Cheap Stocks, 7/29/2011 Update

Worst week for the markets in a year. Our “leaders” still can’t agree on a debt reduction plan. Makes you think that maybe we should split the country in 2. One country will tax everything and the other will spend nothing.

We were down 3.9% last week and are now up 3.8% for the year.

The DOW was down 4.2% last week, NASDAQ was down 3.6% and the S+P 500 was down 3.92%. The Russell 3000 and the Wilshire 5000 were both down 4.1% for the week

AVSO, CCUR, EXTR, RIMG, MTSL, SIGM and MITL are our favorites.

For the year, the DOW is up 4.9%, NASDAQ is up 3.9%, S+P 500 is up 2.75%, the Russell 3000 is up 2.9% and the Wilshire is up 2.7%.

Last week we went 4 stocks up, 14 down and 3 unchanged. Since inception we are now 55 stocks up and 14 down for a 80% winning percentage (80% is our target win %).

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%
2010-DIVX +25%
2010-CHRD +37% Buyout (2 weeks after we recommended it)
2010-HPOL +30%
2010-MGIC +82%
2010-GSL +78%
2010-CCEL +49%
2010-HPOL +27%
2010-CAW EVEN (excluding 2.5 years of dividends)
2011-DWCH +116%
2011-IPAS +15%
2011-PRM +56% Buyout (1 week after we recommended it)
2011-RST +12%
2011-NINE -10%

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 48 stocks that we closed out since 2006 (43 were winners) the average net gain was 37%.

Sigma Designs Inc. (NASDAQ-SIGM)-Recommended 7/11/2011)
Buy Price-$8.49
Valuation $16.02
Closed down $.31 at $8.55
SIGM got “upgraded” by Lazard in July from Sell to Neutral. Hey, at least it is the right direction!

Mitel Networks (NASDAQ-MITL)-Recommended 7/6/2011)
Buy Price-$3.95
Valuation $10.39
Closed up $.21 at $4.45
UP 13%-BUY

Rimage (NASDAQ-RIMG)-Recommended 5/24/2011)
Buy Price-$14.20
NEW Valuation $25.63 (Was $26.45)
Closed down $.61 at $14.82
Earnings out in July. Sales were off about 10% to $20.2 million and earnings were off $.10 to $.12 per share. Cash continued to rise to $119 million ($12.49 per share). Our valuation slipped a bit to $25.63 on the lower sales. With the 2.6% dividend and a huge cash cushion, we still like RIMG.
Their activist shareholder Arcadia Capital Management sent a letter to the Board in July, suggesting that RIMG should pay out a $9 per share special dividend, and not waste it on some stupid acquisition. We would take the dividend—or a buy-out.

Lexmark International (NYSE-LXK)-Recommended 5/24/2011)
Buy Price-$28.80
NEW Valuation $79.12 (Was $63.99)
Closed up $3.83 at $33.57
Earnings last week. They were great. They made $1.27 per share earnings on flat sales up from $1.07 in earnings last year. They are projecting $.86-$.96 in earnings for Q3. They seem easily on track to make over $4 per share this year. Our valuation soared to $79.12 per share. PE guys should be drooling over LXK. This would normally be a “buy” with such a huge discount to our valuation, but the vagaries on the stock analysts make us cautious.

MER Telemanagement (NASDAQ-MTSL)-Recommended 5/17/2011)
Buy Price-$1.42 (Was $1.50 before adding another $10,000 investment)
Valuation $5.11
Closed down $.13 at $1.30
MER recently ran to $2.07 but has settled back below our buy price. Seems to be some persistent accumulation going on. If their next quarter earnings are decent, we could see a another run well past $2.00
$.60 a share in cash and profitable.
Down 9%-BUY

Harris Interactive (NASDAQ-HPOL)-Recommended 3/3/2010)
Buy Price-$.92
Valuation $2.63 (Was $2.97)
Closed at $.77, down $.02.
New CEO is cleaning up. They are closing their Hong Kong, Singapore and Shanghai offices and downsizing their U.K. office. Their will be a restructuring charge in the September quarter of some amount. Nevertheless this will all help to reduce their losses going forward and get this ready to sell.
Old CEO was booted in June and a turnaround guy made CEO. This is good news. He has sold his previous companies.
Latest earnings were not good. Sales fell 7% and they lost $2.3 million or $.04 per share. Our valuation fell to $2.63 per share.
Down 16%-HOLD

Concurrent Computer (NASDAQ-CCUR)-Recommended 2/4/2011)
Buy Price-$5.08
Valuation $18.54 (was $15.99)
Closed up $.03 at $6.43
Company announced four new sales wins in China in July. The price shot up to as high as $6.89 on the news.
Latest earnings report was great. Sales up 26% and they made $.06 per share. They have $3.41 per share in net cash. Our valuation spiked to $18.54 per share.
In April the company announced that it would not do the stock buy back that Skellig was suggesting. We don’t like buy backs anyway. Hopefully Skellig will keep pushing management to get the share price up. Their ownership is up to 5.86%.
Up 27%-BUY

SuperGen Inc. (NASDAQ-SUPG)-Recommended 10/4/2010)
Buy Price-$2.31 (was $2.09 before adding $10,000)
Valuation $5.21 (was $4.89, $4.37, $3.48)
Closed down $.08 at $3.06
SUPG completed their merger with Astex in July.
Next earnings due out Wednesday, August 3rd after the market close.
Latest earnings report was good. Sales up 19% to $17.1 million and they made $.09 a share. Our valuation moved up to $5.21 and they have $2.05 per share in cash. This looks like a steal at these price levels, but there is uncertainty caused by their recently announced acquisition.
SUPR announced in April that they were buying Astex, a UK company for $55 million in cash and stock. They will pay $25 million cash upfront and the remaining $30 million in cash or stock over 30 months. The big, black mark on SUPG was that their drug pipeline was weak. From what we can tell, Astex is nothing but pipeline. They do not appear to have any commercial products and no close-in products; however, they have collaboration deals with a number of drug giants and have collected substantial milestone payments from them. There are $2 BILLION of potential milestone payments down the road. The combined company will have $120 million of cash, but we suspect the profitability will be gone. There is not enough public information at this point to update our valuation for this transaction.
Up 33%-HOLD

Performance Technology (PTIX-Recommended 3/30/2010)
Buy Price-$2.70
Valuation $4.99-(was $3.79, $3.87, $5.03, $5.98, $7.13)
Closed down $.06 at $2.07
Earnings out in May. Sales up 24% but they still lost $1.1 million or $.10 per share. Much better than the $1.9 million loss last year.
Cash per share fell to $1.04 from $1.73 as accounts receivable rose, but our valuation rose to $4.99 as sales rose significantly. We think we will hold on to this one a bit longer and see if they can get to a profit.
Down 23% HOLD

Extreme Networks (EXTR-Recommended 3/22/2010)
Buy Price-$3.18 (Was $3.04 before adding another $10,000)
Valuation-$5.67 (was $7.36, $7.23, $7.31, $6.82, $6.81)
Closed down $.15 at $3.39
Big news in July. EXTR announced they are laying off 16% of their employees and expect $20 million of cost reductions in FY 2012 and allow the company to make consistent double digit operating income. They also announced that Q4 revenues will be above forecast at $88-$90 million and that non-GAAP earnings will also be lower than forecast at $.01-$.02 per share. They will take a $3.1 million restructuring charge in Q4, so they will show a loss. We view this all as good news for the future. Starboard was cleared to buy up to 15% of EXTR as disclosed in an SEC filing in June.
Starboard Value Fund filed another 13D/A in June disclosing that they had upped their stake again to 9.6%.
Latest earning report was not good. Sales fell 3%, but they lost a whopping $6.8 million or $.07 per share. Cash rose to $1.60 per share. Margin fell, sales fell and they lost money, so our valuation dropped to $5.67 per share.
EXTR entered a settlement agreement with Ramius (Ramius owns 6.4% of EXTR). Declassify the Board, add a Ramius Director and the Ramius Director must be on any committee that reviews “strategic alternatives”. Pushing to sell EXTR obviously.
Still a cheap stock.
Up 7% HOLD

Broadvision (BVSN-Recommended 3/16/2010)
Buy Price-$13.50
NEW Valuation $18.01-(was $21.21, $22.95, $22.31, $21.77, $23.37, $27.15)
$13.57 per share in cash.
Closed down $.66 at $11.95
Earnings last week. Not so hot. Sales were down to $4 million (from $5.1 million last quarter), and they lost $1.5 million. Cash per share fell to $13.14. Clearly their social networking initiative has not taken hold yet. This is still trading like a Chinese stock, but it is a U.S. company and it trading at less than cash value. Our valuation however fell to $18.01. Without the fact that BVSN is trading at less than cash, we would likely sell BVSN but will hold on another quarter or two and see if they can produce some decent results.
Down 12%. HOLD

Gravity Company Ltd. (GRVY-Recommended 1/18/2010)
Buy Price-$1.68
Valuation $5.61-(Was $5.73, $4.38, $4.44, $5.15)
Closed down $.12 at $1.58.
Earnings out in July. Pretty good. Cash was $2.07 per share and they made $.08 per share. Our valuation is $5.61. Not bad at all. Ragnarok 2 is delayed until at least Q3 2011.
Down 6%. 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 $.27 at $1.98
Perifosine got a European patent issued, as announced in July. Market yawned.
Oppenheimer put a $5.50 price target on AEZS in June. .
Needham also gave AEZS a buy recommendation with a $5 price target.
Earnings out in May. Revenues about $7.4 million for the quarter compared to $6.4 million last year and they lost $10 million. Cash was $41 million before counting about $15 million of cash received in April from the sale of stock.
AEZS announced a new partnership for perifosine in Japan. They got $8 million upfront and up to another $60 million in the future. Plus AEZS gets to sell the compound to the company and gets double digit royalties. Not a bad deal.
Riding the tail of Kerx and perifosine, new orphan drug approval from the FDA and a lot of investor interest in their pipeline of cancer products.
Speculative for sure.
Up 39% 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 –$10.00
Closed down $.10 at $6.93
Earnings out last week. Sales rose 7% to $32.2 million and they actually managed a $.02 profit. Cash rose to $35.7 million.
SPNC announced recently that they finally hired a new CEO. He comes from DaVita, but we were not all that impressed with his resume. I hope he is planning on making a big killing on his stock options at SPNC and not just continuing to screw up like the other current and previous management.
Paragon filed a 13D/A in May disclosing they had upped their stake to 7%.
a year.
Up 22%. 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 $16.07 (was $15.04, $14.23, $15.02, $14.35, $12.13, $12.57, $12.29, $11.90, $11.30, $11.48, $11.47 $10.99, $10.28, $13.32, $12.89, $13.40)
Closed up $.03 at $11.26
Constellation continues to sell a few thousand shares here and there. This is putting a damper on the stock price. Something needs to happen here to overcome this selling pressure. They have 1.7 million shares left.
Earnings reported in May. Good again. Sales up 8% and they made $.17 per share up from $.11 last year. Our valuation rose to $16.07 per share. They have $3.66 per share in cash.
MEDW announced what sounded like a nice military contract win in April. No details though, so hard to get too excited. Hopefully this and the acquisition will keep their sales and earnings momentum going.
MEDW announced another acquisition in March. No details of what it cost, or what it will do to earnings.
We give up on the sale of the company anytime soon.
Constellation Software owns 21.8%, but put itself up for sale this year. Should have bought Constellation stock, it has tripled since they got into MEDW!
All we read is that medical records will be a hot area, so MEDW looks like the place to be.
Up 78%. HOLD

Vertro (VTRO (was-MIVA)-Recommended 10/21/2007)
Buy Price $8.15 (Was $11.90 before adding another $20,000, $13.10 before another $10,000 and was $15.00 before double up),
Valuation $12.42 (was $14.23, $14.76, $12.40, $12.55, $10.85, $8.25, $9.45, $28.05, $32.10, $34.20, $37.90, $37.95)
Closed down $.12 at $2.03
Earnings in May. Sales actually were up to $8.4 million versus $8.1 million last year, but they fell from $9.6 sequentially. They lost $89,000 this quarter compared to a profit of $1.3 million last year. Disappointing compared to the sequential gains in sales and profits of recent quarters. Should have sold this when it traded over $6. Our valuation fell to $12.42 and cash per share fell to $.73.
Down 75%. HOLD

Angeion Corporation (ANGN-Recommended 8/28/2008)
Buy Price-$3.82 (was $5.15 before $10,000 added)
Valuation $13.19 (was $13.60, $15.00, $13.06, $12.15, $11.29, $11.73, $11.47, $11.16, $9.53, $13.30, $13.03)
Closed unchanged at $4.54
ANGN announced in July that they hired their interim CEO.
Earnings out in June. Sales flat at $6.8 million and they lost $138,000 or $.04 per share. Blueline Partners still owns 7.6% of ANGN and ought to be pushing on the company to do something about the stock price.
ANGN also recently announced a distribution contract with Premier Purchasing Partners, where Premiers 2,500 hospital customers and 73,000 other customers can buy ANGN’s products at a discount.
Up 19% 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 $5.65 (was $5.39, $4,86, $5.60, $5.73, $5.54, $5.74, $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 $.75 down $.24.
ARI announced last week that they had refinanced their 14% debt with a regular bank loan, with regular interest rates. Should save them over $300,000 a year in interest expense ($.04 a share).
Earnings out in June. Sales were flat at $5.354 million, operating income however jumped to $675,000 from $297,000 and they made $.07 per share (about $.04 excluding non-recurring and discontinued operations). Our valuation jumped back up to $5.65 on higher than expected margins. If they can maintain $.04 per quarter (fully taxed), we should be on our way to having a winner here.
Wake up management–you have a great little company here worth 6X what it is selling for.
Now down 54%. BUY. Still a Huge valuation gap here.

Rand Worldwide (RWWI.ob (Was Avatech, AVSO.ob)-Bought November 28, 2005)
Buy price $.79 (Was $.93, $.99 and $1.19 before adding $10,000-each time),
Valuation $2.60 (was $2.40, $1.90, $2.26 $3.07, $3.03, $2.38, $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 $.80, unchanged.
Earnings out in May. Sales were $27.4 million and they made $.04 a share. Our valuation jumped to $2.60 a share. Hopefully another quarter or two of positive results will get this over $1.50.
Up 7%. HOLD.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)
Buy price $.27 ask,
Valuation $.91 (Was $1.21, $.71, $.83, $.88 $.96, $.93, $.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 $.09, closed at $.08.
The CEO has been buying shares. About 39,000 purchased on the open market in filings in May.
Earnings out in May. Sales were $4.17 million and they lost $380,000. Our valuation dropped to $.91. They also announced that they signed a contract with a customer for $6 million most of which will come in Q2. Their VOIP business did $246,000 of revenue in 2010 compared to $120,000 in 2010.
At a $3 million market cap, this is stupidly cheap. Their intellectual property is probably worth 10 times this price. They need to liquefy this value somehow.
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 67%. HOLD

Lotus Pharmaceuticals (LTUS.ob-Recommended 12/3/2007)
Buy price $1.68 (Was $1.80 before $10,000 adder, $2.16 before double-up)
Valuation-$2.43 (Was $4.11, $4.84, $4.98, $4.60, $3.82, $4.00, $3.68, $3.12, $3.98, $4.44, $3.22, $2.12, $4.56, $4.16)
Closed at $.50, down $.05
Earnings in May. Sales down 12% and they made $.08 versus $.18 last year. Our valuation plunged to $2.43 per share on sales, margins and income declines. This quarter is typically their weakest sales quarter. Not great guidance either in amounts or specifics, other than this will be a “transitional year” as they get their buildings done. We still think this will be a big winner in the end, but it looks like it will take another year to find out.
Ghost stories of ALL Chinese reverse merger companies being shams continue to spook stockholders. We don’t think LTUS is one of them.
.Looks like the Mongolian land story has shifted AGAIN. Now they intend to keep some of the land and build a distribution facility on it and trade the excess land for the new building to preserve about $6 million a year of tax benefits they are getting. The move into the Beijing building is delayed also–till sometime near the end of the year. This delay will keep 2011 sales and earning flat to down.
When the Beijing building is complete, they expect to have invested a total of $48 million ($36 million already spent) and that based on current market values, the building will be worth over $100 million. This plus the Mongolian land are worth 3 times the current market cap of LTUS.
Down 67%. HOLD


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