Cheap Stocks, 2/26/2010 Update

Up 1.3% last week and we are now up 8.8% for the year. All of the averages were down slightly last week, and all show losses for the year. We are about 10 percentage points ahead of all the averages now.

IPAS, ANGN, NINE, CAW and MGIC are our favorites.

We have been watching HPOL fall from $1.54 after their last earnings release to $1.04 on Friday. Their last earnings report was pretty encouraging and our valuation was $3.24. We are buying again at this price, looking for a 30-40% gain.

The DOW was down .7%, NASDAQ was down .3% and the S+P 500 was down 1%. The Russell 3000 was down .5% and the Wilshire 5000 was down .4%. For the year the DOW is down .25%, NASDAQ is down 1.4% and the S+P 500 is DOWN 1%. The Wilshire is down .4% and the Russell is down .5%.

Last week we went 11 stocks up, 5 down and 1 even. Since inception we are now 40 stocks up and 11 down for a 78% winning percentage.

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%

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 35 stocks that we closed out since 2006 the average net gain was 30%.

Ninetowns Internet Tecnology (NINE-Recommended 1/25/2010)
Buy Price-$1.53
Valuation-$3.19
$2.68 per share in cash
Closed up $.09 at $1.67.
Up 9%. BUY

Gravity Company Ltd. (GRVY-Recommended 1/18/2010)
Buy Price-$1.68
Valuation-$5.15
Closed down $.09 at $1.95.
Still trading slightly below cash value ($2.17 per share).
Up 16%. 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 $.01 at $.83.
Been very quiet on the news front for the last 3 weeks.
Following the early December announcement that Cetrorelix is dead, Sandofi and AEZS canceled their agreement to develop Cetrorelix. On the other hand Kerx (AEZS partner in U.S. on Perifosine) announced positive news, “The data presented here further supports the planned Phase 3 trial design which has been granted Special Protocol Assessment by the FDA”. This is still a “lottery ticket”.
Earnings out in November. Revenues about $8.5 million and they lost $11.3 million. This of course all means nothing yet.
Their pipeline and the related announcements will be what drives this stock.
Just waiting for some more good developement news here.
They still have $45 million in cash, marketed products and a good pipeline
Down 42% 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 –$13.00
Closed up $.01 at $6.64.
Earnings out in February. Record sales of $29.7 million, up 11% from last year. The litigation is behind them with a $5 million P+L hit in Q4. Another $1.1 million write down of their auction rate securities and a total net loss for the quarter of $5.5 million. Excluding all the abnormal stuff, they actually made about $600,000!
Guidance was tepid. Looks like maybe a 10% sales increase, a Q1 loss and a profitabe year. SPNC has always been very conservative in their guidance. 2010 is their year to show us what they can do–assuming they don’t step on their …..’s again.
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%.
Canaccord Adams upgraded SPNC on the settlement announcement in December. Target price is $11.
The company has $30 million in cash ($.90 per share), no debt and is growing about 10% a year.
Up 17%. 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 $5.86 (was $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 up $.02 at $2.29
Earnings out in early February. The economy finally caught up to DWCH. Revenue down 19% as you would expect this year, but they slipped into a loss of $.03 a share (only $200,000 though). Cash rose to $.99 a share, but sales and margins fell and so did our valuation–to $5.86 per share. Stil trading at only 41% 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 $12.13 (was $12.57, $12.29, $11.90, $11.30, $11.48, $11.47 $10.99, $10.28, $13.32, $12.89, $13.40)
Up $.63 at $8.79.
Earnings out in February. Sales were up 8% and EPS more than doubled to $.10 per share. Cash is $2.23 per share. Our valuation fell $.44 to $12.13 per share, but we think that when they get a full quarters revenue from the acquisitions that reduced cash, this will rebound.
Constellation Software filed a 13D/A in late August 2009. Bought 290,000 shares at $5.20 raising their stake to 21.8%. 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 39%. 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 $2.17 (was $1.65, $1.89, $5.61, $6.42, $6.84, $7.58, $7.59)
Up $.04 at $.34.
In early February VTRO issued a very encouraging press release with good growth in their key business metrics, and saying they belived they would be EBITDA positive in the December quarter.
Earnings out in November. Sales were $7.4 million and they lost $1.8 million before a $1.2 million gain from discontinued operations. Cash was about $6.9 million or $.20 per share. Our valuation rose to $2.17 per share.
We have no hope that we will ever make money on this one, nor are we sure they will survive at all.
Down 79%. 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 $3.34 (was $4.17, $4.73, $4.75, $4.12, $4.99, $4.30, $4.09)
Up $.01 at $1.07
Earnings out in February So-so at best. Sales down 12%, but were only down 3% if you exclude their legacy dial-up revenues. On a Non-GAAP basis they lost $700,000 or $.01 per share. Aside from their $3.8 restucturing charge, they also had a $1.2 million charge to fix “historical billing errors”. This on top of their sales tax charges, make it look like they had some pretty shoddy accounting going on. Hopefully this is the last shoe they drop on us. Seems like they are cleaning the books up though–for a sale maybe? Our valuation dropped to $3.34 per share as cash dropped ($.16 from their last dividend), margins dropped and sales fell. Still, at this price IPAS is only trading at 31% of our valuation. Cheap.
Foxhill ownership is 6.7%. Millenium owns 9.9% and Federated, 5.5%.
Down 19%. 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 $18.89 (Was $17.09, $17.05, $14.51, $17.23, $18.36)
Unchanged at $5.42.
Earnings out last week. Revenues were up 5% to $12.6 million and they earned $.14 per share compared to a loss of $.12 last year. They made $.49 per share for the year. They also declared their $.07 quarterly dividend. We will update our valuation when they file their 10K. We expect it will drop to about $15 due to the seasonality of their 4th quarter. Still would be about 3X the current price.
Down 2%. BUY

Magic Software Enterprises. (MGIC-Recommended 8/18/2008)
Buy Price-$1.43 (adjusted for $.50 special dividend) (was $2.08 before another $10,000 added, $2.00 before $10,000 added at $2.16)
Valuation $3.71 (was $3.78, $3.84, $3.80, $3.97, $4.18, $4.15)
Closed up $.03 at $1.80
Earnings out in February. Sales fell only 4% to $14.5 million (up from $13.5 last quarter) and they made $.11 per share. Our valuation fell $.07 to $3.71 per share AFTER taking into account the $.50 special dividend. Increasing sales, income and margins offset almost all of the loss due to the dividend declaration.
Cash per share was $.80 per share AFTER the dividend.
Formula Systems (NASDAQ-FORTY) holds 17,605,000 shares of MGIC or 55.4%. FORTY is a long-term investor that at some point will want to sell MGIC.
Up 20% (adjusted for special $.50 dividend). BUY

Angeion Corporation. (ANGN-Recommended 8/28/2008)
Buy Price-$3.82 (was $5.15 before $10,000 added)
NEW Valuation $11.29 (was $11.73, $11.47, $11.16, $9.53, $13.30, $13.03)
Closed up $.10 at $4.07
Earnings out last week. Sales up 5% to $6.6 million (about flat with last quarter) and they lost $800,000 or $.20 per share. Cash decreased to $2.53 per share, and our valuation fell to $11.29 (still about 3 times the current share price).
Blueline Partners filed a 13D on ANGN on June 23, 2008. They own 216,000 shares or about 5.3% of the company. All of their purchases were well North of the current price.
UP 7% BUY

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 $.22 at $1.85
Current dividend yield–suspended
Earnings due out Tuesday, March 2nd before the market open.
Last earnings in November. Good again. Revenues up 57% to $37.6 million. Made $6.2 million or $.12 per share excluding a $8 million “mark-to-market” derivative charge. Everything else seems good.
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. Meanwhile their business is great. This is definitely going to be long-term though.
Could be the buy of a lifetime if the ecomomy–and ship prices recover.
Their average ship charter life is around 10 years and the closest-in renewal is at the end of 2012.
Down 16%. HOLD

DIVX Inc. (DIVX-Recommended 5/26/2009)
Buy Price-$4.94
Valuation-$8.57 (Was $8.49, $9.24)
Closed up $.01 at $6.04.
Royce cut their holding here to about 6% from about 14%. 13G filed in February.
Earnings out in November. Sales fell 32% to $16.6 million. They lost about $2.5 million, excluding a $9.5 million litigation gain. Cash rose to $143 million or $4.34 per share. On a non-GAAP basis they lost about $300,000.
Our valuation rose to $8.57 per share.
We will hang on to this one for a while more.
Up 22%. 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 $5.74 (was $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 at $.85 down $.05.
Earnings out in December. Sales up 35% to $5.5 million and they made $162,000 or $.02 per share.
Our valuation backed off a bit to $5.74 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 47%. 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),
NEW Valuation $3.03 (was 42.38, $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 $.83, down $.02.
Earnings out in February. Sales fell 19% to $7.7 million, and they made $600,000 or $.02 per share. Net cash rose to $.14 per share. Our valuation surged to $3.03. Market cap is about $15 million, sales are about $30 million, with decent margins, profitable and with $.14 in net cash.
Up 4%. HOLD.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask,
Valuation $.93 (Was $.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 $.10 up $.025. Closed at $.08.
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.
Earnings out in November. Sales down 54% to $3.6. million (down from $4.1 in Q2) and they lost $320,000 (essentially breakeven excluding depreciation). They blame the sales decline on currency issues and the economy. Our valuation rose to $.93 ( 11 times the current selling price) as losses were reduced and margins gapped up over 70%.
Their VOIP business continues to struggle and lose money, sales were $112,000 down from $188,000 last quarter. They VOIP loss was $675,000. They also spent $129,000 on patent enforcement, which may result in some future gains for the company but there is no way to tell for sure.
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 63%. HOLD

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $.84 (Was $.95 before $10,000 adder, $1.08 before double-up)
Valuation-$2.00 (Was $1.84, $1.56, $1.99, $2.22, $1.61, $1.06, $2.28, $2.08)
Closed at $1.41, down $.07.
Remember our $2 valuation is a true “value” calculation. EPS is not given much weight. But LTUS looks like it will earn $.40 this year, fully diluted. So at even a measly 8 multiple we could see over $3 per share.
Earnings out in November. Sales fell only 13% from last year, but they were up from Q2. They made $5.5 million in profit or $.11 per share. For the nine months they have now earned $.28 per share. Our valuation headed back up again to $2.00 per share.
Lotus announced in February 2009 that it bought the land use rights in Mongolia for $26 million, subject to contruction approvals etc. If the project is not approved, they get the money back. They paid for this out of internally generated funds. Pretty impressive. 3 years and $58 million to go to build this plant. They are also looking to sell or rent up to 80% of the land to other pharma companies to create a pharma industrial park.
This may work out ok. Unusual legal structure, $58 million construction project all hang over this company.
UP 69%. HOLD

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