September 30, 2008

New 52 Week Low for Nuance Communications

Nuance Communications appeared on the 52 week low list today, despite the 500 point rally in the stock market. As their third quarter earnings report will attest, this company is a long term growth story, as acquisitions are eating into their revenues.

As of September 24, this stock is still a MF Hidden Gems recommendation. It appears that the company still has some growing pains to endure before they become consistently profitable and are able to focus on growing their earnings.

If you can stomach investing in the current market environment, this may prove to be a good entry point into this stock, but I would expect to hold it for a good 3-5 years.

For more on Nuance Communications, click here.

September 24, 2008

GigaMedia Entering Value Territory

I love it when growth stocks become undervalued. Buying cheap growth is a great way to make big gains in a relatively small amount of time.

The Fool notes in this article that GigaMedia is down over 30% in the last 30 days and over 50% in the last 52 weeks. According to the article, GIGM is still a MF Global Gains and Rule Breakers pick. What happened?

Nothing significant as far as I can tell. Yes it is a Chinese stock, and most Chinese stocks have fallen out of favor (what hasn't lately). Headlines have gone from "GigaMedia climbs as 2Q profit beats analyst views" on August 12 to "GigaMedia Among 52 Week Lows" on September 15.

At the current price of $8 a share, the P/E sits at just over 11. The forward P/E (ending Dec. 31 2009) is just over 8.

There is also plenty of growth still ahead for the company. Analysts are expecting revenue growth estimates of 25%. GIGM still has plans for launching its sports betting venture in the fourth quarter of this year. The online role playing game Warhammer Online is set to launch this quarter, and if popular will be another catalyst for growth for this company.

Anything under $10 a share would be a great entry point into this stock. Get it cheap while you can.

On Tessera Technologies

The Fool mentions Tessera Technologies, a MF Hidden Gems Paydirt recommendation in this article. What does this company do? They shrink technology. They also hold several patents on how to shrink technology. In fact, licensing and royalty revenue nearly composed all of the $56 million the company earned in the second quarter of this year.

Zack's likes them also, giving the company a price target of $35. That seems like a pretty steep price with the forward P/E at just under 15, but if the company anticipates record revenue to come in via licensing and royalty, a price target in the low $30's may not be outrageous.

One thing to keep in mind is that one of the company's patent expires in 2010. If Tessera has not developed additional patents through research and development by then, their plans for growth will most certainly be slowed.

September 23, 2008

A Compellent Growth Story

As an IT person by day and a stock blogger by night, I occasionally attend IT conferences and seminars that showcase new technologies and trends in the IT market. My most recent adventure took me to Las Vegas, at the VMworld 2008 conference.

Between lectures on best practices and technology previews of some new features that will be included in future releases of Vmware's (VMW) virtual infrastructure, I had the opportunity to network with various vendors on the trade show floor and learn about the products they had developed for VMware. One of the most intriguing vendors present was a company named Compellent Technologies (CML).

Before Virtualization Comes Storage

In order to properly leverage virtualization technology, whether it comes from VMware or Microsoft, companies need to purchase a storage area network (SAN). A SAN is simply a device that is made up of big collection of disks that can be plugged into a computer network. What you then get is terabytes of storage that can be shared between servers that are running virtualization software.

Compellent happens to posses some of the best SAN technology in the marketplace. Although not a traditional server itself, most enterprise SANs run a custom operating system that allow SAN administrators to create and allocate storage space within the SAN.

However, Compellent's technological advantage is that their SANs constantly monitor the data that is stored on the disks. Based on usage, a Compellent SAN will move the most freqently accessed data to faster disks in the SAN. Conversely, it will move less freqently used data to slower (and typically cheaper) disks in the SAN.

The technology industry has taken notice of Compellent's technological advantage. Compellent won a gold "Best of VMworld 2008" award at the Vmware Conference in the "Hardware for Virtualization" category. For the third year in a row, the independant labs at Infoworld declared Compellent's SAN the "Best SAN of the Year." Compellent is the only SAN manufacturer to win this award in consecutive years.

Growing to Profitability

Despite having a great product and a customer base of 1,000 companies, Compellent has yet to turn a profit, but that may change as early as this year. For the second quarter which ended June 30, 2008, Compellent reported revenue of $21 million, up 74 percent from $12.1 million in revenue for the second quarter of 2007, and an increase of 15 percent from the first quarter of 2008. Net loss was $603,000, or $(0.02) per share, for the second quarter of 2008 compared with a net loss of $1.9 million, or $(0.45) per share, for the second quarter of 2007.

The second quarter of 2008 marked the 11th consecutive quarter of revenue growth. 59% of product revenue was from sales to new customers.

Compellent is a Compelling Investment

Compellent made its debut as a publicly traded company in October 2007 at just under $27 a share. With shares trading slightly over $12 a share, and the company not profitable, they cannot be justified as "cheap." However, if the company continues to develop their award winning technology and more customers buy their product as a result, this may prove to be a reasonable entry point into the stock.

The SAN market is very competitive, even for a company like Compellent who although tiny, has superior technology that gives it a significant competitive advantage over its piers. Don't be suprised if one of the larger players in the SAN market decides that they would like to own Compellent's technology for themselves one day and makes an offer for the company.

Disclosure: none

September 19, 2008

Exelixis Update

The Fool has a feature on Exelixis and reminds us that it is still a MF Rule Breakers selection and that the Fool owns shares of the company.

September 16, 2008

Take Two is a Bargain

The StockMasters points out that since Electronic Arts walked away from their $25 a share offer for Take Two Interactive, shares of Take Two are now under $17 a share. From the article:

"JANCO set a price target on Take-Two of $35 per share (20x EPS estimates), which is a more than 100% premium to today's $16.45 price."

Let's look at a few other factors. Grand Theft Auto IV just became one of the best selling games of all time. According to this article, over 8.5 million copies of the game have been sold so far. GTAIV is still scheduled to be released for the PC this November, which will add to these numbers.

Bioshock is also still scheduled to be released for the PS3 in October. This has proven to be one of the best games of the year for the xBOX 360 and PC. It would not be unreasonable for Take Two to sell 1-2 million copies of the game for the PS3 platform.

On a valuation basis, Take Two now sports a current and forward P/E of under 12. Their PEG ratio is now .6. A price target of the low 30's is not unreasonable for a company that has a lot of growth left.

September 12, 2008

Interactive Intelligence: Cheap Growth

The Fool has an article today on one of their Rule Breakers picks, Interactive Intelligence. They note that the CEO bought 40,000 shares one week ago. But, that hasn't been the only insider transactions occurring lately. The Vice President of Business Development of Business Development bought 4,600 shares on August 7. The CFO and CEO purchased over 128,000 shares between the two of them from July 31 to August 1.

Why are top officers in the company buying? As pointed out in the MF article, Interactive Intelligence sports a five year projected earnings growth of 28.3% and a PEG ratio of .62. Its current P/E is slightly under 13 compared to 29 for the industry.

This company is an emerging leader in a niche market that still has plenty of growth ahead for it. It appears that Mr. Market has turned this growth story into a value play. Long investors may want to jump on for the ride.

September 9, 2008

Could Your Portfolio Use a HERO?

Hercules Offshore Inc. (HERO) is a leading provider of offshore contract drilling, liftboat and inland barge services with operations in nine countries on four continents. With a market cap of 1.5 billion, Hercules Offshore is trading at a new 52 week low at under $17.00 a share. Much of the recent sell off has to do with a second quarter earnings miss coupled with fears of equipment damage due to the recent hurricane activity in the Gulf of Mexico. However, the recent sell off may be a great time to buy stock that is poised for growth at a cheap price.

Valuation

The company is profitable, reporting earnings of $16.4 million or $.18 per share on July 29. Revenue in the second quarter rose to $270.8 million compared to $99 million in the second quarter last year. However, analysts were looking for earnings of $.25 per share.

This earnings miss coupled with fears of hurricane activity in the Gulf of Mexico has brought shares down to a historic low of around $17.00 per share. This translates into a P/E of just under 15, and a forward P/E of 5.6.

What was responsible for the earnings miss? Increased costs. Operating expenses rose from $44.4 million to $158.9 million in the second quarter. The company did not offer an explanation for the nearly four-fold increase in operating expenses, but sometimes actions speak louder than words as Hercules ousted its CEO in June.

Growth Estimates

Analysts are estimating Hercules will grow sales 30% for their next quarter ending December 2008. Hercules has demonstrated that they have the capacity to grow revenue as it nearly tripled compared to the second quarter a year ago. They are also estimating just over 30% sales growth for fiscal 2009. If management can control costs, Hercules will be able to meet or exceed analysts earnings expectations with ease.

Two analysts have recently upgraded the stock. Jesup and Lamond initiated coverage in June to Neutral but upgraded the stock to buy at the end of July. Another upgrade to Add was given by CapitalOne Southcoast. They had previously given the stock a Neutral rating at the end of March.

Look Who's Buying

The President and CEO John Rynd bought shares at $25.58 per share on July 31. Lisa Rodriguez, Vice President and CFO bought shares at $22.96 on August 4. The president of Hercules International Holdings also bought shares at $18.64 on September 4.

Geosphere Capital Management, which operates a hedge fund has also recently disclosed that it owns shares of Hercules Offshore.

If insiders and institutions thought that the stock was a bargain in the low 20's, it is certainly dirt cheap right now.

Conclusion

Hercules Offshore is the operator of the largest jackup rig fleet in the Gulf of Mexico. Clearly the stock has suffered lately due to escalating costs and fears that recent hurricane activity has the potential to affect business operation.

However, the outlook for growth still remains solid. A new CEO at the helm may also be able to cure the company's recent plaque of increased costs which will translate into higher earnings for future quarters.

Given the stock's current price, it appears that this small cap growth stock just became a value stock. Now would be a great time to add a HERO to your portfolio.

Disclosure: none

September 4, 2008

Five Reasons Why Mutual Funds Suck

American households are the largest group of investors in mutual funds. However, mutual funds have shown that they are not the best place to park your money. Below are five reasons why mutual funds suck:

They Don't Perform Well

According to this article written in August 2008, "Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date."

To be fair, the S&P 500 is down approximately 13% between August 2008 and August 2007. But, how many mutual funds are down more than that amount? Quite a few.

Even in prosperous times, mutual funds haven't shown to outperform the market. In 2005, the average US diversified equity fund grew 6.7 percent, the third upside year in a row, according to fund-tracker Lipper Inc. Yes, 6.7% is growth. Yes that is better return than a CD or a savings bond, but 6.7& is hardly anything to get excited about.

High Fees

According to a study published by Standard and Poor's,
U.S. mutual fund companies collect $12 billion per year in fees for their funds. And some $442 million of this comes at funds that are closed to new investors — charges that are assessed even though the funds no longer need to cover marketing and distribution costs to attract and begin serving new customers.

Mutual funds have a fee to purchase, maintain, and leave the fund. Is there a limit on the fee amount that you can be charged? Sure. The National Association of Securities Dealers does not permit mutual fund sales loads to exceed 8.5%

What about no load funds? The fees won't be as high, but you will be the last to benefit from any paltry gain that the fund makes. The fund management company is entitled to a percentage of the gain first (up to 2% of the fund's value), in addition to the fund manager's commission.

So, it is possible that your mutual fund may need to earn more than 10.5% before you actually begin to earn any return on your investment.

Restrictions

Have a bad mutual fund? Want to get out? You will have to wait until the market closes. Since mutual funds are priced at the end of each day that the market is open, they can only be bought and sold when the market is closed. So, if a stock in the mutual fund tanks (or the entire fund for that matter), you can't get out until the market has had all day to beat it to death.


Mutual funds are also restricted on how much of a security they are allowed to buy. So, if a stock in the fund goes through the roof because a company invented a time travel device, the mutual fund will not be able to fully capitalize. Even if the fund did hold shares, those shares cannot comprise more than 20% of the fund's assets.

You Pay Taxes on Bad Trades

If a fund is underperforming, and investors begin to cash out, a fund manager may sell stocks in the fund that have made a gain in order come up with enough cash for the payout. Why don't they sell the underperforming stocks? They don't get a bonus for selling the underperformers. Regardless, you pay the capital gains tax on the winners that they did sell.

You also pay taxes on when the fund bought the stock, not when you bought the mutual fund. Say the mututal fund bought shares of Yucky Foods Inc, (YUCK) at $10.00 a share in 2005. You then bought into shares of the mutual fund in 2007 when YUCK was trading at $20.00 a share. In 2008, the fund manager sold shares of YUCK at $15.00 a share. You then pay a capital gains tax, since the fund realized a gain of $5.00. The fund doesn't care that you personally took a $5.00 loss on that trade.


Bad Fund Managers

Just like mechanics, doctors, and teachers, there are good and bad fund managers. Just because someone is a "professional" doesn't mean that they are guaranteed to do a good job managing your money, especially since they are going to get their cut first. In fact, the number of active fund managers that can beat the market are rapidly shrinking.

What to Do?

If you would like to stick to trading funds, you can try Electronic Trading Funds (ETFs). They are similar to traditional mutual funds, but they trade like stocks. They can be bought and sold throughout the day, and they typically charge lower fees too.

However, with a little research, you can invest in individual stocks yourself. You eliminate the high overhead of mainting a fund and can reap the benefits of finding great stocks that can offer market beating returns for years to come.


Would You Buy Potash at $150?

Notable Calls notes that RBC Capital has given Potash a $375 price target, the highest price target given by all analysts that cover the stock (the lowest is $239). Zacks is not too far above that with a $250 price target.

With all of the favorable articles about fertilizer companies in general, and Potash in particular, $150 seems like a reasonable entry point for this stock.

September 3, 2008

Game On for CDC Corporation

Zacks is out with an article today on CDC Corporation (CHINA) where they appear bullish on the stock. They give the stock a target price of $3.50. They site growth in the Chinese gaming market as the primary factor that will drive earnings for the company:

"It is expected that China's online game market will grow 49% in 2008 over 2007. We forecast China's online gaming market would grow to RMB 40.1 billion yuan by 2011. "

I did some digging and found another article at Zacks from August 18, that contains the same language (literally the same sentences) as the article that was published today, however no price target was given at the time.

How about other sources? According to this article, Cantor initiated CHINA with a buy in February and gave it a $6 price target.

How about the Motley Fool? This article covered the stock when it was trading at $4 a share calling the stock at that time fairly valued. Another Fool article called shares "a compelling value" when shares were trading at $4.02 in January.

It appears that the stock is down mainly due to the attitude of investing in Chineese stocks. The Chineese gaming market is poised for growth, and CDC should get its share of that growth. However, management must do all that it can in order to control costs and drive profitability.

This could be an intriguing long term play, but it may be a bumpy ride for the next twelve months.

September 2, 2008

On Sears

Two great articles were published this week on Sears Holdings (SHLD). The first one at Circle of Competence focuses on the fact that Sears has been engaging in a lot of stock buyback over the last quarter.

Todd Sullivan also points out that the company is reducing inventory, paying back debt, as well as buying back shares. Like a lot of retailers, a lot of patience will be required until gains are realized.