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Archive for August, 2009

Myriad Pharmaceuticals, Inc. (MYRX): Interesting Spin-Off Opportunity

August 29th, 2009 by Yehuda Fruchter   |   1 Comment

I have never posted a biotech stock idea on this website, since quite frankly I don’t really have any expertise, or should I say “pattern recognition”, for that area of technology investing.

However, the other day, I stumbled upon Myriad Pharamceuticals (MYRX – current price: $4.60), which seemed like an excellent opportunity, even for biotech neophytes, like myself. It’s not clear you even have to understand anything about biotechnology to recognize the potential of MYRX.

MYRX is a spin-off from Myriad Genetics (NasdaqGS:MYGN), a company specializing in gene-based cancer diagnostics. Following the spin-off MYRX, with about 24 million shares outstanding was funded with $188 million in cash from the parent company. Just running the numbers quickly will show a market cap of around $110 million, versus cash of $188 million, implying a negative enterprise value of nearly $80 million!

Of course, in a rational world, I’d could easily argue that the majority of biotechs should trade beneath cash, since they are nearly all cash guzzlers and very few end up making it to a cash-flow positive stage. However, in reality, very few (perhaps only a handful) biotechs trade at negative enterprise values for reasons that are too lengthy to get into in this post.

So why is MYRX trading beneath cash? The reason, of course, has to do with the nature of this particular spin-off. Many institutional holders of MYGN (which has an operating business) are forced to sell MYRX, because it is an R&D enterprise, and they are not permitted to invest in this type of company. This forced selling is what is causing the negative enterprise valuation of MYRX. The selling has absolutely nothing to do with any investors perception of the future of MYRX. As such, the price of MYRX cannot possibly reflect the value of the company’s pipeline, and therefore presents an attractive investment opportunity . As the forced selling abates over the coming months, and a new biotech-friendly shareholder base forms, the stock should rise quickly to a valuation more in line with other biotech peers and the potential of its various drugs.

For those who are interested in a more detailed analysis of MYRX, I suggest reading this article from Morningstar:

http://finance.yahoo.com/news/Money-For-Nothing-This-Stock-ms-882557794.html?x=0&.v=1

VocalTec Communications (VOCL): Another Interesting VOIP Investment

August 28th, 2009 by Yehuda Fruchter   |   5 Comments

After my successful investment in VG, I’ve been looking for other ways to play the renewed interest in VOIP, especially considering the push for VOIP applications on mobile networks.

One stock that peaked my interest was VOCL. The company is a provider of carrier-class voice-over-IP solutions for communication service providers, and counts VG as a customer. VOCL was in fact a pioneer in the VOIP space. Recently, VOCL announced the availability of a new mobile VOIP product, which you can read about here. Supporting my bullish stance on VOIP for mobile was this interesting quote from the CEO in the press release for the new product: “Market estimates mention mobile broadband penetration rates of over 50% by 2013 with cellular VoIP representing the majority of voice traffic by the same year.”

As for the stock, though it has increased over 1,000% from its low (wish I had found it earlier, of course), incredibly it still seems to offer a good risk/reward. Basically, in February of this year, VOCL bought back 1.7 million shares of its own stock from Cisco International at $0.40. That represented about 23% of the shares outstanding, leaving VOCL with about 5.7 million shares outstanding.

At the current price of about $1.75, this equates to a market cap of about $10 million. However, at the end of the last quarter, VOCL reported about $11 million in cash, implying that the company, despite the significant rise in the stock price, still sports a negative enterprise value. Notably, however, during the last quarter revenue grew by 50% on a sequential basis to $1.5 million and the company reduced losses to around $700K. In 2008, VOCL had approximately $6 million in revenue and the company expects growth this year. With over 60% gross margins, this revenue stream, and other IP at the company, are clearly not worthless.

Overall, despite the fact that the company has had significant trouble generating profits in the past, I think that at current prices, these financial difficulties are already priced into the stock valuation, given the negative EV. At the same time, as the company’s financial situation improves due significant industry-wide changes, and as more investors look for ways to invest in the mobile VOIP sector, VOCL’s stock value could still increase significantly.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in VOCL and VG. 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.

TALF Continues and With it The Bull Market

August 18th, 2009 by Yehuda Fruchter   |   1 Comment

TALF = Elimination of Risk = Higher Asset Prices = Bullish for Stocks
Though the markets finally sucumbed to a nasty sell-off the other day, the announcement by the Fed that the TALF will continue thru June of next year implies that financial markets, despite occassional bouts of false panic, will remain buouyant for quite awhile longer.

In fact, there is no doubt in my mind that some elements of TALF, or any other clever acronym the Treasury creates,  will continue indefinately as key components of our financial system. This in turn will lend ongoing support to the stock market, irregardless of valuation metrics.

The TALF is but one of the many programs the Fed is using to eliminate any degree of financial risk and accountability from large financial institutions. This removal of risk, as explained in the past, renders the notion of valuation meaningless and implies an almost infinite upper limit for asset prices. As noted, without risk, any price is a fair price and capitalism ceases to function.

And Now for Some Political Commentary…TALF over Healthcare?
Coming in midst of a heated national debate over healthcare, the TALF announcement, must induce a political response. I for one, find it ironic that for one our most important necessities of life, namely our health, the government seems dumbfounded on how to come up with a measly sum of $1 trillion over a decade. At the same time, however, for the support of the completely useless securitization markets the Fed is able to magically create $1 trillion in a matter of months! This is of courses lends continued support to my thesis that the financial crisis mainly reflects a moral bankruptcy of our country, rather than any true diminution of our economic capital.

TALF is Ultimately Worthless Because Complex Securitization Markets Are Not Needed for Economic Well-Being

In case one thinks securitization markets are by any means necessary for economic growth, I would call your attention to emerging markets, like China and Brazil, where the type of securitizations the TALF supports are non-existent. One can only marvel at the ability of these countries to sustain economic growth without sophisticated securitization markets. More importantly, one wonders how it was possible for the US to sustain strong economic growth for over a century, before the securitization gurus came on the scene.

The plain truth is that complex securitization markets are absolutely unnecessary for economic growth. They only exist as a foundation for casino capitalism, and are of no help to developing sustainable economic growth. The TALF as the savior for securitizations, is as such a useless economic program, that merely serves to strengthen the current economic policy of socialism for the rich, i.e. the banks, and capitalism for the poor.

Autobytel (ABTL): A Good Clunkers Play

August 7th, 2009 by Yehuda Fruchter   |   1 Comment

With the extension of the cash for clunkers program, it may be a good time to consider shares of ABTL, an online automotive company whose shares now sit at $0.50. I’ve traded ABTL many times over the years, and the stock has several times rebounded strongly from severely depressed levels. It’s the type of “toxic” security that Wall Street has become quite fond of recently.

From a more fundamental perspective, at the current price level of $0.50, ABTL actually has a market cap of $23 million, despite having nearly $27 million in cash, and no debt. This negative enterprise value implies that the business is worthless. This may of course be a reasonable assumption, given how terribly managed ABTL has been in the past. Nevertheless, I believe the company’s revenues may have finally reached a nadir out at about $50 million a year. With a 30% or so gross margin, and negligible ongoing cap-ex needs, I don’t see how this business can actually be considered worthless.

Moreover, ABTL has cut expenses down significantly in the last year (though I still think they can easily cut some more). Therefore, as the cash for clunkers reignites optimism in the auto industry, and dealers begin to spend again on online advertising, ABTL could begin to report renewed top-line growth, which should lead to significantly improved profitability given the vastly reduced cost structure.

In reality, for good or for bad, I believe that some form of cash for clunkers will become a permanent part of the US economy, since it’s nearly impossible to turn off the free money spigot once it gets going. Given that view, it seems clear to me that ABTL’s business has bottomed and will grow from here. The odds of the business actually being worthless seem quite low, versus the probability of a significantly higher value given the improved industry outlook.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ABTL. 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.

Vonage (VG): Significantly Better Than Expected Results, Turnaround Is Progressing

August 6th, 2009 by Yehuda Fruchter   |   10 Comments

Recent Financial Results Way Above Expectations

Even though Vonage (VG) (Recommend Price: $0.40, current price: $0.45) has always been a controversial stock, I don’t think there was much to debate about after the company’s recent financial report.

After years of massive losses, Vonage (VG), has now successfully turned the corner on profitability, with EBITDA rising to $31 million in the quarter, up 50% sequentially, and nearly triple the level of a year ago. Free cash-flow was also positive this quarter at around $12 million. Incidentally, I was only expecting about $20 million in EBITDA this quarter.

VG Skeptics Still Abound Citing the Customer Loss Issues

Despite these better than expected results, VG stock price was highly volatile yesterday, and actually closed down a few percent. Whether the drop has anything to do with fundamental analysis is an open question, as the stock had rallied nearly 20% into the earnings release, so a slight sell off could be expected. In addition, it’s difficult nowadays with the proliferation of algo trading to to definitively attribute any short-term stock price movements to sound economic analysis.

Nevertheless, since it always pays to invert when investing, to use a Munger term, I’ll gladly consider the lingering bearish argument against VG. While in the past, bears rightly pointed to VG’s massive losses, and legal troubles, as reasons to avoid the stock, with those problems now behind the company the argument now has shifted to concern over VG’s customer losses. Notably, during the quarter, Vonage  lost about 88,000 customers, to end the quarter with 2.49 million customers. In addition, churn increased, and overall revenue dropped 3% year-over-year.

The Customer Loss Issue is not Relevant or Necessarily Important At This Junction in the Turnaround
Of course losing customers is not a recipe for long-term success, but still I offer these counterarguments to the “customer loss” concern at Vonage:

  • Revenue/Customer Declines Not Unexpected in This Economy

I can count on my hand the number of companies that are reporting revenue and customer growth in this economic environment. So the situation at Vonage is no way unique or out of the ordinary.

  • A Tripling of Profits on a 3% Decline Is a Bad Thing?

I find it extraordinary that anybody can complain about a roughly 3% drop in customers and revenue, when that situation in turn led to a tripling of profits. The point of a company is to make money, not lose money. If stalling growth plans for a period of time, is the only way to nurse a company back to financial health, that is the correct way to go. In every turnaround, the most important thing is to first stabilize the financial situation. Thereafter, one can focus on growth.

  • Long-Term Customer Losses Are Exaggerated and the Worst Case Is Not All That Bad

Of course the contention is that due to mobile alternatives, VG will continue losing customers at a rapid pace (as if even if losing 3% is necessarily rapid), and soon enough the company won’t have any customers. This, of course, is a major exaggeration. The company lost a mere 88,000 customers in the quarter, out of 2.5 million. Even if the trend of losses continues, and the company can’t reignite growth (a possibility of course, but equally possible is a return to growth), VG will still have another 7 years+ to milk the current customer base. In other words, in a worst case, there is still value in the business in “run-off” state, to use the insurance analogy, in excess of the current stock price.

  • Current Valuation Already Reflects a Non-Growth/Decline Scenario

The current stock valuation of VG, at about 2X EV/EBITDA, already reflects the non-growth, business will decline argument. As such, I do not see why this is even a worry. Everybody knows about this risk already and it’s priced in.

  • New Products Could Reignite Growth

Finally, though critics are focusing on VG’s current customer losses, they are not looking to the future growth prospects at VG. The company has several new services, including a much anticipated mobile product, which it will be launching shortly. At this point, the probability of renewed customer growth at VG due to these new products, is just as probable, as is the worst case scenario of continued 3% customer declines. So I see no reason to focus on the negative here, when a positive outcome is just as likely.

Summary: Risk/Reward Still Very Favorable
In sum, VG financial results while not entirely perfect, demonstrate a company undergoing a substantial turnaround. With a valuation that continues to reflect bankruptcy concerns, I believe most of the worst case is already priced into VG shares. At the same time, I think the upside case for VG in not in the least bit reflected in the current valuation. The stock price may appreciate dramatically in the year ahead, should financial results continue their positive trend, and should new product launches succeed in renewing customer growth, or even in the worst case stemming the decline.

Cash for Clunkers, Next Up is Bling for Your Burger

August 3rd, 2009 by Yehuda Fruchter   |   2 Comments

Back in March 2009, I suggested that the Treasury consider launching a Lemon Aid Repair Program (LARP), as a way to alleviate the auto crisis.

Incredibly, what was at the time simply a joke, has now to my amazement, been basically implemented, with a few twists, in the government’s Cash for Clunkers program. Admittingly, Cash for Clunkers has a nicer ring to it, supporting my contention that the top employees of the Treasury are linguists rather than economists. To the extent that hyperbole, i.e. a “good story”, is the recipe for financial success, this linguistic talent at the Treasury will assuredly be quite beneficial for the US economy in the years ahead.

Given the success of the Cash for Clunkers program, I’m not sure it’s any longer outrageous to imagine the government printing cash, in due time, for almost any conceivable type of garbage, e.g. broken iPods, malfunctioning refrigerators, older HDTV’s etc. As I suggested in the original post, once lemons are able to subsidized, there’s no reason to stop there. The government, can easily rationalize the printing of “cash” for a host of useless products, on even firmer environmental grounds than that offered for clunkers.

My favorite idea for a new stimulus program: Bling for your Burger. This would provide subsidies for healthy food for anyone who brings a McDonald’s hamburger, preferably double-cheese, into their local restaurant. As eating out has become difficult with the recession, Bling for your Burger will definitely help to reignite the US restaurant industry, while simultaneously improving the health of the US population.

With the Death of Capitalism, Financial Asset Prices Have No Theoretical Upper Limit

August 3rd, 2009 by Yehuda Fruchter   |   1 Comment

The best explanation for the continued unrelenting rise in stock prices and other risky financial assets, is simply that the Fed and Treasury have removed all risk and accountability from the financial system. In so doing, they have destroyed any ability to price financial assets, and in the process have actually layed capitalism to rest.

This is, of course, may or may not be a good thing. Only time will tell. One thing is clear, though:
With all notions of risk removed from major financial institutions, there is now, in theory, no upper limit on financial asset prices.

Recent Reports Provide Continued Evidence of the Removal of Risk and Accountability for Major Financial Institutions

The evidence for the abandonment of risk metrics and acccountability in financial markets is in the SIGTARP’s report, which is available here:

http://www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_to_Congress.pdf

(Note: As is detailed in the SIGTARP report linked to above, insider trading by major financial institutions is now encouraged by the Fed and Treasury).

Another recent article in the Financial Times, also highlights the fact that the Fed purposely allows Wall Street firms to profit by front-running the Fed, even as the Fed remains the primary buyer in critical financial marketplaces, such as mortgages.
See the Article here: http://www.ft.com/cms/s/0/e84383dc-7f8c-11de-85dc-00144feabdc0.html

What is clear from the SIGTARP report and from a variety other sources, is that the government has, and continues to fork over enormous sums of capital to major financial institutions with absolutely no oversight, and more importantly no risk! Pretty much any sort of garbage or fictitious asset can be passed to the Fed at any price.


Without Risk any Price is a Fair Price and Capitalism Ceases to Function

However, if there is no risk to buying a financial asset than any sort of valuation or pricing is meaningless.

If endless capital is available to major economic entities with zero risk, there can be no notion of risk/reward. Without risk/reward the pricing of financial assets makes no sense. If there is absolutely no risk in paying for a particular asset, and capital is available at any price to pay, than any price is a fair price. Why not pay 50X cash-flow for a company, if your investment entails no risk? And if 50X is not risky, than why not 200X? And ad infinitum…

In such a case, capitalism ceases to function, since there is no longer any logical meaning to the basic tenets of capitalism, such as risk/reward, and market pricing. Basically, any price is the right price and all profit is guaranteed. There can be no pursuit of profit, if profit is guaranteed!

The only logical outcome of such a scenario is a staggering rise in prices, such as is now being experienced across all financial markets.

Warning: Don’t Run Out and Pay Any Price

Be forewarned, though, that the death of capitalism, and the new paradigm of “Any Price is a Fair Price”, is not an invitation to go out and buy stocks at any price. The reason for this is simply that the government is only removing risk from financial institutions, not individuals. So individuals still face enormous risk when buying financial assets, especially since there is no longer any ability to price these financial assets. In other words, for all intents and purposes, capitalism, competition, and hard work, still exists for Main Street, though it has been dismantled for Wall Street.

Nevertheless, understanding the new economic paradigm is helpful in devising some failsafe investment strategies, that I’ll get to in another post.

Will Asset Inflation Translate into Hyperinflation for Real Goods? It’s Possible, but Unlikely at This Point

Another worry for individuals, is the possibility of asset inflation crossing over into the “real” world and leading to hyperinflation for basic human necessities. While, this sort of situation can’t be ruled out, I’m no longer certain it is a major imminent danger, precisely because the financial nirvana now gripping Wall Street will never “trickle down”, for reasons that I’ll also discuss in a future post.

However, it is 100% certain that if the Fed and Treasury do not reinstate capitalism into the financial markets, in due time, paper inflation will quickly cross over into the real world and prices for basic good will rise by a staggering amount. The trouble, of course, is that the Fed and Treasury can only reign in asset inflation by causing a financial crash. And who’s ready for another crash just yet?