To OTC Journal Members:
 

Riskless Rebound Portfolio

We are publishing our Riskless Rebound Portfolio in this weekend's edition. It contains five stocks. We have chosen these stocks based on the intrinsic value on their balance sheets compared with the price at which they are trading. In order to believe in this concept you must agree that if a company is losing money it could still worth more than zero. You must believe there is a point at which stocks can trade well below their true value, and there is a possibility these stocks could rise with the market tide to reasonable prices.

One of the stocks we are featuring traded to a high of $174, and has since been below $1.74. One wonders how a stock could fall this far from grace without evidence of fraudulent or criminal activity. As stocks fall through certain thresholds institutional investors are forced to sell because the rules of their funds preclude them from holding stocks which fall below certain prices and market caps. Forced margin sales also help drive down prices indiscriminately.

In addition, the Venture Capital community, which has come under extreme pressures in the last year, holds large blocks of these stocks at extremely low prices from fundings prior to IPOs. Venture capital investors have been selling shares of technology companies to raise capital and restore beleaguered cash positions. All this pressure creates a domino effect of falling prices, setting up opportunities for investors with courage and patience.

As overbought as these stocks were in March of 2000 near the all time high of the NASDAQ, they are just as oversold today. At some point the bubble will burst once again, and these stocks will rise.

With each company comes a top of the line Wall Street pedigree. You will see IPO prices way above current levels, little or no debt, and cash balances to sustain these companies for years. In fact, each company is trading at a value well below the cash they have in the bank.

Based on today's closing prices, if each of these companies simply rises to the level of cash they have in the bank, you will enjoy a 71% return on your investment.

Within the portfolio there are probably two stocks that will rise 300% to 400% over the next six months. There are probably one or two stocks that will drop significantly or go to zero. There are probably one or two stocks that will stay about the same. However, we have no idea which ones will be the winners, and which will be the losers.

We are calling this the Riskless Rebound portfolio because all the stocks are below their cash values. However, these stocks are not riskless. In fact, because every company is losing money, there is a great deal of inherent risk. Do not invest your safe money in these stocks. These ideas are for the speculative end of your portfolio.

In order to use this concept you must be a contrarian. You must believe the best time to buy is when everyone is selling, and you must believe value will eventually be reflected in price. Here is our Riskless Rebound portfolio.
 

Avici Systems (NASDAQ: AVCI)

We chose Avici first because this stock was previously at the highest price of all five in the group. This was once a darling of Wall Street. Avici was believed to be a serious threat to Cisco's dominance in the router business.

About Avici Systems: "Avici Systems Inc, headquartered in North Billerica, Mass., is a developer of next-generation Internet backbone platforms that optimize and drive creation of all-optical "speed-of-light" networks. Designed to bring packet intelligence to the core of optical networks, Avici's technologies offer superior scalability, resiliency and port density enabling just-in-time bandwidth provisioning, high reliability and the quality of service needed for carriers and ISPs to support mission-critical applications of the future."
 
 

Avici has about 7.5% of the high speed router market, and their market share is growing. Here are the important facts for your review:

• Closing Price: $2.46
• Cash in Bank: $146 million; Cash Last Quarter: $167 million ($21 million per quarter burn rate)
• Cash per Share: $2.95; Cash per Share Last Quarter: $3.20
• Long Term Debt: $0
• Book Value: $4.24
• Annual Sales: $53 million
• All Time High: $174
• All Time Low: $1.10
• % Return to Cash Per Share: 20%
• % Return to 10% of all time high: 600%
• Underwriter of IPO: Morgan Stanley
• IPO Date and Price: 7/28/00- $31 per share

Cosine Communications (NASDAQ: COSN)

About CoSine Communications: "Founded in 1998 and based in Redwood City, Calif., CoSine is a leading provider of a new class of infrastructure equipment for Service Providers, allowing them to offer value-added, secure Internet and data services to tens of thousands of enterprise subscriber networks simultaneously. The CoSine IP Service Delivery Platform is a combination of advanced hardware and software in an open service application platform design that combines scalable computing, routing and switching resources to enable Service Providers to deliver highly differentiated, managed IP services including both IPSec and MPLS site-to-site Virtual Private Networks (VPNs), dial-up VPNs, managed firewalls, extranets, Secure Digital Subscriber Line (DSL), Frame Relay to IPSec interworking, IP-enabled Frame Relay and Frame Relay over IPSec." 

Cosine's last quarterly revenues were up 22%, indicating the company is capable of top line growth in a challenging environment.
 

Here are the vital numbers on Cosine:

• Closing Price: $.93
• Cash: $194 million; Cash Last Quarter: $216 million ($22 million per quarter burn rate)
• Cash Per Share: $1.98; Cash per share last Quarter: $2.18
• Long Term Debt: $3.1 million
• Book Value: $2.10
• Annual Sales: $40 million
• All Time High: $71
• All Time Low: $.32
• % Return to Cash Level: 98%
• % Return to 10% of All Time High: 710%
• IPO Underwriter: Goldman Sachs
• IPO Date and Price: 9/26/00; $23 per share

Endwave Corporation (NASDAQ: ENWV)

Endwave designs and manufactures systems that enable transmission and reception of high speed wireless data in broadband. Here is how they describe themselves:

Endwave Corporation is a provider of radio frequency (RF) subsystems that enable the transmission and reception of data signals in broadband wireless systems. The company develops and manufactures products used in high-speed cellular backhaul, point-to-point access and point-to-multipoint access applications. These products include RF modules, synthesizers, integrated transceivers, broadband antennas and outdoor units. Endwave has more than 34 issued patents covering its core technologies including semiconductor, circuit and antenna designs as well as its Flip-Chip Integrated Circuit (FCIC) technology. Endwave Corporation is headquartered in Sunnyvale, Calif. Additional information about the company can be accessed from the company's web site at http://www.endwave.com.
 
 

Here are the vital numbers on Endwave:

• Closing Price: $.84
• Cash: $83 million; Cash Last Quarter: $72 million
• Cash Per Share: $1.78; Cash Per Share Last Quarter: $2.00
• Long Term Debt: $0
• Book Value: $2.37
• Annual Sales: $40 million
• All Time High: $21
• All Time Low: $.60
• % Return to Cash Level: 114%
• % Return to 10% of All Time High: 153%
• IPO Underwriter: Deutshce Bank Alex Brown
• IPO Date and Price: 10/17/00; $14 Per Share

Network Engines (NASDAQ: NENG)

Network Engines designs and develops large scale server appliances suitable for organizations to supply information and applications over the Internet. The company's fiscal year end is the end of September, and the audited numbers are not available yet. Therefore, the numbers we are using for this presentation are based on the June quarter. The company is scheduled to release year end results on November 8th. Careful attention should be paid at that time to the year end balance sheet. Monitor the amount of cash they have per share, and make sure their burn rate is reasonably low.
 
 
 
 
 
 

Here are the vital numbers on Network Engines (June Quarter):

• Closing Price: $.88
• Cash: $82 million; Cash Last Quarter: $94 million
• Cash Per Share: $2.33; Cash Per Share Last Quarter: $2.63
• Long Term Debt: $0
• Book Value: $2.41
• Annual Sales: $30 million
• All Time High: $48.50
• All Time Low: $.52
• % Return to Cash Levels: 167%
• % Return to 10% of All Time High: 457%
• IPO Underwriter: Donaldson, Lufkin, Jenerette (DLJ)
• IPO Date and Price: 7/13/2000; $17 per share

Alvarian Ltd (NASDAQ: ALVR)

Alvarian is the hybrid of two companies which have merged: BreezeCom and Floware. This is another wireless infrastructure company. This company has not filed its September quarterly results, but has pre announced that revenues would be in the $28 million range for the quarter.

Financial results are scheduled to be released on November 12th. Again, pay careful attention to the amount of cash they have per share and their burn rate once results are available for the September quarter. This will be the first reported quarter of the merged companies, therefore the balance sheet should be studied very carefully.
 
 
 

Here are the vital statistics on Alvarian based on June results and prior to the merger:

• Closing Price: $2.50
• Cash: $117 million; Cash Last Quarter: N/A
• Cash per Share: $4.03; Cash Per Share Last Quarter: N/A
• Long Term Debt: $0
• Book Value: $6.65
• Annual Sales: $107 Million
• All Time High: $53.50
• All Time Low: $1.55
• % Return to Cash Level: 59%
• % Return to 10% of Previous High: 111%
• IPO Underwriter: US Bancorp/Dain Rauscher
• IPO Date and Price: 3/22/00; $20 per share

Conclusion

We believe we have presented a contrarian portfolio from which investors could make a substantial return over the next six months. Risk is mitigated by the low price of the stocks versus the cash they have and the reasonable burn rates.

We also believe economic conditions in 2002 will improve over 2001. Wall Street is also beginning to believe the business climate will improve, and stocks are showing signs of life. The September 11th disaster established a bottom in the economic cycle and there is a widespread belief conditions get better from here forward.

The upside potential of these stocks is difficult to determine. If you assume each of these stocks returns to the cash they have per share, cumulatively this would yield $13.07 from $7.61, or 71% on your money.

To take it one step further, if you assume each of these stocks returns to 10% of their previous highs, you end up with a cumulative $36.80- a whopping 383% return on your invested capital at today's closing prices.

Your downside risk is the loss of your entire investment. It is possible all these companies could file bankruptcy and close their doors. However, the risk/reward ratio at these levels is compelling.

Should you decide to invest in any or all of these issues don't depend on the OTC Journal for regular updates. Do your own homework and keep an eye on corporate developments.

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