Email : info@otcjournal.com
URL : http://www.otcjournal.com
To
OTC Journal Members:
This weekend's edition is devoted
to four of the companies we write about frequently. We receive a lot of
email about all four, and we thought it was appropriate to share our views
on each of these stocks. It seems as if we are on the verge of returning
to a bull market environment. Historically, September and October can be
tough months, but generally not as ugly as they have been this year. With
the bull just around the corner it is time to look at stocks that could
rebound, especially the ones we know our members own and care about.
Year 2000 has been the most volatile
we have ever seen. The phenomenal run-up in the 1st Quarter has set us
up for an equal but opposite reaction to the downside in the 3rd quarter.
We have never seen so many $100 stocks trading under $5 within the same
year. September and October were particularly bloody for small and microcap
issues. We believe tax selling has contributed greatly to this environment
since so many investors had large profits in the first quarter.
Here are our views on four stocks
we write about frequently. We know many of you own these stocks, and therefore
are interested in our thoughts. The opinions expressed are solely ours,
and don't come from management at any of the companies. The stocks are
listed in the order we feel they are most likely to appreciate in the short
term.
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NetSol International
(NASDAQ: NTWK) |
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This stock was our biggest winner
of all time. We began covering the company at $3.75 on January 15, 1999.
The company was then known as Mirage Holdings. It evolved and the name
changed to NetSol International. Since releasing the original profile
the stock has seen a closing high of $75, for a net return of 1835%.
NetSol was trading solidly
in the mid $20 range at the end of August when the bloodbath began. Short
sellers relentlessly pushed the stock down during September. Once the stock
fell below $10 investors were forced to liquidate to meet margin requirements.
The stock spiraled down to a low of $4 on October 19th. This signified
total capitulation by leveraged shareholders.
Much to the dismay of the shorts,
this stock has a core of loyal of shareholders. Last week this stock came
roaring back. Now that leveraged shareholders have all been blown out of
the stock, investors are coming back in droves. This past Friday
alone the stock traded 163,00 shares and traded as high as $9.44,
up from $4 just 7 trading days ago.
On the basis of supply and demand
this stock has the potential to return back to the teens within the next
thirty days. Short sellers have not been able to cover in any significant
quantities. Of the 4 million publicly traded shares, 2.5 are owned by one
hedge fund that has never sold a single share. The reported short position
is nearly 400,000 shares of the 1.5 million remaining, and we believe it
is much higher than that.
The company completed fiscal 2000
(June Year End) with $7 million in sales and losses. However, sources close
to the company inform us that NetSol could do as much as $20 million
this year and turn profitable. The September numbers will be reported in
the first week of November. This will give of confirmation of the company's
progress.
The stock closed at $7.70 on Friday.
Bargain hunters should grab this one if you see it near $7, but it could
get up and walk away from these levels if short sellers begin covering
in quantities.
In the interest of full disclosure
we inform you that one of our editors owns 1500 shares of NetSol at
an average cost of $21.60. This should be viewed as a conflict of interest.
Our editor can buy or sell the stock at any time at his own discretion.
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Envoy
Communications (NASDAQ: ECGI; TSE: ECG) |
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There are two strong buy recommendations
on Envoy from Canadian Brokerage firms. Both have a target price
of $12 (CDN- about $7.20 US) which is 40% higher than the stock closed
on Friday.
If this company were not considered
a "New Media" company and had US Brokerage firm sponsorship the stock would
be much higher in our opinion. After months of delays Envoy made
the jump to its dual listing on the NASDAQ just prior to the April
crash. It has never had the chance to appeal to the NASDAQ audience
in a bull market.
Envoy is not really a "New
Media" company. This group of stocks has performed poorly. With all the
Dot-Coms in the toilet, the market believes advertising revenues will dry
up for companies like Envoy.
However, Envoy has been minimally
effected by the Dot-Com advertising slow down. WalMart is
their biggest single client, and they have several other division that
have nothing to do with the slow down in Internet Advertising.
Lost in the October panic selling
was a news release that was issued on October 11th. The company announced
it had retained Merrill Lynch as a "lead financial advisor
for its global acquisition strategy". Click
Here to read the full text of the news release.
The company did not pursue this relationship
for fun. There will be some very significant events unfolding from Envoy,
and we expect Merrill Lynch to play a key role in the company's
growth. Lauren Fine is Merrill Lynch's New Media analyst, and is
widely considered the best New Media analyst on Wall Street. She
alone has the ability to bring the company the kind of institutional sponsorship
the company desperately needs.
Look for major upcoming corporate
events, and look for Envoy to participate in a big way in the next
bull market.
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Blue
Zone (NASDAQ: BLZN) |
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Over the summer we felt Blue Zone
was poised to make a big move. We were right, but dyslexic. The stock made
a big move, but to the downside, not the upside.
In August Blue Zone was close
to unveiling its long awaited Convergence software for CTV News
(Canada version of CNN). There were rumors of big contracts once the software
was proven. The stock was trading well at $7, and we felt it had the potential
to return to its old high of $15.
A few things got in the way. The
Convergence software rollout was delayed for three weeks. The NASDAQ
market dropped 1300 points. The company made no substantive
announcements of any kind.
Shareholders demonstrated their disappointment
by obliterating the stock. From $7.75 on September 6th, the stock dropped
to $1.62 on October 23rd.
The stock bounced hard at nearly
made it back to $4 last week, settling in at $3 on Friday.
On the plus side the software which
powers www.ctvnews.com is outstanding
in our view. This software allows CTV to create it news content
in a truly interactive format on the fly as news breaks. Rumors of larger
contracts to come still circulate. Go to the site and experiment with it
features. Make up your own mind. However, a high speed Internet connection
is required to enjoy the content.
This is the type of company that
will give you a big contract signing which adds 4 points to the stock the
day after you give up in frustration and sell. A little patience could
pay off in this case. Widespread use of Convergence is coming as
more US Internet users obtain the bandwidth they need.
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PawnBroker.com
(OTC BB: PBRR) |
|
There is good news and bad news on
Pawnbroker. The good news has been coming out regularly. The deal
with First Cash, which was announced on October 17th, is great for the
company. This was the final step they needed to assure a healthy supply
of excellent merchandise on their site. eBay's recent outstanding
earnings release demonstrates that the business model can work.
However, since the beginning of September
we have chosen not to cover any of these events because we believed the
stock had no chance to go up. In our opinion the stock is in a Death
Spiral with no chance to recover until the company stops raising
money from its $24 million equity line of credit.
On August 22nd the company announced
that it has received a $24 line of equity with Wall Street boutique firm
Ladenberg Thalman acting as the placement agent.
The Equity Line of Credit allows
the company to sell free trading shares at a small discount to the prevailing
market in order to raise capital. We were hopeful that the fund manager
would invest in the shares fairly.
However, in our opinion this has
not been the case. When a company uses this type of financing oftentimes
the fund manager will aggressively short sell the company's stock, which
forces the price down. The fund then purchases shares directly from the
company at a much lower price than it was just shorted, creating huge profits
for the fund in a very short period of time. They are worse than Loan Sharks.
When the company needs more money
it is forced to go back to the same source, the stock is shorted lower,
resulting in the Death Spiral we alluded to above. This will probably
continue until Pawnbroker stops using this source to raise money.
We cannot prove this is happening
to the stock. It is just our opinion based on experience. It is very disappointing
to see a firm as good as Ladenberg make such an inappropriate introduction.
We were hopeful that this would not happen.
This problem will continue to plague
this stock like a cancer until PawnBroker stops using this fund
to raise money. Once they discontinue the stock should recover. However,
PawnBroker may have issued so many shares of stock to raise money
that the supply of shares could become overwhelming.
Management can not be held accountable
because they are doing what they have to in order to survive and someday
prosper. Nobody is funding Dot-Coms today. We still love the company's
business model, and look forward to hearing from management that the funding
has ceased.
In the meantime, either hang in there
for the long term or use the stock for a tax loss. We still love their
business model, but don't like the way the stock is behaving.
We remind you again that our comments
on PawnBroker represent our opinions only. There is no proof the
stock is being shorted by the fund manager, and we will never find out
with any certainty.
Next week look for Trading Alerts
on some larger cap stocks. We are also considering a feature on Photochannel
(OTC BB: PHCHF). Have a great weekend. |
