Cheap Stocks, 10/31/2008 Update

Finally a good week overall, but still lots of uncertainty out there, and still plenty of choppiness ahead. Mutual Fund liquidation, margin calls, tax selling, Q4 earnings warnings.

The markets soared for a change. The DOW was up 11.3%, NASDAQ 10.9% and and S+P 500 10.5%. For the year the DOW is now down 30%, NASDAQ 35% and the S+P 500 is down 34%. The Russell 3000 and the Wilshire 5000 are also down about 34%.

We managed to post “only” a 3.5% 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 14 stocks up, and 8 down. Since inception we are now 24 stocks up, 20 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 $.26 to $3.00.
SPNC released earnings last week. They were good. Initially the stock junped to $3.65, but sellers used the opportunity to dump into the small rally. Tax loss selling no doubt (I am personnally doing some tax selling on other positions).
Sales were up 26% and thay managed to make $.01 per share despite over $400,000 in legal expenses (see below). They are still predicting at least $105 million in sales for the year, which means Q4 will be over $27 million in sales. At the current $101 million market-cap, SPNC is trading at a little over 50% of sales, net of $44 million in cash. Cash includes $16 million of auction-rate securities (shame on the CFO). 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.
The company has $44 million in cash ($1.30 per share), no debt and is trading at about 1/2 times 2008 revenues (net of cash)and is growing about 25% a year.
Now down 66%. 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 $1.34, up $.02.
They have $.75 a share in cash and are profitable.
Earnings out Thursday, Nov. 20, before the open
Trading at a measly 15% of our valuation.
Now down 44%. BUY

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 $11.48 (was $11.47 $10.99, $10.28, $13.32, $12.89, $13.40)
Down $.04 at $3.98.
Earnings out last week. Not bad. Although sales were down 8%, they still managed to make $.03 per share (HPOL management should learn from this–see below). Still have $2.76 per share in cash. Our valuation moved up a penny to $11.48.
Last Wednesday over 250,000 shares traded. It looks like 5, 50,000 share blocks traded. Someone is selling, but someone is also buying. No new SEC filing yet.
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 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 $.12 to $.68
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).
Down 82%. 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 $.06 to $.39.
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 7% of our latest valuation
Down 76%. 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),
NEW Valuation $4.66 (Was $6.00, $5.96)
Up $.17 to $1.16.
Earnings out last week, 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 last week and pledged to cut expenses. Our valuation fell to $4.66 from $6.00.
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 16% 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 $.14 to $1.90.
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.
Earnings due out Nov. 3rd, after the close.
Down 6%. BUY

Healthstream Inc. (HSTM-Recommended 8/4/2008)
Buy Price-$2.40
NEW Valuation $4.62 (Was $4.42)
Up $.05 at $2.25.
Earnings out last week. Pretty good. Sales up 16% and they made $.03 a share (same as last year) despite having $550,000 of expense in the quarter for their annual Summitt, which was in Q2 last year. Our valuation moved up to $4.62 from $4.42.
Down 6%. 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) (9.8% dividend yield)
Valuation $17.23 (Was $18.36)
Up $.03 to $4.50.
Down 18%. 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 down $.21 at $1.64
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 15%. BUY

Angeion Corporation. (ANGN-Recommended 8/28/2008)
NEW Buy Price-$3.82 (was $5.15 before $10,000 added)
Valuation $13.03
Closed down $.13 at $3.85
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.
Up 1%. 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 $.25 at $2.60
Still trading at below cash value of $3.62 and profitable.
Down 14%. BUY

Datalink . (DTLK-Recommended 10/12/2008)
Buy Price-$3.02
Valuation $10.26
Closed up $.37 at $3.08
Cash is $2.08 per share–68% of the current market cap.
Up 2%. BUY

Global Shipping . (GSL-Recommended 10/12/2008)
Buy Price-$3.69
Valuation NA-Dividend yield play
Closed down $.26 at $3.08
Current dividend yield–30%
Earnings out Thursday, November 13th, before the open.
Down 17%. BUY

Middlebrook Pharmaceutical. (MBRK-Recommended 10/12/2008)
Buy Price-$1.16
Closed up $.07 at $1.35
New management and capital investment at $3.90 a share.
Earnings out Thursday, November 13th, before the open
Up 16%. HOLD

SonicWALL. (SNWL-Recommended 10/20/2008)
Buy Price-$4.50
NEW Valuation-$11.09(Was $10.44)
Closed up $.04 at $4.48
Earnings out last week. Sales were up 5% and they made $.01 per share versus a small loss last year. They have $3.02 in cash and our valuation moved up to $11.09 per share from $10.44.
Down 1%. HOLD

Cynosure. (SNWL-Recommended 10/29/2008)
Buy Price-$9.10
Closed down $.34 at $8.76
Earnings out last week. Sales up 21%, made $.25 per share (compared to $.36 last year). Not bad. CYNO has $7.33 per share in cash–86% of its market-cap. Cheap.
Down 4%. HOLD

Cutera. (CUTR-Recommended 10/29/2008)
Buy Price-$7.88
Closed up $.63 at $8.51
Cutera has $8.01 in cash–94% of its market-cap. So you can buy this for 7% of sales. Profitable too.
Up 8%. 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),
NEW Valuation $5.66 (was $5.63, $5.61, $5.71, $5.49, $5.34, $5.03, $5.28, $5.28, $5.21)
Closed at $.95, up $.06.
Earnings announced last week. 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 $5.66 from $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 41%. 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 $3.76 (was $4.00 $3.41, $3.05, $2.53, $3.25, $3.29 $2.69, $3.36, $3.81)
Stock closed at $.74, up $.14.
Trading at only 20% of our valuation.
Down 7%. 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 $.01 at $.10. Closed at $.10.
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 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-$1.61 (Was $2.28, $2.08)
Closed at $.32, up $.02
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


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s