Blog

Archive for July, 2009

Nasdaq 2000: Party Like It’s 1998

July 30th, 2009 by Yehuda Fruchter   |   No Comments

I had to laugh when I read the bullish news stories today about the Nasdaq Composite surpassing 2,000. A bit of history: The Nasdaq Comp first hit 2000 in 1998. That’s Eleven years ago! So tech stocks, in general, have basically gone nowhere for a decade. Yes, we’re in a V-Shaped recovery, but it looks like a decade-long V to me.

It’s fascinating to think about how much money Wall Street has made over the last decade, churning stocks, most of which are actually lower now than they were 10 years ago.

Lesson: Don’t Take the Rumpelstiltskin route to investing. Stay alert, and trade your stocks. Keep moving capital around to depressed valuations from overvaluations. And never invest in anything long-term.

Here’s an easy prediction: Ten years from now, inflation-adjusted, stocks in general, will still have gone nowhere due to economic policies that defy any logic.

Buying Vonage (VG)

July 27th, 2009 by Yehuda Fruchter   |   1 Comment

I’ve written about Vonage (VG, current price $0.40) awhile ago, and I now believe the stock offers a good risk/reward at current prices.

Vonage (VG) is one of the leading providers of VOIP services.

The main reasons for entering a position now are as follows:

  • The stock is trading near its all-time low of around $0.30.
  • Almost anyone who hears you mention VG as a potential investment, will shudder at the prospect.
  • There are nearly zero Wall Street analysts covering the company.
  • Despite the negative halo surrounding the company, financials are beginning to show dramatic improvement, with EBITDA jumping last quarter to over $18 million from $8 million last year.
  • Debt has been entirely restructured and there are no near-term major repayments.
  • On the subject of debt: Vonage is highly leveraged, but given their improving cash-flow, we think the company will have an easy time refinancing this debt in the future, at much lower interest rates, and thereby greatly increasing returns for equity holders
  • Valuation is incredibly low with an EV/Sales of around 0.3 despite very good margins and the recurring nature of the business.

    • Incidentally, I have two Vonage lines and have used them happily for five years already. The service is great and I’m probably a customer for life. I’m sure there are many people like me, so clearly there is a business here. How much of a business, I have no idea. But it’s obviously viable, even if it does not have major growth prospects.

    So if VG is able to continue to report solid profitability improvements the value of the company’s equity should increase dramatically. At the same time, if the company disappoints I don’t see much downside, since the equity is already considered practically worthless.

    Incredimail (MAIL) Ups Guidance

    July 21st, 2009 by Yehuda Fruchter   |   No Comments

    As we predicted in an earlier post, MAIL would easily beat its guidance for 2009. Today, MAIL announced that it expects to exceed $9 million in EBITDA in 2009, up from previous expectations of $7 million, and up from virtually nothing last year.

    From a valuation standpoint, despite MAIL’s rise the year, the stock still appears very cheap. On an enterprise value (after subtracting cash), the company is valued at about $35 million. This is against $9 million in EBITDA, or about a 4X multiple. This is extraordinarily inexpensive for an Internet advertising business, with many of the comparable companies trading at significantly higher multiples, despite slower growth than MAIL and greater financial risk. Even at a modest 10X multiple, MAIL would be valued at $12, or about double the current price.

    Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in MAIL. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

    Ditech Networks (DITC): Lamassu Holdings Missives are Misleading and Should Be Ignored

    July 17th, 2009 by Yehuda Fruchter   |   2 Comments

    Back in June, we highlighted Ditech Networks (Nasdaq: DITC) as an interesting investment opportunity, given the company’s negative enterprise value, despite what appears to be clear signs of improving business fundamentals and financial peformance.

    Recently, however, Lamassu Holdings LLC (Lamassu), a large institutional shareholder in DITC, has commenced a proxy fight with DITC to win two board seats. Unfortunately in their pursuit of Board election, Lamassu has started disseminating misleading information to stockholders of DITC, even though they claim to represent the interests of DITC’s shareholders. It is ironic that a large shareholder of DITC, will purposively publicly malign DITC, and thereby in reality hurt shareholders of the company, even if Lamassu stands to lose money by these negative PR campaigns. This fact alone, as well as others detailed below, should cause current investors in DITC to question Lamassu’s missives and motives.

    Other reasons for maintaining skepticism towards Lamassu include:

    1.
    Lamassu Has Demonstrated Complete Disregard for Shareholders by Offering to Buy DITC for $1.25 per share.
    In the past, Lamassu has offered to buy DITC for $1.25 per share. Even a cursory glance at the company’s balance sheet, and current legacy business, would convince even the most neophyte financial analyst, that Lamassu’s offer is inadequate and laughable. The valuation would assign the company a negative enterprise value, despite over $20 million in annual legacy sales, over $38 million in cash (not including ARS which we fully expect the company to monetize at some point), and substantial intellectual property and other intangible assets. In effect by offering such a ridiculous buyout price, Lamassu is attempting to buy DITC for nothing. This is clearly not in the best interest of shareholders .

    2.
    Lamassu’s Description of Ditech’s mStage/toktok Product is Meaningless
    Furthermore, in its recent press release Lamassu call DITC’s new mStage/toktok initiative, “an unproven technology that to date has produced no revenues and has no immediate prospects.” This of course is an unintelligent comment.

    mStage/toktok is a very new product from DITC, and as any industry participant knows, it can take quite some time to sign deals and generate revenues from a new telecom product, particularly when your customers are major telecom providers. Quite simply, the sales cycle for these types of products is quite long.

    So the fact that mStage/toktok has yet to generate revenues, is irrelevant to any investor in DITC. The key point is whether or not, mStage/toktok has long-term (i.e. 3 to 5 year) potential. We encourage readers to perform their own due diligence on mStage/toktok, since if they do we think they’ll agree that the mStage/toktok has enormous potential.

    Furthermore, since we’re not sure how Lamassu defines “immediate prospects”, we’re unclear what this evaluation of mStage/toktok implies. As mentioned above, as long-term investors with a 3 to 5 year time horizon, we believe that mStage/toktok has significant prospects.

    3.
    Lamassu’s Description of Most DITC Investors is Completely False

    Finally, Lamassu also states in a recent PR: “Investors in Ditech Networks (NASDAQ: DITC – News) are not venture capitalists and did not sign up for this type of speculative investing with such a large portion of the Company’s assets.”

    We beg to differ. Any serious investor in a deep value micro cap stock understands the speculative nature of such an investment and by allocating capital to such an investment has purposively signed up for such a speculative endeavor. Investors who do not care to speculate in micro cap stocks are free to invest in larger companies with less speculative prospects. Furthermore, the investment appeal in many micro cap situations is precisely due to the venture capital type of analysis and returns that these equity investments can provide, notwithstanding the public trading of the shares. Almost by definition, investing in deep value micro cap, is the functional equivalent of venture capital investing.

    Conclusion: Ignore Lamassu and Focus on DITC’s Future Financials Which We Believe Will Improve

    In conclusion, based upon the reasons outlined above, we recommend that subscribers and other investors in DITC ignore Lamassu’s diatribes against DITC, and focus on the DITC’s financial performance going forward. Ultimately, the company’s future performance will dictate the share price. Past performance has no bearing on the future direction of the company’s business or stock.

    As we mentioned in our first write-up, while DITC has surely had a few very difficult years, due to both macro-industry factors outside of DITC’s control, as well as a few past management errors, the company’s core legacy business has currently stabilized and will in fact begin to grow again in the coming quarters. A more positive mobile industry and overall economic outlook, will surely benefit DITC’s legacy business, and provide strong momentum for the company’s new product initiatives.

    Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in DITC. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

    j2 Global Communications (JCOM): A Good Short?

    July 10th, 2009 by Yehuda Fruchter   |   No Comments

    I usually try to never invest in stocks that trade above $5, and when I do it seems that on average I lose money. But, I couldn’t resist jumping into JCOM after reading a short thesis of the stock in a recent Barron’s article.

    JCOM’s main business is the highly popular eFax service, and related brands that allow people to send/receive faxes by email. The company also now provides incredibly useful voice services for small to medium-sized businesses.

    I’ve followed JCOM’s financials for years, and even a cursory analysis of the company’s books over the years, will reveal a fantastic business and an incredibly shareholder-friendly management team.

    Revenue is recurring. Ongoing cap-ex is de minimus and so Free cash-flow is copious. The balance sheet is pristine, with no debt. And Management has actually reduced shares outstanding via buybacks without the usual huge option grants that simply derail any benefit from most buyback schemes. Finally, management makes acquisitions mostly with cash, rather than stock, providing reassurance that the acquisitions are made in an economically rational manner with a value perspective.

    So what’s not to like, especially when such a business is being offered at about 8X EV/Free Cash-Flow?

    The short thesis is simply that fax is dying business and that the company’s growth is exagerrated by acquisitions. 

    My reponse to shorts is as follows:

    • While Not Growing, Fax Isn’t Going Anywhere Anytime Soon In The Absence of Alternatives

    Of course fax is not a growth industry, but in the absence of alternatives, fax remains a key method for a large majority of businesses, to send important documents. Therefore, until and if digital signatures ever gain widespread usage, JCOM’s fax services will always be in demand and customers will not abandon the service in droves as shorts would have you believe. I have personally used JCOM’s fax services for a decade already, and I’m sure I’ll be using them in ten years from now since the service is indispensable for several document transfers, and inexpensive enough for the times I need the service. Incidentally, I’ve spoken with the CEO of a major surgery center and eFax is a key component of their document communication solutions, and will remain so for the foreseeable future. I’m sure most other long-term customers feel the same way.

    • JCOM Is Not Just About Fax: The Company’s Voice Business Has Huge Potential and is Growing Rapidly

    What many investors do not realize is that JCOM has quietly been replicating its strategy in the fax market, with a whole new array of services for the voice market. Services are offered thru such sites as: https://www.evoicereceptionist.com/, and http://www.onebox.com/. As with the fax services, I personally use JCOM’s voice offerings for several businesses, and the service is incredible.

    While voice is still a small part of JCOM’s overall revenue, the customer base is growing rapidly and I am certain this business will continue to grow enormously over the next 3 to 5 years, even with a long recession.

    • A Value-Drive Acquisition Strategy When Done with “Non-Dilutive” Cash to Eliminate Competition Is a Positive, Not a Negative

    I usually agree with shorts that any company that pursues dilutive growth thru acquisition by paying exorbitant prices for crummy businesses with stock is doomed to fail. I’ve seen this with INAP and PTEC, to name two perfectly excellent businesses that have been destroyed by overvalued acquisitions paid for with stock.

    However, if history is any guide JCOM is different. The company pays for acquisitions with cash and the acquisitions are made at very reasonable, and in fact deeply discounted, valuations. Moreover, the company is acquiring smaller businesses that directly compete with JCOM. They are not entering a new business, in which they have zero experience. By eliminating smaller competitors, JCOM is able to further solidify its leadership position, increase revenue, and simultaneously reduce costs. This is all done without diluting shareholders at all.

    • Financials Remain Impeccable

    Even during the biggest recession in decades, JCOM has been able to record record free cash-flow, remain debt free, and buy back shares. In the last quarter alone the company generated $30 million in free cash-flow. This is not a business that has any financial difficulties.

    • Slower Growth is Already Priced In

    As mentioned above, JCOM’s enterprise value to free cash-flow multiple is at about 8. This type of depressed valuation for a company with an excellent financial track record, already reflects expectations of significantly slower growth ahead. Therefore, if JCOM surprises investors and is able to accelerate growth, particularly as the recession eases and the voice services division continues to grow, the company’s EV/FCF multiple can expand significantly.

    Overall, given the depressed valuation, the pristine balance sheet, and ample free cash-flow, I see little long-term risk in JCOM’s shares at current prices. At the same time, there is substantial upside should investors begin to focus on the many positive aspects of the business, I have mentioned here.

    Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in JCOM. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

    Government Stimulus: Does Corruption Ever Enter Into the Economic Formula?

    July 10th, 2009 by Yehuda Fruchter   |   5 Comments

    Predictably, The Market continues to be influenced by politics, rather than economic fundamentals, and the new political debate du jour to grip Wall Street is the potential need for more government stimulus.

    Government stimulus, in theory, has the potential to ease economic pain. However, the trouble is that economists, ever so adamant about designing rational policies around numbers, fail to incorporate fraud and corruption into their neat formulas.

    Keynesian economics can work in an ideal world where people act ethically, however, unfortunately the reality in the US, and most profit-driven societies, is the complete opposite. So what happens when the government prints money to save banks or to prop up the production economy, is simply that the money mysteriously disappears or winds up as large bonuses. As such, all economic policies, like stimulus plans, based upon some version “trickle down economics” remain a myth and are doomed to fail.

    I have, of course, no solution to this problem since our entire society is sadly built around the love of money and the acquisition thereof. The overwhelming greed and rat race, by nature, forces otherwise ethical people, into dubious pursuits.

    Unemployment a Lagging Indicator?

    July 2nd, 2009 by Yehuda Fruchter   |   No Comments

    It’s somewhat surprising that the market was down today on the unemployment data given that the accepted meme is that unemployment is a lagging indicator.

    On the surface, the “unemployment lagging indicator” meme seems self-evident. Clearly companies don’t start hiring in earnest unless they see improving business conditions. The implication of the meme is simply that unemployment is an effect of a recession, rather than its cause.

    However, whenever a meme is so widely accepted and quoted it pays to become skeptical and to question its intellectual basis. As for the “unemployment lagging” meme, the meme, of course, begs the question as to what caused the recession in the first place? It’s when one reflects on the actual cause of our economic troubles that one realizes that this time it may be truly different and maybe the meme is not all it’s cracked up to be. It’s quite possible that during this recession the relationship between unemployment and recovery may reverse.

    Housing Fuels Our Economy, but With Rising Unemployment How Will Housing Recover?

    The reason for advocating this position is simply based on the realization that for nearly a decade or more the entire US economy, including Wall Street’s paper economy, had been propelled upwards by a massive housing bubble. However, now that the housing bubble has burst, it’s nearly impossible to see how business conditions can improve substantially if the housing market does not bubble up again. And yet if unemployment is rising, how can housing recover sharply? It simply can’t.

    Ipso facto, rising unemployment indicates only one thing: Housing will remain depressed for a long time and therefore there can be no significant economic recovery. So paradoxically, rising unemployment is perhaps a leading indicator this time around, since it’s a sign that housing will remain depressed, and our economic problems are far from over.

    Perhaps the only way to get the economy to recover without a new housing bubble, would be to generate economic growth in other economic sectors in an attempt to make up for the losses in the “housing” economy. This, however, will prove difficult given the sheer size of the “housing” economy and its broad social reach.

    Moreover, the government still seems oddly intent on propping up the financial/paper economy, as opposed to launching large enough programs to soften the blow in the production/real economy. Unfortunately, 99.9% of the country gets absolutely no benefit from the trillion dollar bailouts of mega financial institutions, and are actually harmed financially by these asinine bailouts (i.e. higher taxes will be needed to support the trillions the Fed continues to print to keep mega financials on life support and to buy their garbage assets).

    Stable financial markets are absolutely no help in driving a sustainable economic recovery, since so few see the fruits of renewed speculative fervor in financial instruments. Interestingly one wonders why the government still believes that funneling money into the likes of Goldman Sachs via a wide variety of conduits, backstops and asset purchase programs, so that they can award their average employee $700K in annual salary, represents an intelligent solution to our economic troubles.

    Concurrent Computer Corp (CCUR): Risk/Reward Remains Favorable

    July 1st, 2009 by Yehuda Fruchter   |   3 Comments

    Though we currently remain wary of initiating new long positions given the long market rally, Concurrent Computer Corp (Nasdaq: CCUR current price: $5.60, recommended price: $3.75) remains our favorite idea from the three long picks recommended to members, back in February 2009. We continue to believe that, at current prices, the stock still offers an excellent risk/reward opportunity.

    CCUR products consist of hardware and/or software as well as integration services, sold primarily to broadband companies that provide interactive, digital services for the delivery of video. The company is basically operating in the high-growth and exciting market of Video On-Demand (VOD). From the company’s website:

    “Concurrent’s on-demand technology is shaping the future of video. As a leading provider of open, commercial-grade video solutions, Concurrent enables service providers to deliver the next-generation of rich, reliable and personalized video applications to any device, anytime, over any network.”

    Like many of the stocks we invest in, CCUR has been an abysmal performer over the years, until quite recently. What caught our attention, as in other recent recommendations, was the strong balance sheet (cash at 50% of market cap, and no debt), and solid cash-flow, despite large one-time accounting losses. Additionally, financial results, as measured by the top and bottom line, are improving, and the valuation remains quite depressed with an EV/TTM Revenue at a measly 0.3X and an EV/TTM EBITDA of about 3.5. Cap-ex needs at the company are minimal.

    If the company continues to deliver strong financial results, and announces additional high profile partnerships, we believe more investors will discover the stock, especially considering the company’s active role in the VOD market.

    Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in CCUR. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.