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URL : http://www.otcjournal.com
To
OTC Journal Members:
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Imagine You
Own A Restaurant |
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In honor of Haloween, imagine you've
just inherited $1 million, and you've opened a fast food restaurant on
a busy street.
When you first open the doors business
is good. Lots of people come in, and you have strong demand for your food.
In fact, because you have $1 million to work with, you hire plenty of help,
and start preparing the food in advance in order to avoid forcing customers
to wait for their order.
Then, one day you come to work, and
there is a major construction project starting on the street where your
restaurant is located. Traffic slows down and business drops dramatically.
Food prepared in advance spoils and
must be thrown away. This creates a substantial one-time loss. You now
prepare the food as it is ordered, thereby eliminating spoilage. Since
business has slowed you must lay off some of your employees. You now have
some one time costs associated with laying off part of your work force.
Business has slowed dramatically
and you are operating at a loss. However, you have reduced overhead by
laying people off, become more efficient at preparing the food as ordered,
and have plenty of cash. Your losses are manageable.
You know that sooner or later the
construction project on the street in front of your restaurant will be
over, and business will return to normal. Perhaps traffic will improve
after the construction is completed. Your competors with limited capital
could even go out of business during this slow period. Of course, during
the slow down new competition could come in, but it is unlikely as the
business climate on your street is unfavorable, and financing for new restaurants
is difficult to come by.
Now, imagine an investor comes in
with an offer to buy your business. You have $200,000 worth of equipment
which you are depreciating, and $600,000 cash in the bank with no debts.
All your bills are paid.
The purchase offer for your business
is $350,000. You know your equipment is still worth $150,000, you have
$600,000 in cash left. There is inherent value in your restaurant even
though you are losing money. The argument is made that your $600,000 in
cash will erode over the next six months since you are losing money. However,
you know in six months you will still have at least $450,000 in cash. You
know the construction project on your street will end long before you run
out of money. You know you could close the business today, and after some
minimal closing costs, you would still have substantially more that $350,000
in cash.
You view the offer to buy your restaurant
for $350,000 as ridiculous, and turn down the prospective buyer.
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Understanding
the State of Technology Companies Today |
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The restaurant story is a metaphor
for the condition of many technology stocks today. The market has set the
purchase price for these stocks well below their intrinsic value, and prices
in many cases are absurd.
Companies with viable business models
are trading as low as 1% of their all time highs. Wall Street raised billions
for these companies, and they have been indiscriminately ejected from portfolios
with no regard for value.
Just as stock prices were over inflated
in many technology companies to the upside, some of these valuations are
just as ridiculous to the downside. This negative bubble will also burst,
and some of these decimated issues will rise to reasonable levels.
If you had the courage to be a contrarian
and short technology stocks with the NASDAQ at 5200 you would have made
a fortune. The same climate exists today for investors on the long side.
This weekend we will publish our
"Riskless
Rebound" portfolio. It will contain five stocks. Each stock is
trading at a substantial discount to the cash the have in the bank
with little or no long term debt. Each company has a viable business model
with at least $30 million in annual sales. Each company is
trading at a substantial discount to book or liquidation value. Each company
is down at least 95% from its previous high. Each company is operating
at a loss, but their cash burn rates are minimal.
Based on the prices of these stocks
as we write today's edition, if the stocks all rise just to the level of
the cash they have per share, you will make an 88% return on
your investment.
We are calling this edition our Riskless
Rebound portfolio. These stocks are not riskless. There is risk in
all stocks. However, these stocks all have an excellent chance of returning
to just their cash values, especially if the market continues to improve.
Please stand by for the weekend edition.
We believe it is one of the most important and exciting editions we have
ever published.
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