Cheap Stocks, 10/17/2008 Update

Up and down goes the market. Feels like it is trying to find a bottom, but with earnings season coming up–we expect a lot of disapointing reports–and more downward pressure (add some tax selling to that also).

The markets sea-sawed last week, but ended up. The DOW was up 4.75%, NASDAQ 3.75% and and S+P 500 4.6%. For the year the DOW is now down 33%, NASDAQ 35% and the S+P 500 is down 36%. The Russell 3000 and the Wilshire 5000 are also down about 36%.

We managed to post a 6.7% gain, but are still down 35% for the year.

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 11 stocks up, 7 down and 1 even. Since inception we are now 23 stocks up and 19 down.

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 $.40 to $3.56.
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 60%. 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 $1.25, down $.12.
They have $.75 a share in cash and are profitable.
No news.
Trading at a measly 14% of our valuation.
Now down 48%. 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)
UP $.03 at $4.94.
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.
MEDW announced an expanded share buy-back last week-another $4 million. This moved the stock back up from the $4 level it was trading at before the annoncement.
Looks like something is going to happen here–but when?
Down 22%. 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 $.26 to $.74
Candela reported that they lost the first of 3 lawsuits against Palomar. They now have more cash ($1.44 per share) than their market cap. (as of June 30 anyway).
Earnings out 10/21 after the close. Probably a good buy here for a rebound.
Down 80%. HOLD until after earnings this week.

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 $.03 to $.35.
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.
Trading at 6% of our latest valuation
Down 79%. 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)
Up $.06 to $1.17.
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 20% of our valuation.
Down 35%. 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)
Up $.32 to $1.82.
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.
Down 4%. BUY

Healthstream Inc. (HSTM-Recommended 8/4/2008)
Buy Price-$2.40
Valuation $4.42
Up $.07 at $2.23.
Jumped to $2.70 last week and then gave it all back.
No news.
Down 7%. HOLD

CCA Industries. (CAW-Recommended 8/4/2008)
NEW Buy Price-$5.51 (was $6.14 before $10,000 added, $6.66 before $10,000 added, $7.00 before $10,000 added) (9.4% dividend)
NEW Valuation $17.23 (Was $18.36)
Up $.47 to $4.69.
Earnings out last week. Sales fell a bit from $46.6 to $45.4 million and EPS fell from $.29 to $.16. Not great but our valuation only fell to $17.23 from $18.36, and they still have $2.58 a share in cash (55% of current market cap.). Quarterly $.11 dividend declared also.
Down 15%. BUY

Magic Software Enterprises. (MGIC-Recommended 8/18/2008)
NEW Buy Price-$1.93 (was $2.08 before another $10,000 added, $2.00 before $10,000 added at $2.16)
Valuation $4.15
Closed up $.06 at $1.74
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.
Earnings out November 10th, before the market opens.
Down 10%. BUY

Angeion Corporation. (ANGN-Recommended 8/28/2008)
NEW Buy Price-$3.82 (was $5.15 before $10,000 added)
Valuation $13.03
Closed up $.31 at $3.35
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.
Down 12%. HOLD

Noah Educational. (NED-Recommended 10/5/2008)
NEW Buy Price-$3.03 (was $3.00 before $10,000 added)
Valuation $13.03
Closed down $.01 at $3.04
HIt $4.27 last week before giving it all back.
Still trading at below cash value.
Down less than 1%. BUY

Datalink . (DTLK-Recommended 10/12/2008)
Buy Price-$3.02
Valuation $10.26
Closed down $.01 at $3.01
Earnings out last week. Pretty good. Sales increased 9% to $50 million and they earned $.08 per share (GAAP basis) compared to $.07 last year. Cash was $2.08 per share–67% of the current market cap. Q4 guidance is revenue of $49-$53 million and GAAP EPS of $.08-$.12 per share.
Down less than 1%. BUY

Global Shipping . (GSL-Recommended 10/12/2008)
Buy Price-$3.69
Valuation NA-Dividend yield play
Closed up $.02 at $3.71
Current dividend yield–25%
No news.
Up less than 1%. BUY

Middlebrook Pharmaceutical. (MBRK-Recommended 10/12/2008)
Buy Price-$1.16
Closed up $.22 at $1.38
New management and capital investment at $3.90 a share.
Up 19%. 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 $5.63 (was $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $1.01, down $.29.
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 37%. BUY. Still a Huge valuation gap here.

Avatech Solutions Inc. (AVSO.ob-Bought November 28, 2005)
NEW Buy price $.79 (Was $.93, $.99 and $1.19 before adding $10,000-each time), 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 $.60, up $.05.
Trading at only 16% of our valuation.
Down 24%. 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 unchanged 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 in early October. 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 $.32, up $.12
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 62%. HOLD


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