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Titan Global (OTC BB: TTGL)
has become this summer's shining star out of nowhere. As it turns out,
TTGL
has been like a duck on a pond. On the surface, quietly cruising along.
Below the surface, paddling like crazy. The stock made a new OTC Journal
post coverage high yesterday, and there's a whole lot of interesting stuff
going on behind the scenes. I can't help but use a baseball metaphor as
well. TTGL has come up from AAA and is all of a sudden hitting .340
and 10 homers out of nowhere. Others in the starting line up (see CPNE)
have been placed on the injured reserve and getting close to be putting
on waivers. Read Friday's BLOG for a comprehensive update on what's
happening at the company.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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The Market Melt
Down and Liquidity Crisis |
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Here that loud flushing sound? That's
the sound of equities being flushed down the toilet this past week as the
market melted down and hedge fund managers were forced to raise cash at
any cost.
Here's what's happening- if there's
bad news about financials/mortgage defaults, the market tanks. If there's
no bad news, the market goes up. However, there's a lot more going on here
than just mortgage defaults.
The Yen carry trade is unwinding.
This mega trade has been fueling the move in large cap stocks. As it unwinds,
those same stocks are falling. It's because the Yen is finally firming
up. Here's how it works. You're a huge fund manager. You borrow money in
Japan at about a zero interest rate. You take the money and invest in stocks
or any other asset you can find that is going to create a return. When
you convert back to Yen and pay the note back, you also make money on the
falling value of the Yen. Pretty nifty.
However, the Yen is firming, and
fund managers are unwinding that trade by selling their stocks and paying
back the lender in Japan. This is the kind of meltdown that ruins careers
if you aren't quick enough to get out. These fund managers, who live and
die by their monthly performance, have to go to cash at any cost.
Could this be 1987 all over again?
Not likely for several reasons- 1. The S&P 500 was up 44% prior to
the '87 crash from the previous year low. This time it's only 26%. More
importantly, the S&P 500 was trading at a lofty PE of 24.4- our highest
has been 17.2%. Also, the 10 year note was at 10%- today it is below 5%-
This is a mortgage crisis? No, this is a crisis created by builders and
mortgage financiers to move properties to consumers who simply could not
afford them when we were at the top of the market. This will play itself
out in very short order and be over with. The is not the Savings and Loan
collapse of the late 80's- it's a much smaller percentage of the whole
picture.
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Perception
and Market Values: What Wall Street Will Pay For? |
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You're never too old to learn. In
my 20 plus years of microcap investing, I am still learning new lessons
and being reminded about lessons of the past.
There's an interesting lesson to
be learned looking at two OTC Journal offerings. Both were huge
winners for a time. Both have given ground. One is inexplicably tanking,
the other holding its own.
I use these two companies as an example
because most of the readership knows the stories and has followed both
companies over the past year.
The two companies we are going to
look at today are Commerce Planet (OTC BB: CPNE) and PhotoChannel
Networks (OTC BB: PNWIF). Consider the following hard numbers: In 2006
CPNE
delivered $35 million in revs and $8.7 million in profits. In Q1 '07 CPNE
struck for $13.2 million in revs and $4.1 million in profits.
PNWIF on the other hand delivered
as follows: $3.7 million in revs and $2.3 million in losses in fiscal '06
(end Sept). Last quarter: $1.3 million in revs and $750k in losses. Another
words, PNWIF delivers about 1/10th the revenues as compared to CPNE,
and loses money rather than making a profit.
Here's the question: Clearly, based
on trailing performance and all things being equal, PNWIF is worth
1/10th of CPNE on paper. Yet, the stock market currently values
PNWIF
at about $90 million, and CPNE is valued at $40 million. What
gives?
Let's forget about the fact that
we all know CPNE is going to have an off quarter and the stock has
been getting clobbered of late, and look at the bigger picture. Here's
what the market understands and is willing to pay for:
The market knows PNWIF offers
a much greater value proposition for consumers in the long term, and CPNE
is selling the dream that never comes true for most of its customers. The
market knows PNWIF will get more customers and retain its current
base, while CPNE probably has to rebuild most of its customer base
on an ongoing basis.
OTC Journal reader Benjamin
puts the market's perspective on CPNE much better than I can. He
observes: "This is a simple case of the company marketing a flawed
product, having high charge backs, high returns, high levels of customer
complaints and a business model which is very similar to Kevin Trudeau
and just as flawed."
Despite the enormous amount of profit
they have generated, investors are clearly not embracing this business
model. The stock has been in a free fall for about 5 months. The revelation
of a hiccup in Q3 has resulted in a 75% reduction in value.
PNWIF on the other hand is
considered a great value proposition for consumers by many investors -both
individual and institutional. Why- because the market believes in the future
of digital photo processing. In fact, institutions invested $15 million
in the company at a cost of $3.40 a few months ago. The company
invested the money in the purchase of another complimentary business with
a much higher revenue line. As such, the company becomes a larger player
in an arena where there a very few pure plays.
Here's the theme of today's edition:
When looking at these small companies with great growth prospects, you
have to think in terms of the "stickiness" and long term value of the model-
does the company provide great value to its customers? The market asks
that question, so why shouldn't you?
I am not trying to suggest one or
the other is a better buy today. That's hard to say. Technically, CPNE
is by far the greater oversold of the two. Fundamentally, PNWIF
has a much "stickier" long term model, and the ability new business in
huge chunks with the right alliances.
I like them both for much higher
levels than the current anemic pricing. I just can't say when, or where
the bottom is. However, understanding what the market is willing to pay
for is an important tool in enhancing your profits.
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