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Spring Cleaning
Time: Time to Step Back and Make Adjustments |
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Longer term members know I always
publish a Spring Cleaning edition wherein I drop of the few of the company's
I have been covering as I have either lost interest, or the companies still
are not performing up to an acceptable level.
This is going to be an interesting
edition as this year there are a couple of different sorts of categories-
in the past it has either been winners or losers- this year there are 4
different kinds of both.
This is a good time to refocus. Micros
are out of favor in the current market. There is a clear rotation out of
smaller growth companies- into the behemoth "Old Economy" names.
There are several reasons money is
chasing large caps now. These larger companies are loaded with cash, and
have been investing gobs of it in stock buy back programs. This reduces
their cash, increases their EPS without needing to grow or become more
profitable, and reduces the supply of stock. Trillions of dollars in supply
is coming out of the market in the large cap space.
Another huge factor drawing attention
to large cap is the new phenomenon of Private Equity Buy Outs. Gigantic
pools of cash are being assembled with the sole purpose of buying behemoth
pub cos and taking them private. Shareholders simply don't feel the market
is giving them a reasonable valuation, and they are selling out to Private
Equity. Did you know 12 companies will be coming out of the S&P 500
before year's end? All at big premiums to where their stocks were trading.
Fund managers and investors are trying
to capitalize on private equity by trying to guess which company is next.
They are buying, hoping to be bought out. In the meantime, trillions in
pooled money believes these companies are more valuable being private as
opposed to publicly traded. They'll all come back in the form of IPOs when
we have a more robust market.
The 90's were all about tech. The
early 2000's were stock market death. That was followed by a bull market
in energy/commodity stocks. Now, for the first time in 5 years, old economy
large caps are trading up. Small caps will be back next.
We are now going through the standard
seasonal adjustment. Unless we have another international crises, I don't
believe we are going to have a repeat of June and July of 2006. Stocks
have already corrected, and will probably continue to trade sideways on
lesser volumes for the next couple of months, with occasional exceptions.
I want you positioned to make serious
returns when the microcap switch flips back on. Here's where we start.
The following is a quick review of
stocks I will continue covering and will be dropping.
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Great
Growth Companies; Lousy Stocks |
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Sometimes you invest in good companies.
Sometimes you invest in good stocks. The two can go arm in arm, but sometimes
not. There are three companies that fit into the category of great companies,
but bad stocks, and I intend to continue following them all. Here's a quick
review of the three:
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Commerce Planet (OTC BB: CPNE):
One of the more absurdly undervalued situations I have ever seen. Last
quarter's $.08 per share in earnings should peg the stock around $4, but
it is trading at $1.60. It would have been $.10 if they hadn't run out
of loss carry forwards and are now forced to pay taxes. You could argue
their business model is flawed- they are just selling the "Internet business
from your home" dream. However, they have now notched 5 straight quarters
of growth in sales and earnings, and could be a good take out target. Clearly,
management needs to get far more skilled at getting their message out to
the institutional community. The stock behaves atrociously. A great value
proposition for long term investors.
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Titan Global (OTC BB: TTGL):
Finally turned the corner to profitability last quarter, and is running
at an annual $150 million run rate. Balance sheet improving. Only trades
at an anemic $60 million market value, which is pathetic relative to corporate
performance. The company still suffers from the stigma associated with
toxic financiers who funded the company when they were struggling, and
as such institutions have not warmed up to this one- yet. Another great
long term hold.
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Universal Capital (OTC BB: UCMT):
No one quite understands what a great company this is, but someday they
will. When they do, the stock should do very well as the supply is extremely
limited. Still 40% undervalued, and it won't take much to get it there.
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Great
Stocks, Good Growth Stories |
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There are also three OTC Journal
offerings
that fit into this category, and I will continue following all of these.
Here's a quick review:
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eFoodSafety (OTC BB: EFSF):EFSF has
one of the most loyal shareholder bases I have ever seen. Investors believe
this company is going to deliver major product breakthroughs throughout
the course of 2007. Cinnergen is just starting to take off, and
there are several other products to follow. If they want to keep or exceed
the current valuation, they are going to have to deliver more positive
fundamental developments. Sporting a $54 million market value with actual
trailing sales of nil, financials need to improve and will. Stock trades
great and probably will continue to do so.
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PhotoChannel Networks (OTC BB: PNWIF):
This "theme" play is one of the only pure ideas in the digital photo revolution.
This stock moved almost three fold from when first introduced last September,
and has only given back 30% of its gain. The company has turned profitable,
and will probably be the first idea in a while to graduate to the NASDAQ
from the BB. Lots of big players believe this is a buy out candidate- perhaps
Kodak will buy them as they grow. The stock has held up beautifully.
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Nighthawk (OTC BB: NIHK): When
this one gets going, it goes. As the company expands its niche product
to other applications, additional order flow is picking up. It's a good
old fashioned penny stock favorite, and made a huge, profit taking opportunity
a couple of months ago. I advised you to do so, and I did so myself. The
company should deliver at least $2.5 million in revs this year, a big improvement
over last year's $1 million. The current $10 million valuation offers lots
of upside if any one of the 10 or 15 big deals they have in the pipeline
comes through in '07.
Good Long Term Holds Being Dropped
I am not going to cover any of the
following former offerings any longer. However, each is a good long term
hold for those with a one year plus time horizon.
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Advanced Cell (OTC BB: ACTC):
Ground breaking stem cell technology which will some day be worth hundreds
of millions. However, the company is an enormous cash gobbler, and as such
supply keeps a lid on the stock. When stem cell companies become the darlings
of Wall Street again, ACTC will be right in the mix.
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Callisto (AMEX: KAL): Great orphan
drug opportunities in cancer treatments. Their pipeline is full with a
number of products in Stage II- when they are well into Stage III someone
will either buy them or do a deal with them. Unfortunately, another cash
gobbler that turns to the equity markets to keep the register full.
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IncrediMail (NASDAQ: MAIL): I
suggested this NASDAQ idea at $7 a few months back, and it is currently
trading at $8. The stock trades a little thinly, but profits are growing.
In a market with an appetite for small caps, this one should hit the $10
target price.
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Losers |
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These are the three I am dropping
because they don't have a mailman who delivers. In short, these three have
simply not delivered on promised results:
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HyperDynamics (AMEX: HDY): The
current "oil exploration" version of this company is the third incarnation,
and they all have been losers. It's really quite a testament to the management
that they are still around after about 9 years of failure. They had the
market convinced they would drill for oil off the West Coast of Africa,
but the simply cannot get the go ahead from the unstable Guinea Government.
The company claims it has an enforceable document that allows them to drill
exploratory wells, but they haven't been allowed to drill anything yet.
To make matters worse, they borrowed $6 million from one of the most aggressive
funds in the microcap world, so supplies of stock are certain to be endless.
If they ever get the OK to drill, I can always pick it up again. Until
then, it's strike 3.
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US Energy Initiatives (OTC BB: USEI):
Promised contacts in Thailand have not materialized, and this stock has
been swimming in supply since Day 1. To further exacerbate the problem,
the company seemed incapable of filing its financial in a timely manner,
and is late again for Q1. This is generally a sign of inept management.
In 2006 the stock dropped through my first SSL at the $.21 level, then
fell through my second SSL at the $.12 level. If they start delivering
numbers I can always pick it up again, but fundamentals and technicals
remain atrocious on this one. Too bad- I thought they had a great product.
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Siena (OTC BB: SIENE): You know
why this stock has a "E" on the end? because they have not filed their
year end financials which were due by the end of March. Six weeks ago-
absolutely pathetic. That tells me all I need to know. Management is inept-
end of story. This one could pop up on the radar screen again if there
is a transformation.
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Conclusion |
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The spring cleaning is done. I am
going to keep reporting on EFSF, PNWIF, NIHK, CPNE, TTGL, and
UCMT. I am dropping ACTC, KAL, and MAIL simply to make
way for some new ideas. I am dropping HDY, USEI, and SIENE
because they appear to be failed ideas at this time.
One unmentioned company I haven't
covered in some time is Titanium Group (OTC BB: TTNUF)- this is
my idea in facial recognition software. The company has stumbled a bit,
but could right the ship. I'm waiting for more information to make a final
decision on this one.
This edition clears the way for several
new, money making opportunities. My theme as we roll into and through the
summer of 2007: Tangible companies- I am going to focus on companies with
products and/or services you can understand and experience first hand.
There's a few new ones coming, so
stand by.
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