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When You’re Wrong, You’re Wrong: ENER Disappoints

March 11th, 2011 by Yehuda Fruchter   |   No Comments

ENER’s news today regarding production cutbacks following an “abrupt shift in the French and Italian solar incentive structures” calls into serious doubt the company’s ability to continue the recent financial turnaround. And the Market is reacting accordingly. I still believe the company can, in theory, still restructure the convertible debt, but with the lower stock price and tepid end markets, the dilution equation would now be quite onerous for equity shareholders. Obviously my previous post about ENER’s worst case dilution is flat out wrong. This is obviously not a stock I would average down on, as despite the lower stock price, the risks are quite large here.

Well, I needed a nice tax loss and it’s always good to be reminded why diversification is so important when investing in high-risk equities. It’s rare that things work out as planned either on the downside or the upside.

LOJN Continues an Impressive Turnaround

February 16th, 2011 by Yehuda Fruchter   |   1 Comment

Today LOJN (current price: $6.90 – original write up August 2010 at $3.70) reported another strong earnings report providing further evidence of the company’s successful turnaround. Although management provided somewhat lower guidance than I would have expected given the recent results and the macro environment, it was clear from the conference call that management is simply being conservative following the tough business climate in the past two years.

Nevertheless, even with the current guidance of $155 million in revenue in 2011 and around $17 million in EBITDA, the stock appears undervalued at current levels, with an EV/Sales of 0.5 and EV/EBITDA of 4.6, despite 50% gross margins and reasonably low cap-ex needs. Notably, LOJN’s balance sheet continues to swell with cash, with cash at over $50 million, now comprising nearly 50% of the market cap.

Overall, the Market still seems to be pricing LOJN as if it has no growth potential, while in fact the company has enormous growth potential in several markets, including but not limited to, applications of the technology for missing persons (SafetyNet), international auto markets, and pockets of the US auto market that have not yet been really penetrated, i.e. used cars. I remain especially bullish on the company’s SafetyNet service (missing persons) and would hope management would get more aggressive with this business given the fact that they have the financial resources to grab a large market share in this burgeoning business.

In terms of upside, at current valuation levels, LOJN could easily become a takeover target for a private equity firm, a competitor, or a larger company looking to get into this business. I estimate that the auto side of the business alone should be worth $10 to $12 per share just based on the current numbers. With more than 50% upside for just the auto business, I plan to hold onto my shares of LOJN for awhile longer.

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

VG Becomes Ten-Bagger: Continue to Hold On

February 15th, 2011 by Yehuda Fruchter   |   1 Comment

Congrats to all our readers. Today VG (current price: $4.20) became a 10-bagger. I first wrote about VG back in August 2009 at $0.40, when the company was left for dead. Fast forward to January 2011, and VG’s turnaround is now completely evident for all to see, as demonstrated by the company’s Q4 results reported today.

What to do now? As unbelievable as it may seem, I would still hold on to VG for now (though of course taking some profits is always wise). The company’s valuation (EV/Sales approximately 1.3) while obviously now normalized, still does not reflect a growth (i.e. hype) scenario. As such, if VG were to gain traction with new services, the stock price could still appreciate further. 2.5X EV/Sales seems conceivable, depending on how investors perceive the company.

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

NAVI Acquired for $5.50 Per Share – INAP Next Up

February 1st, 2011 by Yehuda Fruchter   |   3 Comments

After the close NAVI announced an acquisition offer from Time Warner for $5.50 per share. Congrats to all who have held on. I first recommended NAVI way back in June 2009 at what I believe was around $0.80 per share.

Even though the acquisition price seems fair based on recent comps (especially from NAVI’s recent divestitures), I still plan to hold onto NAVI even with the acquisition announcement. My experience with Fibernet Telecom showed that sometimes higher bids will come in, particularly when one is dealing with a hot sector. And it’s important to remember that only a short while ago the major shareholders at NAVI were offering to acquire the company for around $3 per share. So today’s offer is actually about an 80% premium over the last offer price. It’s still conceivable to me that other higher offers will come in, now that NAVI is truly “in play”.

With TMRK and NAVI now both gobbled up, the question, of course, is who will come next? My personal favorite remains INAP, which I believe will be acquired later this year as the company’s data center expansion shows traction.

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

ENER: Worst Case Dilution is Not So Bad

January 25th, 2011 by Yehuda Fruchter   |   1 Comment

ENER (recent price: $4.30) remains, in my opinion, an interesting investment situation, even if I’ve been losing on this one to date. The company’s financial results are clearly improving and the company bonds have been on a tear. The stock, however, is still stuck at the low 4′s, despite occasional rallies and then declines. The main reason (if there is really any rationality for stock prices), I believe, for the poor performance is the prospect of stock dilution to pay off the convertible debt in 2013. The company has already done several debt-for-equity swaps, and clearly this is a restructuring strategy they may continue to pursue.

But, are debt-for-equity swaps something to be scared of? Not really. It all depends…on the stock price, and on your bankers/lenders, who ultimately control the prices via their support or lack thereof. In the case, of ENER, my best guess is that in a worst case, assuming their bankers don’t try to screw the company (which I doubt, since the company has potential), the company could issue 50 million shares (round numbers here for simplicity) at around $4 a share to pay off all the debt. That leaves the company with 100 million shares, nearly double the current share count. Massive dilution you say? But wait, the debt will now be at ZERO. And the company will have well over $100 million in cash to fund operations instead of paying down debt. All in all, even with 100 million shares, the enterprise value would be only $300 million. The company is expecting over $300 million in sales in 2011, and has strong growth prospects in the years ahead. So is $300 million enterprise value with zero debt and strong growth prospects, all that bad? I say, it’s a good and smart deal.

The positive counterpart to the above scenario is that it’s entirely feasible that the stock price will go up as more investors become aware, or at least trust, in the financial turnaround. In that case, any debt-for-equity swaps would be done a much higher price than $4, implying a much lower share issuance count, which would of course be quite bullish.

All in all, I’m still hopeful for ENER, since I’ve seen these near death spirals before (e.g. VG) and the odds of pulling out of them are very strong, if financial results show continued improvement, if you have some lenders on your side (always the case in these situations, since lenders have an opportunity for hefty fees in these situations) and if the Market is somewhat decent. The next few quarters will be crucial to the ENER story.

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

MAIL Update

January 10th, 2011 by Yehuda Fruchter   |   No Comments

I’ve been following MAIL since mid-2008 and 2010 was surely a volatile year for the company’s shares. Fears over the loss of Google caused a sharp decline in the shares, but as speculation of a renewal surfaced and a final deal was consummated, the shares rallied sharply.

Despite the recent rally in the shares, I think MAIL still has room to appreciate (Current Price: $8).

What Has Changed?
As referenced above, the company renewed its agreement with Google late in 2010, removing the primary risk for the shares. In addition, the company today announced strong guidance for 2011, indicating that even with growth initiatives it expects to earn nearly $8 million in 2011 with double-digit top-line growth. Finally, there is a huge bubble ongoing in private Internet companies that trade on private exchanges. I fully expect this private bubble to seep into public markets in 2011, where many Internet companies trade a ludicrously low valuations when compared to their private peers. Interestingly, the private companies that have soared in value, do not have long operating histories and are by many measures much riskier than their public counterparts.

So why the bubble in these private companies? As always, illiquidity combined with limited financial disclosures and dealer controlled pricing, have all led to complete insanity. But, the bubble is not ready to pop yet, given the only recent entry of Goldman into the private exchange trading business via its Facebook investment. Moreover, as the bubble continues to inflate the huge discrepancy between private and public valuations simply cannot be sustained as this would lead to significant M&A activities as the private companies acquire or merge with their undervalued public counterparts. So overall, expect huge investment gains in “undervalued” public internet companies, like MAIL, in 2011.

Risk
The main risk I see for MAIL is the depletion of their growing cash pile (last quarter at around $32 million) on a silly acquisition at an inflated value. Since many private Internet companies are now valued absurdly, this is a salient risk. However, since investing in MAIL nearly two and half years ago, I have been quite impressed with management’s interest in shareholder value, as evidenced by the company’s previous dividend policy and strong record of free cash-flow. So I am somewhat confident that the largest shareholders of MAIL will be quite prudent in their acquisition strategy and I see it as unlikely that the Adlers will hurt the value of their shares with an overpriced acquisition. Their history with the company surely shows a careful consideration of shareholder value and capital.

Reward
Given the valuation of similar private companies, I see no reason why MAIL should be valued at its current discounted price of about 5X EV/FCF. I expect the stock to appreciate significantly as the public markets adjust to bubble valuations in the private sector and as more investors rush to take advantage of “cheap”public Internet plays.

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.

LOJN – Update

October 30th, 2010 by Yehuda Fruchter   |   No Comments

Quick update on LOJN, which we originally wrote up this past August at $3.70:
The company reported stellar earnings of $0.15 per share for the quarter, as the company’s overseas markets expanded rapidly. What is most interesting about LOJN’s results, in my opinion, is that the company’s main business is still in the US, and yet the company has been able to generate an incredible profit recovery with the US still declining. So as LOJN’s US business begins to grow again, and management is confident there could be some growth next year (US auto business has finally stabilized, and there will be easier comparisons with none of the Cash for Clunkers noise), earnings could ramp up pretty quickly, especially if the company’s growth businesses internationally continue to perform solidly. Furthermore, earnings comparisons in the coming quarters will be quite easy, given the quarterly losses of 2009, and early 2010. These favorable earnings comparisons, combined with some growth “hype” should send the stock significantly higher over the coming 12 months, given that LOJN’s valuation is still, I believe, beneath replacement costs. At these prices, LOJN is a strong acquisition target for a competitor or larger company.

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

What if Fire Deparments Were Run Privately?

August 29th, 2010 by Yehuda Fruchter   |   1 Comment

A few weeks ago there was small fire in the elevator shaft of my office building. Thankfully, the fire department, staffed with volunteers, arrived literally minutes after the alarm sounded and quickly put out the fire. Since then, however, I’ve been pondering a basic economic question: What if the fire department was owned by a profit-maximizing private company whose CEO needed to earn millions in pay every year. Would service be as quick? Would it be affordable? How would society fare when every fire was handled by a private company eager to “burn” a hole in your pocket?

What I find interesting is that capitalist die hards, and Market purists seem to have no problem with our current system of public service fire departments, but yet cry socialism at the mere suggestion of removing decisions of life and death issues from the hands of a bunch of greedy professionals working at insurance companies and other healthcare businesses.

Why is that as a society we seem to function very well with various public services, like fire and police departments, that provide for a safer society, but when it comes to protecting our individual health and the health of our families, we feel obligated to devise a system that relies on profiteering, and institutes practices that can at best be described as completely barbaric?

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