Cheap Stocks, 10/10/08 Update

Well, we got October 1987 all over again–just 21 years later. The markets plunged like bever before. The DOW was down 18%, NASDAQ 15.3% and and S+P 500 18%. For the year the DOW is now down 36%, NASDAQ 38% and the S+P 500 is down 39%. The Russell 3000 and the Wilshire 5000 are also down 38-39%.

We of course did not escape this carnage with a 21% loss.

We must confess, that with such huge losses, the plunge exposed a flaw in our calculation of our performance. We spent hours this week recalculating our performance since 2006. As it turns out we over-stated our 2006 and 2007 performance a bit, but we overstated our losses in 2008 so far also. So officially in 2006 we were up 14.4% (reported 15.5%), in 2007 we were up 11.1% (reported 19.9%) and so far in 2008 we are down 42%. Turns out our calculation effectively assumed that all purchases were margined–which we never, never actually do. Sorry for this.

Everything got hammered last week. Almost any company that has, or holds debt was decimated, and everything else got whacked too. So we are going to buy more. We are adding $10,000 to ANGN ($1.80 a share cash-59% of market cap), NED ($3.62 a share in cash-119% of market cap), MGIC ($.94 a share in cash-56% of market cap), AVSO (just too cheap), CAW ($2.58 a share in cash–61% of market cap. and buying DTLK again ($2.24 a share in cash-74% of market cap).

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

We would also recommend a couple of trades:

Global Shipping-($3.69-NYSE-GSL)-Has announced that it will pay a $.23 quaterly dividend starting with the Sept. quarter. This was a bling pool company that bought a container ship leasing company this summer. We believe few people understand this one. At $.92 a year dividend, the yield is currently 25%. Dividends can always be cut, but they have very long term charters already in place. Sell this at $5 or better (35% gain-we hope).

Middlebrook Pharmaceutical ($1.16-NASDAQ-MBRK). MBRK was recapitalized with a $100 million equity investment in September by a Sam Zell affiliate. They bought new stock at $3.90 a share. New management was installed with the investment. We will still try to follow smart money where we can. With a 70% loss on their investment so far–they should be pretty motivated to get his stock price back up. Sell at $1.80 or better (55% gain-we hope).

We went 2 stocks up and 14 down. Since inception we are now 21 stocks up and 17 down. Only one of our current holdings is still above water–NED (which is profitable and trading below net cash).

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.
Down $.77 to $3.96.
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.
SPNC has the financial where-with-all to deal with this. Just got to wait this one out.
The company has $44.4 million in cash ($1.33 per share), no debt and is trading at just less than 1 times 2008 revenues (net of cash)and is growing about 30% a year.
Now down 56%. 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), Valuation $8.64 (was $8.47, $8.47, $10.30, $9.28, $9.20, $8.32, $7.50, $7.63, $9.31)
Closed at $1.37, down $.42.
They have $.75 a share in cash and are profitable.
No news.
Trading at a measly 16% of our valuation.
Now down 43%. 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 $11.47 (was $10.99, $10.28, $13.32, $12.89, $13.40)
Down $.59 at $4.91.
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%.
Cannell sold some MEDW (about 175,000 shares at about $5.60 to $5.80) but still holds 875,000 shares or 11.5%. We have not seen another Constellation filing, but obviously someone is buying these shares and the price has barely moved.
Looks like something is going to happen here–but when?
Down 23%. HOLD

Candela Corp. (CLZR-Recommended 8/30/2007)
Buy Price $3.74 (was $7.26 before double up), Valuation $8.63 (was $9.90, $8.69, $11.51)
Down $1.02 to $1.00
Candela reported that they lost the first of 3 lawsuits against Palomar. Add this to the market crash and we lost half our investment last week. They now have more cash ($1.44 per share) than their market cap. (as of June 30 anyway). Probably a good buy here for a rebound.
Down 73%. BUY.

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 $.32 to $.38.
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 last week. Looks like they may be in active discussions to sell the company. Not a great environment to sell–but there is some hope.
Trading at 7% of our latest valuation
Down 77%. 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 $6.00 (Was $5.96)
Down $.56 to $1.11.
Finaciere De Sainte Marine, is a big investor in HPOL. They now own 7,779,000 shares up from 6,640,381 shares just over a month ago, or just over 14% of the company.
Trading at 19% of our valuation.
Down 38%. 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 $4.30 (was $4.09)
Down $.30 to $1.50.
Foxhill has been buying more shares (13D/A filed in September for another 272,000 shares). Foxhill now owns 3,844,000 shares or 6.9% of IPASS. They also sent another letter to IPASS urging they sell the company. Looks like they are serious.
With $1.12 per share in cash (75% of market cap), we feel that this has little additional downside. Nice mention in Barron’s this week as being a cheap stock based on its cash holdings.
Down 21%. BUY

Healthstream Inc. (HSTM-Recommended 8/4/2008)
Buy Price-$2.40
Valuation $4.42
Down $.32 at $2.16.
No news.
Down 10%. HOLD

CCA Industries. (CAW-Recommended 8/4/2008)
Buy Price-$6.14 (was $6.66 before $10,000 added, $7.00 before $10,000 added) (6.9% dividend)
Valuation $18.36
Down $1.08 to $4.22.
Dividend yield up to 10.4%.
Adding another $10,000 here. New average buy price will be $5.51.
No news.
Down 31%. BUY

Magic Software Enterprises. (MGIC-Recommended 8/18/2008)
Buy Price-$2.08 (was $2.00 before $10,000 added at $2.16)
Valuation $4.15
Closed down $.17 at $1.68
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.
Adding $10,000 here. New average buy price will be $1.93.
Down 19%. BUY

Angeion Corporation. (ANGN-Recommended 8/28/2008)
Buy Price-$5.15
Valuation $13.03
Closed down $1.35 at $3.04
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.
Add $10,000 here. New average buy price will be $3.82.
Down 41%. BUY

Noah Educational. (NED-Recommended 10/5/2008)
Buy Price-$3.00
Valuation $13.03
Closed up $.05 at $3.05
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.
NED got up to over $4 last week before the plunge.
Double up here. New average buy price will be $3.03.
Up 2%. BUY

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 $5.63 (was $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $1.30, up $.10.
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.
They announced a small aquisition in early July. Will add $1 million in revenue and be profitable. This is the stuff that will help get some attention for ARI.
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 19%. 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 $3.76 (was $4.00 $3.41, $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.55, down $.43.
AVSO finally issued their 10Q. Our valuation came down to $3.76 form $4.00 on seasonally slow sales and margins. Cash continues to increase, and so does net income. Trading at only 15% of our valuation. We will average down one more time on this one. New average buy price will be $.79.
Down 41%. BUY.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask, Valuation $1.29 (Was $1.38, $1.31, $1.38, $1.29, $1.42, $1.28 $1.13, $1.05, $.82)
Ask price down $.08 at $.12. Closed at $.12.
Q2 earnings announced in August. Sales were ok, but they had another loss. Sales were $5.035 million compared to $6.1 million last year. Last year included about $900,000 of legal settlement income. They lost $553,000, which included $247,000 of patent enforcement costs. They indicated that there might be a litigation settlement before the end of the year. Their VOIP business continues to struggle and lose money–$707,000 in the current quarter. Gross margin % held steady at about 75%.
They might have to sell or shut this VOIP business down in our opinion. Just losing too much money, and eroding shareholder value.
CTIG issued a very positive press release last week. Hopefully there is some substance to their touting their VOIP buaisness. We’ll see.
Still an “undercover” company and stock.
This is still trading at only 9% of our latest valuation.
Down 56%. BUY

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up) Valuation-$1.61 (Was $2.28, $2.08)
Closed at $.20, down $.16
Earnings out in early August. Sales were up 51% over last year to $19.4 million. They earned $2.2 million or $.05 per share. For the 6 months, sales were up 47% to $31.1 million and they reported $.07 per share in earnings.
So why is the stock down? It looks like it is trading at at less than 4 times EPS.
Well, their legal structure, apparently uncollectible $13 million of receivables from their Chinese affiliated company and their committment to build a manufacturing plant for about $70 million with no disclosable means of financing it, are giving all investors pause. Also their “Selling Expenses” went from $800,000 last year to $5.9 million in the current quarter as they paid $3 million more commissions to sell product and $2.4 million in “bonuses” to accelerate collections. Pretty odd, almost sounds desperate.
Our valuation fell to $1.61 from $2.28.
We listened to the conference call. It actually made us feel a little bit better, although all the Chinese and subsequent translations were trying. They reaffirmed their 2008 guidance. They are shooting for the moon here. If it works, we will have another AOB. It seems that if their land deal and $70 million building don’t pan out, their back-up plan is to sell the land (or parts of it). Sensible.
Keep your finger on the SELL trigger on this one. Our only solace is that all Chinese stocks have been hammered also.
Down 76%. HOLD


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