $11.48, $11.47 $10.99, $10.28, $13.32, $12.89, $13.40)
Closed down $.04 at $9.75
Earnings out in May. They were good. Sales up 26% to $12.8 million and they made $.11 per share up 80% from last year. Cash was $2.67 per share and our valuation spiked to $14.35, up 18%.
Constellation bought more shares (about 130,000 at over $9 per share) and MEDW announced they had re-engaged William Blair to look at "strategic alternatives". Got to have an I Banker to sell your company.
Constellation now owns 22.8%. When is the take-over offer??
All we read is that medical records will be a hot area, so MEDW looks like the place to be.
Up 54%. HOLD

Vertro. (VTRO (was-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 $2.48 (was $2.51, $2.17, $1.65, $1.89, $5.61, $6.42, $6.84, $7.58, $7.59)
Closed down $.03 at $.45.
Earnings out in August. Sales were $8.1 million, slightly higher than Q1 and they were slightly profitable. Cash rose to $6.1 million ($.17 per share). Our valuation fell $.03 to $2.48.
VTRO managed to pass the NASDAQ net worth test in June, so they can remain on the exchange till mid-September. It they can get the stock price over $1 for 10 days before then, they get a free pass-otherwise we are looking at a reverse stock split. This means nothing of course, but it gives unsophisticated investors worries--and they sell.
We have no hope that we will ever make money on this one, nor are we sure they will survive at all.
Down 73%. HOLD

IPASS. (IPAS-Recommended 6/1/2008)
Buy Price-$1.42 (adjusted for $.32 and $.16 dividends) (Was $2.07 before another $10,000 added and $2.15 before double up
Valuation $2.95 (was $3.22, $3.34, $4.17, $4.73, $4.75, $4.12, $4.99, $4.30, $4.09)
Down $.01 at $1.08
Earnings out in August. Sales were down again to $39.1 million, and they lost $.02 a share. Cash was $.52 per share down from $.61. Our valuation fell a bit to $3.22. Still, IPAS has plenty of cash, and is trading at only 37% of our valuation.
Foxhill ownership is 6.9% and Millenium owns 10.4%.
Down 18%. BUY

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) (5% dividend yield)
Valuation $17.45 (Was $15.95, $13.80, $18.89, $17.09, $17.05, $14.51, $17.23, $18.36)
Down $.26 at $5.30.
Earnings out in July. Sales flat at about $14.9 million and they lost $900,000 after a $2 million litigation settlement charge. So they made about a nickel a share compared to a dime last year.
Our valuation moved back up to $17.45 as gross margins increased. Cash is $2.55 a share.
Down 4%. HOLD

Angeion Corporation. (ANGN-Recommended 8/28/2008)
Buy Price-$3.82 (was $5.15 before $10,000 added)
Valuation $12.15 (was $11.29, $11.73, $11.47, $11.16, $9.53, $13.30, $13.03)
Closed down $.03 at $4.02
Earnings in June. Sales up 10% to $6.9 million but they lost $.13 per share versus $.05 last year. Cash remained strong at $2.68 a share and our valuation nudged up to $12.15.
Zacks actually recommended ANGN in early March with a short term price target of $6.
Blueline Partners filed a 13D on ANGN on June 23, 2008. They own about 6.3% of the company. All of their purchases were well North of the current price. Renaissance also owns 5.5%
Up 5% HOLD

Global Shipping . (GSL-Recommended 10/12/2008)
Buy Price $2.16-(Was $2.59, $3.69 before adding another $10,000 each time)
Valuation NA-Dividend yield play
Closed up $.10 at $2.65
Current dividend yield--suspended
GSL is up 80% this year.
Earnings out last week. More of the same-good. Ship utilization was 100%, and they made about $.14 per share on a "normalized" basis (excluding "mark-to-market" accounting on interest rate hedges). They generated $16 million of cash in the quarter.
Container rates are rising and CGM appears to be getting its feet back under them.
CGM (their main customer continues to struggle). Trying to restructure their debt, get funding from the French goverment etc. We would think that GSL would be the last "supplier" to CGM to feel any effects of this due to CGM's equity ownership in GSL.
Big announcements in late August 2009. They finally made a deal with their bank and survived the ordeal. They had the rest of their credit line canceled, were allowed to take delivery of a used ship, no dividend until the loan to ship value is less than 75% and they have to start prepaying their loans. CGM has to stay in as an equity holder until at least November 30, 2010.
Their average ship charter life is around 10 years and the closest-in renewal is at the end of 2012.
Up 21%. HOLD

OB-abies (Bulletin Board Listed Stocks)

As proven by OPTIO, patience is necessary with these stocks, especially in this Market.

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 $5.73 (was $5.54, $5.74, $5.96, $4.72, $5.19, $5.66, $5.63, $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed up $.15 at $.75.
Earnings out in June. Sales up 29% to $5.4 million, 79% gross margins and they made $26,000 for the quarter. Our valuation moved back up to $5.73 per share.
No one cares.
Wake up management--you have a great little company here worth 5-6X what it is selling for.
Now down 54%. 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),
Valuation $3.07 (was $3.03, $2.38, $2.57, $2.81, $2.78, $3.30, $3.76, $4.00 $3.41, $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.65, down $.01.
Earnings out in May. Sales up 5% to $8.4 million and they made $.03 a share versus a loss of $.01 last year. Our valuation rose to $3.07 a share.
Another 13D/a filed in May. The "dissident" group is up to 33% ownership.
The initial 13D filing was in early March. A group of investors including a prior CEO of AVSO is clamoring for an increase in shareholder value. Basically they are hanging out a "for sale" sign. In late March the same group filed a 13D/A adding more members to the group. I hope they are successful! Management of AVSO came out with a press release disavowing any discussions or interaction with the group. Too bad, with a few more members they may control the company soon. We would suggest all shareholders join the group.
Down 17%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask,
NEW Valuation $.83 (Was $.88 $.96, $.93, $.75, $.85, $1.57, $1.40, $1.29, $1.38, $1.31, $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price $.09, closed at $.08 unchanged (didn't trade either).
Earnings out last week. Sales were down from $4.1 million last year to $3.6 million, and they lost about $433,000. Their VOIP business continues to drain the company. Sales were a whopping $200,000 and it lost $500,000 excluding depreciation. Our valuation fell a bit to $.83.
At a $2 million market cap, this is stupidly cheap. Their itellectual property is probably worth 10 times this price. They need to liquify this value somehow.
They might have to sell or shut this VOIP business down in our opinion. Just losing too much money, and eroding shareholder value--or it could be a home run.
Still an "undercover" company and stock.
Down 67%. HOLD

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up)
Valuation-$1.87 (Was $1.91, $2.00, $1.84, $1.56, $1.99, $2.22, $1.61, $1.06, $2.28, $2.08)
Closed at $1.05, unchanged.
Earnings announced in May. Sales were up 26% and they made $.09 per share, up from $.07 last year.
They projected 15-20% EBIT growth for 2010. So maybe we "only" make $.45 this year. If this traded like the growth stock it is, this should trade at more than $4.50 per share. Our valuation fell to $1.87, but this is still only selling for about 3 times last years earnings.
Early in March LTUS disclosed a deal to sell up to 10 million dollars of stock from time-to-time at about a 7% discount to market. This deal has been canceled as the company says they don't need the money. After a brief spike to about $1.10 a share--down we go again.
Up 17%. BUY

2 Comments:

Blogger Usiku (oo-SEE-koo) said...

...a reverse stock split. This means nothing of course, but it gives unsophisticated investors worries--and they sell.

Doesn't this raise your cost basis and therefore limit your return?

1:32 PM  
Blogger Cheap Stock Investor said...

As you said, a reverse split means nothing. But it can rattle some investors. If there is a 1 for 5 reverse split, your cost per share goes up by 5X and you would expect the tradind price to go up 5X also. So there is no impact unless the price per share does not go up 5X also. It does not limit your return at all.

6:51 AM  

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