Cheap Stocks, 6/27/2008 Update

We were off last week, so all discussion, stats, are for the last 2 weeks.

Bear market for sure. Not much good news out there. Housing, financials, oil prices, inflation, interest rates, end of quarter fund selling, Russell rebalancing. They all came together in the perfect storm and drove the markets down hugely. You cannot even make money on Chinese stocks these days.

BDAY soared on Friday by 65% on a “take-under” bid from Liberty Media. We advised selling on the news at $3.75. This was a 56% gain from the previous week, but still left us with a loss of 39%. We hate when we are right—and wrong like this. But at least the agony of waiting is over on this one. No more retail for me.

Both MIVA and IPASS look too good to be true–so we are adding another $20,000 to MIVA and $10,000 to IPASS this week. New average buy price for MIVA will be $1.63 and for IPASS, $2.07.

The DOW was down 7.8%, NASDAQ was down 5.7% and the S+P 500 was down 6.0%.

We went 6 stocks up, 8 down and 1 even.

For last week, 2008 year-to-date, and since we started this Blog in January 2006, our model portfolio is -6.2%,-28.5 and +7.0% respectively. Since inception we are now 22 stocks up and 12 down, with 5 of them being down 10% or less.

So far in 2008 the DOW is down 14.6%, NASDAQ is down 12.7% and the S+P 500 is down 12.4%. The NASDAQ is still down a 19.0% since October 31, 2007.

The Russell 3000 and the Wilshire 5000 are both down just about 12% 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%
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”)

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 20 stocks that we closed out in 2006, 2007 and 2008 the average gain was 20%.

Spectranetics (SPNC-Recommended 9/2/2006)
Buy price $9.40 (was $10.65 before double up), Valuation $20-$22
Down $.60 to $9.98.
SPNC presented at the Jeffries conference last week. Not a word, or reaction from it. Disappointing.
The company has $43.4 million in cash ($1.37 per share), and is trading at about 2.5 times 2008 revenues (net of cash)and is growing about 30% a year.
Now up 6%. HOLD.

DataWatch Corp. (DWCH-Recommended 2/12/2006)
Buy price $3.02 (was $3.21 added $10,000, averaged down from $3.66), Valuation $8.47 (was $8.47, $10.30, $9.28, $9.20, $8.32, $7.50, $7.63, $9.31)
Closed at $2.41, down $.25.
Our valuation is $8.47, so we are trading at 28% of our valuation.
No news.
Now down 20%. BUY

Parlux Fragrances (PARL-Recommended 11/30/2006)
Buy price $4.14 (was $4.78 before $10,000 adder, $6.12 before another $10,000 added, $6.65 before double up), Valuation $12.40 (Was $11.24, $10.80 $9.20, $8.63, $13.77)
PARL closed at $5.12, up $.15.
Parl announced FY 2008 earnings in early June. Sales were $154 million, gross margin was 50%, they have $1 per share in cash and made $.24 a share for the year-fully taxed. Q4 EPS was like $.13. Our valuation moved up to $12.40 per share.
Now trading at 41% of our valuation—still cheap.
The new management has 2.0 million reasons to make this stock go up. Glenn Nussdorf paid $6 for his shares.
Up 24%. HOLD.

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 $24.06 (was $24.67, $20.51, $23.22, $20.99, $20.52)
Closed at $10.25 up $.61.
ILOG revised their 2008 guidance down from 20% sales growth and $1-6 million in operating income to double digit sales growth and breakeven operating income. ILOG’s market cap, minus cash is $80 million. This is less than 50% of annual sales, for a software company with 70%+ gross margins.
Cash is $3.84 a share (37% of market cap).
ILOG is trading at 43% of our valuation.
A buy-out is a decent possibility here.
Down 15%. HOLD

Celebrate Express (BDAY-recommended 4/17/2007)
Buy Price $6.15 (was $8.38 before $10,000 adder and $8.82 before double-up), Valuation $7.82 (Was 15.51, $17.85 $18.18)
Up $1.35 to $3.75 on the Liberty Media take-over offer. SOLD.

Mediware (MEDW-Recommended 6/4/2007)
Buy Price $6.33, (was $6.52, $6.67 ($10,000 added), $6.98 after double up) NEW Valuation $10.99 (was $10.28, $13.32, $12.89, $13.40)
Down $.16 at $5.84.
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 May 21 Constellation purchased another 586,000 shares of MEDW at prices from $5.43to $5.70 (most at $5.70). So Constellation now owns 1,056,000 shares–13.9%.
Looks like something is going to happen here.
Down 8%. BUY

Candela Corp. (CLZR-Recommended 8/30/2007)
Buy Price $3.74 (was $7.26 before double up), Valuation $9.90 (was $8.69, $11.51)
Up $.21 to $2.38
No news.
Down 36%. 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 $6.42 (was $6.84, $7.58, $7.59)
Down $.56 to $1.11.
With $.70 per share in cash (63% of market cap.) we are adding another $20,000 to this position. New average buy price is $1.63.
If they can do what they say in 2008, a valuation of close to $8 is possible.
Trading at 25% of our latest valuation
Down 53%. BUY

Datalink. (DTLK-Recommended 10/31/2007)
Buy Price $4.28, Valuation $9.97 (Was, $10.66, $9.39)
Up $.41 to $4.69.
No news.
Trading at 47% of our valuation.
Up 10%. HOLD

Harris Interactive. (HPOL-Recommended 5/25/2008)
Buy Price $2.02 (was $2.15 before double up), Valuation $5.96
Down $.44 to $2.07.
Wellington Management filed a 13G/A last week disclosing that they had sold almost all of the 4.5 million shares they had owned. This seemed to take the lid off the stock as it was very CHEAP.
Trading at 42% of our valuation.
Up 3%. BUY

IPASS. (IPAS-Recommended 6/1/2008)
Buy Price $2.15, Valuation $4.09
Down $.18 to $2.00.
With $1.09 per share in cash (55% of market cap), we feel that this has little additional downside so we are adding another $10,000 here. New average buy price is $2.07.
No news.
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 8% on average, compared to 19% 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 $5.63 (was $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $1.65, up $.18.
Earnings announced in June were impressive. $.06 per share in earnings (untaxed)for the quarter and $.14 per share for the first three quarters. Our valuation moved up to $5.63 per share. This is still way too cheap.
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 2%. 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), NEW Valuation $4.00 (was $3.41, $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.85, down $.05.
Earnings out in early May. Sales weak, but earning were great.
Sales dropped from $14.6 million to $12.8 million. But, net income was $1.005 million compared to a $224,000 loss last year. EPS was $.05 versus a loss of $.02 last year. For the 9 months ended March 31, earnings per share were $.12 (untaxed).
Now down 9%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask, Valuation $1.38 (Was $1.31, $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price unchanged at $.28. Closed at $.20.
CTI announced earnings in early May. Sales were good, but they had another loss. Sales were up to $5.339 million from $5.054 million. They managed to reduce their loss to $180,000 from $587,000 last year. Their VOIP business continues to struggle and lose money–$729,000 in the current quarter. Gross margin % rose to 75% from 72%. Still an “undercover” company and stock.
Our valuation rose slightly to $1.38 from $1.31.
Maybe these guys will wake up and create some shareholder value in 2008.
This is still trading at only 20% of our latest valuation.
UP 4%. BUY

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up) Valuation-$2.28 (Was $2.08)
Closed at $.81, down $.04.
Ah, those Chinese stocks. After announcing earnings in mid-May, it took LTUS another week or so to come out and reaffirm that they expect to make at least $13.1 million in earnings this year. On approximately 50 million shares outstanding this is $.26 per share earnings. So we are trading at a little less than 4 times 2008 EPS. 3 new drugs expected to be introduced this year also.
Down 3%. HOLD

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