To OTC Journal Members:

Today's edition is the second in this week's series on the OTC Journal problem children. NuTech Digital has been a big disappointment in terms of share price. The company's corporate performance has been good enough to justify higher levels, but not remarkable. NuTech's financing at $.40 has become a cancer in the stock. Like any form of cancer, once you cut it out, the patient has a good chance of recovering.  I believe NuTech has been through the surgery, and is just starting the recovery process.

Here are some thoughts on our other problem child; NuTech Digital:
 

NuTech Digital (OTC BB: NTDL): Buy, Sell, or Hold?

NuTech Digital was a superstar idea for about two months in early 2004, and it's been downhill ever since. The first edition was published on January 24th, and I looked like a genius for a few days as the stock rocketed from $.75 to $1.50 in short order. The stock hung in there for two months, and has since dropped like a rock.

The company is positioned for growth in the burgeoning field of digital entertainment for the home. Sales of plasma screens and digital surround sound systems have exploded. Consumers are seeking content for these new systems. 

Nutech has done well for a number of years in the DVD distribution business. In 2003 they delivered $3.7 million in revenues and made a net profit of just over $300k.

Armed with an additional $2.2 million from a financing early this year, the company has embarked on an ambitious expansion plan which will enhance their business by adding content creator to their content reseller model. This new business model should draw a higher multiple if they execute successfully.

Shares of NTDL have been under severe pressure from the $2.2 million financing. It was priced at $.40, and the moment the shares became free trading the investors began selling recklessly.

The big downdraft in the overall market which began in May did nothing to help matters. This stock has been stricken with the cancer of excess supply, and it made the patient look very sick.

NTDL has been stable for two months, and is finally starting to show some early signs of recovery. In the interim, here are the three areas of business, and where we stand now:

• DVD Distribution: NuTech Digital has been distributing DVD content for several years, and has a very stable business in that arena. This division spins off positive cash flow, and will probably grow in the 10% to 20% range this year.
• The DRM (digital rights management) technology- Movies Online: For those who recall reading about it early on, NuTech has developed the best technology I have ever seen to download and show movies over the internet. The commercial use of this technology will start with NuTech's own DVD concert series.  The company hopes to find other ways to leverage the technology during the 1st quarter of 2005.
• Platinum Concert DVD Series: This is the main driver of the company's growth. In this area, NuTech is starting to get some very positive traction. The company believes it has superior expertise in the field of producing Hi-Definition, Digital, Surround Sound DVDs from live concerts of high profile entertainers. To date, they have signed and are in production on DVD concerts for Jessica Simpson, Ol' Dirty Bastard, RZA, and Kool & The Gang. The Jessica Simpson concert win was a major win for the company, and should generate revenues in the 4th quarter. Consumers have been buying plasmas screens and digital surround sound systems, and the demand for content is skyrocketing. I have seen an unreleased version of the Jessica Simpson DVD, and it is outstanding.

NuTech Digital estimates its DVD concert series will generate about $8 million in annual revenues starting in 2005. Their claim is certainly believable as they have already signed five artists.

Couple the DVD revenues with the ongoing distribution business, and you have a company generating $12 million in annual revenues in 2005. The company is, has been, and probably will continue to be cash flow positive from operations. This helps mitigate the long term risk in owning the stock.

Technically, the stocks seems to be getting close to beginning a rebound phase. The cancer that infested this issue has been cut out, and the patient is starting to heal. The healing process is still in the very early stages.

As you can see from the chart, the stock has started to make a series of higher lows and higher highs. This is a sign an accumulation phase has begun. 

I believe it is a fait accompli the stock will find its way up to the blue down trend line. Right now, it would meet the line at about $.38 (26% above Friday's close). It will get interesting from there. If it can break through the down trend line with conviction, higher levels are likely. $.75 would serve as the next major line of resistance, and it should prove to be fairly big resistance.

NTDL buy, sell, or hold. In short, I believe NTDL has finally become a buy. The market has spent months absorbing a toxic supply of stock from a bad financing with the wrong investors. The stock is finally showing some signs of life. The $6.6 million market value represents an opportunity vs the possible $12 million in revenues in 2005. There will certainly be some backing and filling, but it looks like a rebound phase has begun. The company is doing its part by delivering the product to fuel growth.

Go here to read Friday's Macy Gray news release.

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