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To
OTC Journal Members:
You are about to read our last idea
for 2002, a year of dramatic lows and highs. We strongly recommend you
set aside five minutes of your time to read about a technology company
that is positioned to benefit from the massive investment the United
States must make to fight the war on terrorism.
We identified a company we believe
possesses three key elements for potential profits: Read about these elements,
then read about the company.
1. In the Semi Conductor
Sector
Coming off an October 8th
low of 208.9, the semi conductor index rocketed back 90%
to a December 2nd high of 395. The unprecedented surge in this index suggests
technology stocks could come back. Semi Conductors drive all technologies,
and as such semis have to lead any sustained resurgence of the NASDAQ.
Our single best performing
idea of 2002 was a semi conductor stock. In our October
12th edition we featured three stocks, and each has done extremely
well. The standout was Advanced Micro Devices (NYSE: AMD), recommended
at $3.76 on that date. This chip stock is currently trading at $7.33
(95% gain), and has seen a high of $9.60 (155% gain) since then.
2. Oversold Stocks Rebounding
Within this year of extremes
we saw some former Wall Street darlings which had been driven to pennies
rebound off oversold levels. In the telecom sector Lucent (NYSE: LU)
and Nortel (NYSE: NT) have both tripled off their lows. Internet
stocks Yahoo! (NASDAQ: YAHOO) and Amazon (NASDAQ: AMZN) have
both more than doubled from their lows. As sellers became exhausted, buyers
resurfaced in concert with corporate performance suggesting the worst was
behind. Thus, a dramatically oversold technology stock which was beginning
it's rebound phase was preferable.
3. Defense and Homeland Security
Spending
One indisputable fact: the
2003 Bush Administration budget allows for massive increases in spending
on defense and homeland security. President Bush is sparing no expense
as he gears up for the war on terrorism.
The fiscal 2003 Defense
Department budget is $369 billion. Of that $369 billion,
$9.9 billion is earmarked for science and technology, with $1 billion set
aside specifically for development of unmanned vehicles.
The Homeland Security budget is $37.7
billion for fiscal 2003, up from $12 billion pre 911.
Therefore, in seeking out one final
idea for a slightly schizophrenic 2002, we were looking for a company:
-
In the semiconductor sector with
improving fundamentals
-
Who's stock was extremely oversold
-
That could benefit from massive increases
in defense and homeland security spending
For your consideration:
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December
Profile: Irvine Sensors (NASDAQ NM: IRSN) |
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Stock Listing: NASDAQ NM: IRSN
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Estimated Shares Issued and Outstanding:
7.03
Million
-
Estimated Public Float: 5 million
-
Today's Closing Price: $1.72
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Market Capitalization: $12.1 Million
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52 High and Low: $3.41 x $.75
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Corporate Web Site: http://www.irvine-sensors.com/
In our weekend edition we alluded
to a profile on a stock which had the potential to be a Peter Lynch like
"10 bagger" for investors with a two to five year time horizon.
Irvine Sensors is that company.
Based on today's closing price of $1.72, investors would have to see the
stock appreciate to $17 over the next two to five years in order to achieve
these results.
The market would have to place a
value of $120 million on this company during that time frame with the current
number of issued and outstanding shares.
As you can see from the chart, the
market has been willing to place on considerably higher valuation on this
company in the past. In fact, the stock has dropped from a 2000 split adjusted
high of $366 to its current anemic $1.72 level, suggesting there is substantial
upside potential for investors.
In fact, at today's level, the market
is only valuing the entire company at $12 million, despite the company
holding 56 technology
patents, numerous patents pending, and over $200 million
invested in the development of their technology.
This stock is like an airplane in
a turbulent thunderstorm. Having lost altitude in a violent down draft,
the pilot has regained control, and is now returning to a higher altitude
and calmer air.
If current key projects yield big
defense related contracts, the $17 level over two to five years is a realistic
target. In the short term, possibly over the next 30 to 60 days, we believe
Irvine
Sensors could easily rebound to the $3 level as year end tax selling
abates, buyers come back, and corporate developments are reflected in the
stock price.
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Pioneering
Technology- Chip Stacking Provides Massive Processing Power in a Small
Space |
 |
The fiscal 2003 Defense budget earmarks
$9.9
billion for investment in Science and Technology. Those funds will
be used to develop the military and homeland security technologies of the
future.
This next generation technologies
have several common key components: They all require massive computing
power, contained in small, lightweight, and mobile formats, requiring as
little power possible.
Irvine Sensors has been in
business since 1980 and is the pioneer in developing "Chip Stacking" technology.
The company developed the process by which multiple computer chips are
bonded together in a sequence to provide massive processing power in a
very small space.
Irvine Sensors has developed
many applications for this technology. We have decided to feature the three.
The last two represent immediate upside potential for shareholders and
are strong growth arenas for the company.
|
Infrared
and Wireless Applications |
|
If you own a PDA which integrates
with your cell phone or any other device, chances
are 50% that the infrared technology in your PDA was supplied by the Novalog
division of Irvine Sensors. They are the dominant supplier to Palm.
Pictured here is a transceiver module
for a PDA, cell phone, or pager, which allows the device to exchange information
through infrared light with other devices. This infrared technology serves
as the platform from which the company has expanded into various miniaturized,
portable infrared detection devices which can be used in military and homeland
security applications.
|
Miniaturized
Thermal Video Cameras |
|
Pictured here is a tiny miniaturized
video camera that takes pictures by detecting heat emission. The camera
operates in a broad range of temperatures and requires a power source equivalent
to a couple of AA batteries. It lies dormant until detecting motion in
its vicinity, then can transmit the images back to a central location.
Consider the military and homeland
security implications of this technology. Vast areas can be virtually patrolled
by the placement of these miniaturized cameras in sensitive areas both
in the field and on US soil. This technology is also being implemented
in night vision weapons sights, and sensors for small, drone aircraft.
Prototypes of these cameras are being
delivered under a development contract with the US Army.
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Video
"Jigsaw" Technology |
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This technology requires massive
computing power, and has the potential to be the short term "Holy Grail"
for Irvine Sensors. This amazing imaging technology allows the military
to virtually "see through" a multitude of spaces to learn what is hidden
behind cover.
Originally announced in May of 2002,
it was revealed Irvine Sensors was named "prime contractor" by the
Defense Advanced Research Projects Agency (DARPA). Northrup Gurmman, Sarnoff
Corp, and Arete Associates are sub contractors.
In a press release at the end of
September, Irvine Sensors disclosed the development contract would
eventually equate to $9.6 million in revenues, and field testing
was scheduled to be completed by May of 2003. Irvine Sensors expects
to begin discussions with DARPA for long range military plans for this
technology in February or March. We are planning on providing an online
demonstration in a future edition.
The "Jigsaw" technology is used to
enhance combat target detection and identification by use of laser imaging.
The technology takes density images from aloft, and through complex computations
can actually reproduce images below less dense layers. From this, the images
are reassembled in pieces like a virtual puzzle. A practical example is
the technology's ability to uncover military hardware (tanks, planes, guns,
etc.) beneath any sort of camouflage or cover, such as trees or deeply
dug trenches with ground cover.
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Conclusion-
Financial Performance and Current Valuation |
|
June quarterly results came in at
$3.94
million in revenues, up from $2.3 million the prior quarter,
an increase of 71%. Irvine Sensors reported losses for the June
quarter of $1.72 million, but after subtracting non cash and one time expenses
from that number, actual cash losses from operations were only $536,500.
Their September quarter and fiscal
year end numbers are due out any day as their fiscal year ends in September.
When they are available, we will report them in a special edition.
Based on the June quarterly results,
Irvine
Sensors is annualizing at $12 million in sales. Revenues grew 71% from
March to June. If the trend continues, investors could assume they will
see growth again in the September quarter and hopefully diminishing losses.
Fundamentally the company is probably
absurdly undervalued. Like many of its technology brethren, the market
has priced the company for insolvency . The stock is trading at less than
one times annual sales. The market cap is a mere $12 million. With $200
million invested in their technology over the past twenty years, their
enterprise value should be considerably higher. Hence our belief the stock
could appreciate substantially.
On a technical basis the chart we
have provided, drawn from the highs made last May when the company announced
the DARPA contract, suggests the stock is entitled to bounce back into
the $2 range if the current trend continues. A move above $2.40 would be
extremely bullish, and could signal a major trend reversal.
The stock has risen recently off
a long term base of $1 to $1.72 on extremely light volume. Tax selling
pressure on this stock has abated, so it has been able to rise unchallenged.
Therefore, a pull back into the $1.30 to $1.40 range would represent the
ideal entry level. However, if the right kind of news comes along the stock
may never see these levels again.
This stock has an average daily trading
volume of 32,000 shares, so it could be subject to violent price swings
in either direction when volume materializes. Common sense should be used
when accumulating a position. Use a limit order and have a little patience.
If history repeats itself, the high for the day will be made about an hour
after the market opens.
As with any microcap you must assume
you could lose all your money if the company falls on hard times. On the
flip side- the unfortunate cost of the international war on terrorism could
make Irvine Sensors a company who's time has finally come.
Charts Provided Courtesy
Of TradePortal.com
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