Cheap Stocks, 8/9/2013 Update

Terrible week for us, down 5%. Both DEXM and XRSC got slammed for their earnings reports.  We just don’t see this as warranted.

We are now up 20.7% for the year.
DEXM, XRSC earnings last week.

Some of our stocks are just stupid cheap—compared to their net cash on hand per share divided by their stock price.
Check this list:

EXTR
50%
GRVY
156%
CCUR
31%
SIGM
50%
MRVC
49%
AVNW
52%
QADA
38%

The DOW was down 1.5% last week, NASDAQ was down .8% and the Russell 3000 was down 1.1%. For the year, the DOW is up 17.8%, NASDAQ is up 21.2% and the Russell is up 20.7%.

DXM, DAEG, BLIN, MRVC, GRVY and CBEY can still be bought.

Last week we went 3 stocks up, 12 down and 1 even. Since inception we are now 67 stocks up and 15 down for a 81.7% 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 by IBM)
2008-PARL +56%
2009-MBRK +67%
2009-SNWL +14%
2009-CYNO +25%
2009-DTLK +33% (fourth trip on this)
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% (third trip)
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%
2012-BVSN +30%
2012-TISA +137%
2012-PTIX -44%
2012-MTSL +157%
2012-LTUS -98% No more Chinese stocks for us
2012-AEZS -63%  a bad speculation.
2012-RIMG -46% (including dividends)
2012-HPOL +34% (4th trip)
2012-MEDW +133% (Buyout 1 week AFTER we sold this)
2012-SPNC +118%
2012-RWWI +1%
2012-MOTR -29% (lost biggest customer contract)
2013-INUV -83% Held this since 2007. Failed business model.
2013-ASTX-+40%
2013-MGCD-+79%
2013-LXK +2%
2013-AGYS +41%
2013-DRIV+31%

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 65 stocks that we closed out since 2006 (53 were winners) the average net gain was 30%

QAD Inc. (NASDAQ-QADA)-Recommended 6/7/2013)

Buy Price $11.80
Valuation $28.27
Closed down $.46 at $12.46
Next earnings due out Tuesday, August 27th after the market close.
UP 7% HOLD

Dex Media Inc. (NASDAQ-XRSC)-Recommended 5/10/2013)

Buy Price $15.14
Valuation $24.25
Closed down $4.18 at $11.47
Earnings announced last week for the June 30thquarter. Not enough detail to do a full valuation and hopefully the 10Q will fix that. But, it looks like combined revenues (on a pro-forma basis since the merger was completed April 30th) were $568 million versus $684 million last year and EBITDA was $224 million versus $286 million last year. Using a simple 3.5X EBITDA less net debt valuation and 15 million shares outstanding we come up with a value per share of $30. We didn’t see any big sellers last week, so we think it is just people shocked by the $10 a share loss reported.  We believe this is an overreaction, but will not double up here as there really is a lot of debt and this will need a couple of more quarters of performance before it is proven they can handle the debt and survive for the long term. As far as we can tell they seem to be on track with their plan as filed with the SEC on 12/6/2012.
Paulson & Co, filed a Form 13D on 5/10/2013 disclosing a 10.9% stake. They have held this stake since before the bankruptcy and merger. Then on May 14th, they filed a 13D/A disclosing another 350,000 share buy at prices up to $17.07 bringing their stake to 13%.
Down 24% BUY

XRS Inc. (NASDAQ-XRSC)-Recommended 2/26/2013)

Buy Price $1.50
NEW Valuation $6.16 ( Was $6.79, $6.50)
Closed down $.44 at $2.36
Earnings announced last week. Ok for such an undervalued company. Revenues were $13.4 million down from $15.6 million last year. Margins grew from 49% to 61% and they made $.07 profit on a Non-GAAP basis versus a $.03 loss last year. The company continues to transition to a software company (less lower margin hardware sales) as software revenues were 84% of revenues versus 76% last year. Our valuation fell to $6.16 a share-still more than double the current stock price.
UP 57%, HOLD

Daegis Inc. (NASDAQ-DAEG)-Recommended 11/30/2012)

Buy Price $1.09 (Was $1.20 before we doubled up)
Valuation $4.64 (Was $4.86, $4.00)
Closed down  $.16 at 1.37
Kurt Jensen a 10% owner continues to sell stock at almost any price, putting a lid on DAEG. He still has 1.6 million shares, so this could take a while.
Earnings announced in June. Decent. Revenues fell to $9.77 million from $9.811 last year. Margins held at over 70% and net debt decreased to $12.22 million from $13.8 million last quarter. Non-GAAP earnings were $.04 versus a loss of $.03 last year. Our valuation fell from last quarter to $4.64. This is feeling like XRSC, it just needs the stock price to reflect it.
Looks like BlueLine Partners (a “strategic opportunities fund”) have shaken up Daegis management in January with the ouster or the CEO and CFO. The interim CEO and Chairman of the Board is a BlueLine founder. Its feeling like they are not happy with the current stock price for sure.
Up 26%, BUY

Bridgeline Digital Inc. (NASDAQ-BLIN)-Recommended 8/24/2012)

Buy Price $1.24
Valuation $2.19 (Was $2.35, $2.56, $2.24)
Closed unchanged at $1.25
Next earnings due out Wednesday, August 14thafter the market close.
Earnings announced in May. Not great on the surface but all still looks good for BLIN going forward. Revenues fell to $6 million from $6.7 million last year and they lost $.03 a share on a Non-GAAP basis versus a $.01 profit last year. iAPPS revenue was 78% of sales up 9% from last year, recurring revenue was up 30% to $1.3 million. They also lowered their guidance for 2013 to revenue of $25-$26 million from $27 to $28 million. It looks like the reason for this is that their average deal size had doubled and it takes longer to deploy their software—which stretches out the revenue recognition period. We would recommend reading the conference call transcript where they give great detail on the business and forecast. Our valuation fell to $2.19 per share, but we still like the prospects here. It looks a bit like HSTM.
Up 1%, BUY

Telecommunications Systems Inc. (NASDAQ-TSYS)-Recommended 6/14/2012)

Buy Price- $1.37
Valuation $6.28 (Was $4.89, $6.02, $6.72, $5.49)
Closed down $.08 at $2.71
Earnings announced in July. Revenues fell from $115 million to $93 million, but most of this sales shortfall was low margin government pass-through business. Gross margin increased to 39% from 30% last year. They lost $700,000 versus a profit of $1.6 million last year. Our valuation actually popped back up to $6.28 as net debt decreased and margins expanded.
Carlo Cannell, an activist investor filled a 13D in September 2012 pointing out how undervalued TSYS is and urged them to put themselves on the block. He points to a valuation done on the company as of August 29th of $7.40 to $11.81 a share. Even the low point here is higher than our valuation.
UP 96%, HOLD

Aviat Networks Inc. (NASDAQ-AVNW)-Recommended 2/27/2012)

Buy Price- $2.62
Valuation $9.31 (Was $10.28. $9.03, $9.37, $8.85, $8.31)
Closed up $.05 at $2.66
Earnings announced in May. Decent we think, but we were the only one. Revenues were $118 million compared to $112 million last year, gross margins were 29.1% and they made $1.2 million on a Non-GAAP basis versus $2.2 million last year. The current quarter included a $1.1 million inventory write-off for a bankrupt customer. Net cash per share was $1.38.
Their book-to-bill ratio was less than 1 this past quarter leading them to give next quarter guidance of $105 to $115 million in revenues and Non-GAAP income of $0 to $.03 per share. Not setting the world on fire, but doing ok. Our valuation fell from the huge prior quarter to $9.31—a $1 a share more than when we recommended AVNW.
Penn Capital Mgmt. filed a 13G in late February disclosing a 6.05% stake.
Dimension Fund filed a Form 13G in February disclosing a 5.3% stake, Vanguard disclosed a 5.67% stake and Blue Mountain has been buying more and is now up to a 5.90% stake.
UP 2%, BUY

CBeyond Inc. (NASDAQ-CBEY)-Recommended 2/28/2012)

Buy Price $7.17 ( Was $7.94 before another $10,000 added at $6.53)
Valuation $27.58 (Was $28.24, $28.33, $29.04, $29.59, $29.58, $29.21)
Closed down $.23 at $6.78
Earnings announced in July. Nothing to write home about. Sales were $118.2 million versus $123.8 million last year and they lost $41,000 versus making $2.7 million last year. Apparently the earnings were $.05 better than estimates—whoo—hoo.
They also lowered their guidance to $464-$471 million (from $475-$485 million) and adjusted EBITDA guidance to $76-$80 million from $75-$82 million. This was pretty much a non-event to us as our valuation fell a tad to $27.58.
Penn Capital Mgmt. filed a 13G in late February disclosing a 5.55% stake.
$80 million of EBITDA, $.68 a share in net cash and a $230 market cap. Cheap.
Down 5%, BUY

MRV Communications (Pink Sheets-MRVC.pk)

Valuation $27.15 (Was $31.80, $34.60, $28.60, $41.20, $43.20 (after $9.50, $6.00 and $1.40 special dividends), $52.40, $55.80)
Buy Price October 7, 2011- $8.50 ($25.40 before special dividends)
Closed at $9.95 down $.55
Earnings announced in April. Not bad, but not great. Sales were $46 million up slightly from $44.7 last year. They lost $3.1 million pre-tax which included $1.6 million of litigation costs and $400,000 of share based compensation (vapor cost). Net cash was $4.59 per share and our valuation was $27.15.
Lloyd Miller disclosed a 6.9% stake in February.
The 20 for 1 stock split happened in December, so all the share information has been adjusted.
Raging Capital bought another 1.6 million shares in the first week of December at $10.80 bringing their holdings to 20.1% of the company.
Still trading at less than ½ our valuation.
UP 16%  HOLD

Sigma Designs Inc. (NASDAQ-SIGM)-Recommended 7/11/2011)

Buy Price-$8.49
Valuation $11.86 (Was $8.24, $13.05, $10.67, $8.41 $12.10, $13.40, $16.02)
Closed down $.10 at $5.16
Raging Capital filed a 13D/A in July showing sales of about 500,000 shares at prices from $4.96 to $5.68 lowering their stake to 6.6%.
Earnings announced in June. At least they did what they said they would do. Revenues were $52.5 million up 31% over last year and they made a penny on a Non-GAAP basis compared to a loss of $.26 last year. Cash rose to $87 million or $2.57 a share and our valuation rose to $11.86.
Guidance from their press release:
“Moving into the second quarter of fiscal 2014, we believe revenue will be in the range of $52.0 to $54.0 million,” Mr. Tran continued. “We expect to see revenue increases in most of our target markets along with a steady non-GAAP gross margin between a range of 52% and 53% driven by higher margin product mix and continued worldwide cost savings. In addition, we expect our non-GAAP operating expenses in the second quarter of fiscal 2014 to be lower compared to the first quarter of fiscal 2014,” said Mr. Tran.
Raging Capital filed a 13D/A in May disclosing the purchase of another 350,000 shares at prices up to $4.68 a share, bringing their holding to 8.1% of the company.
We will be watching this one very closely and may sell at any time.
Down 39%, HOLD

Mitel Networks (NASDAQ-MITL)-Recommended 7/6/2011)

Buy Price- $3.04( Was $3.36 before $10,000 added, $3.95 before $10,000 added)
Valuation $13.81 (Was $12.26, $13.10, $10.92, $13.92, $12.81, $15.28, $14.04, $10.39)
Closed down $.16 at $4.68
Earnings announced in June. Pretty good. Down from last year but they exceeded their guidance. Revenues were $150.9 million versus $157.6 million last year. On a Non-GAAP basis they made $.25 a share. For the year they made $.81 on a Non-GAAP basis. MITL is selling at 5X Non-GAAP earnings. Cheap. Our valuation rose to $13.81 a share.
UP 54%, HOLD

Concurrent Computer (NASDAQ-CCUR)-Recommended 2/4/2011)

Buy Price-$4.58 (Was $5.08 before $.50 special dividend)
Valuation $16.26 (was $16.20, $15.37, $13.53, $15.85, $14.13, $11.38, $14.04, $18.54, $15.99)
Closed down $.41 at $8.17 (including dividends)
Pays $.48 annual dividend.
We have collected (or will soon collect) $.36 in dividends so far (excluding the $.50 special dividend which reduced our basis).
The Singer/Miller group disclosed in a Form 13D that they  sold about 70,000 shares in June, July and August at prices of $8 to $8.5 a share. They still own 8.4% of the company or about 775,000 shares. Still not good news.
Earnings announced in April. Pretty good we think. Revenues were $16.9 million, up from $16.3 million last year. They had a profit of $937,000 ($.11 per share) versus $337,000 last year. Net cash was $2.52 a share and our valuation rose to $16.26 per share.
UP 78%, HOLD

Extreme Networks (EXTR-Recommended 3/22/2010)

Buy Price-$3.18 (Was $3.04 before adding another $10,000)
Valuation-$7.33 (was $6.58, $6.99, $6.97, $7.46, $6.31, $7.01, $6.72, $6.45, $5.67, $7.36, $7.23, $7.31, $6.82, $6.81)
Closed at $4.08 down $.04
Earnings announced in July. Mediocre as usual. While revenues were up from $68.2
million last quarter to $79.5 million this quarter, they were down from $87.7 million last year. Gross margin held steady around 55% and they made $.03 a share versus $.08 last year. Cash per share rose to $2.17 and our valuation rose back up to $7.33.
Guidance for next quarter is revenue of $72-$77 million of revenue and Non-GAAP net income of $2-$6 million.
Vanguard filed a Form 13G in March disclosing a 5.21% stake, Wellington disclosed a 6.3% stake and Soros upped his holdings to 9.85%..
Starboard owns 8.8% and Blackrock owns 5.4% of EXTR.
UP 28%, HOLD

Gravity Company Ltd. (GRVY-Recommended 1/18/2010)

Buy Price- $1.45 per ADS (Was $1.68 before double up)
Valuation $4.14-(Was $3.65, $3.41, $5.52, $5.00, $5.39, $5.33, $5.61, $5.73, $4.38, $4.44, $5.15)
Closed at $1.17 up $.01
Gravity reported their Q1 results in May. Revenues were down YOY by 28% to $10.8 million and they lost $1.5 million or $.21 per share. By far the worst results since we have owned GRVY. Cash per share fell to $1.69 ($47 million). Not much good news to report although it looks like Rangarok Online is doing OK in Korea and they re-launched it in China in February.
Still trading below cash value, but operations are not looking robust at all. We may have to dump this one, but will hold on for a bit longer to see if they can turn things around. It would be a shame to have to sell this below their cash value.
Down 20%, BUY

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 $6.41 (was $6.14, $5.97, $6.21, $6.13, $5.82, $5.81, $5.72, $5.65, $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 $2.87 down $.03
Wynnefield partners bought another 100,000 shares at $2.90 in the first week of July raising their stake to over 10%.
Earnings announced in June. Looking good. Revenues were up 44% to $8.2 million, gross margins remained steady at 77% and although they reported a pre-tax loss of $1.3 million, after you back out the loss on the debt repayment and an asset write-off , they only lost $200k. How much of this was integration costs are not known. They are projecting a return to profitability next quarter and increasing profitability as the integration activity goes on over the next year. Recurring revenue was 93% of total revenue.
If ARI can grow continue to grow their revenue and profits over the next couple of quarters, we think the stock price could approach our valuation. 
Wynnefield Partners filed a 13D/A in April disclosing purchasing another 50,000 shares at $2.50, and now have a 9.95% stake (1.2 million shares) in ARI.
UP 78%, HOLD, Still a Huge valuation gap here.

CTI Holdings (CTIG.ob-Recommended 2/25/2006)

Buy price $.27 ask,
Valuation $1.07 (Was $1.14, $1.17, $1.34, $1.34, $1.37, $1.36, $1.23,  $.91, $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 $.29 closed at $.29
Interestingly, Veramark another tiny telecom software company that we have long followed was recently being bought for $1.18 a share. Our valuation on it was $1.66. This offer was received after an initial offer of $.98. So it finally went for 71% of our valuation. CTIG would need to sell for $.76 a share to be equivalent.
CTIG announced in June that they had hired Duff and Phelps as their independent financial advisor. Guess the Board decided they need to get a fairness opinion to keep down the damages on the lawsuit.
Earnings announced in May. Not good, but I expected worse given they are trying to buy out the company on the cheap. Revenues were $3.885 million versus $.368 million last year. Gross margins held firm at 73%, but they lost $443,000 compared to a profit of $25,000 last year. Cash per share fell to $.06 and our valuation dropped to $1.07—still triple the current trading price.
Birbeck and Fairford Holdings made a non-binding offer to buy CTIG in March for $.29 a share. The company formed a special committee to evaluate the offer. Hopefully they will find somebody else who will pay fair value—or at least close to it.
UP 7%. HOLD

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