DUE DILIGENCE REPORT: POSTS 1-100, FOR FURTHER DISCUSSION.
Here is my short list. While I have included some explanatory notes, I have had to work fast and have had more food for thought than I can swallow in just a few hours of my spare time. So whatever you do, don't take my word for it. The following are up for further discussion. (After further discussion of our short lists I will announce the Roaring Twenty portfolio as well as a secondary portfolio of stocks which didn't quite make the cut, but which are also worth a look, and probably worth owning.)
TOP PICKS (ABSOLUTE MUST-HAVES)
The following picks offer either outstanding value, outstanding growth, outstanding prospects, or best yet, some combination of all three.
SFAM Speedfam, $26 1/8. Mkt cap $413mil. 1995 Revs. 59.8 mil; 1998 revs. 204.9 mil. 1995 EPS .20; 1998 EPS 1.17. 1999 est EPS 2.21. Trailing P/E 15; next yr. P/E 12. $10/share in cash, no debt. Involved in CMP & slurries business...high tech needs for chip design & manufacture. High growth, out of favor, superb value even if growth slows. I am new to this one so please give me a swift kick you-know-where if there is something I have missed here.
HUMCF Hummingbird Communications, $32. Mkt cap $455 mil. Revs. 1994-1997: 24.6 mil, 47.5 mil., 75 mil, 101 mil. 1994-1999 EPS: .72, 1.22, 1.65, 1.98, 2.43 (est), 2.98 (est). Trailing P/E 16; this year 13; 1999 P/E 10. No debt, good cash position. Networking software; corporate communications; diversified; recent acquisition of a well thought of data mining/OLAP company (Andyne). Concerns about old product image (Unix oriented). Concerns about digestion of new acquisition. Networking stocks battered. Foreign stocks battered. HUMCF has never disappointed the street. At current levels it's low risk, and with growth like this in such a key sector...you want to own stocks like this. New products and acquisitions should put to rest obsolescence fears.
TLDCF Teledata Communications, $21. Mkt cap $250 Mil. Telecommunications equipment, Israeli company, supplies Europe, Latin America. One Q had high Asian exposure but overall Asia seems to be around 5% of revenues. Brazilian woes also on radar screen. Currency scare & political fears battered this stock but largely unfounded. Salomon Brothers, etc. reiterated strong buys, current year EPS estimate. 30% annual EPS growth. $1.54 estimate for this year on track. Trades at 13X current year P/E. Blue sky from new ISP business with major partner should be more than enough to offset other imaginary woes. Good earnings report coming soon! Stock was $50 earlier in year, should get there again as growth continues. Lots of products appropriate to expanding phone capability in countries which do not have enough $$ for state of the art revamp of phone network...can boost capacity for minimal cost. Keep winning huge contracts. No debt, good cash position, thanks to those hardworking underwriters.
I ALSO RECOMMEND....
The posters' comments and my DD are enough to convince me that if you could, you should also own the following basket of stocks. They are either sufficiently cheap as to provide a margin of safety with reasonable prospects for a turnaround, or have an interesting enough role in the future economy to make them likely high growers or takeover candidates...no longshots though, they must at least have a viable business and a `safe' balance sheet.
SSPIF Spectrum Signal, $5 5/8, Mkt cap 52.1 mil. Digital signal processing, computer telephony integration, `modem stuff'. Great customers (Nortel, many others), something of an industry leader. Some other companies in this business are much larger. Yes, this is competition, but if this co. has found a niche and continues to grow in this hot biz then why not a 10-bagger or a takeover target (someone mentioned Texas Instruments as a suitor). Phasing out low margin business. Ramping up high margin DSP business, which grew 65% last year. No major analyst coverage. P/E 25. Cash position not spectacular, but good earnings. High trust in management. Stock buyback program.
SWEBF SoftQuad $1 1/4, Mkt cap. $14 mil (I think). I recommend this as a value play and potential turnaround. New products seem very interesting and `heavy duty'...for `power users', eg. System Selector is a multiplatform utility which seems to be state of the art. Also responsible for HoTMetaL Pro and a host of others. Unfortunately in a very competitive business, and costs got out of control, but if new products sell well the stock is extremely undervalued. No debt, probably 5 years before any possibility of bankruptcy, so as turnaround bets go, it's safe enough. Revenue growth was impressive in the past...92%, 102%, 30%, until recent slowdown. Analyst from Yorkton Securities predicts a return to profitability following a successful program of layoffs and cost cutting.
Need more info/convincing:
The following stocks are `poised for high growth' and I like some of them. But I really need more convincing.
AMK American Technical Ceramics. Capacitors for satellite/space communications; 1,500 customers. Niche product. Although EPS growth has been impressive, revenues have been slow growing, on the order of 10% per year. Thus the stock is probably fairly priced where it is. The margin salad days are over...unless there is some reason for revenues to explode...
BTHS Oceanographic exploration, beer leak plugger <g>. Need more info, good earnings but will be flat next year? Reasons for future high growth? Isn't it equally likely that growth will just stop, or reverse itself in this niche area?
EQNX Makes serial I/O, relevant to Internet servers. EPS growth has impressed but this has been done through higher margins. Good company all around, balance sheet good, but why not more growth? Why will it grow in future? For now it looks like a hardware company in potential decline/stagnation...need more convincing....would feel better about it if a bit cheaper.
INSO I recommend this one, but why? Stock trades not far from book value is partial reason. Good diversity of software products, many are `hot', some ahead of the curve, yet co. has strong sales on existing products while it waits for new markets to emerge. Like the focus on communications/translation/ spell checkers/words/books. New acquisitions and emphasis on higher margin areas and phasing out low margin areas will make company's return to profitability better than street expectations. Various markets it is in will mean a long period of growth. Anyone else believe me?
KVHI Good value, at trailing P/E of 13. At a market cap of $40 million, there is plenty of room for growth. Formerly a high grower, but a slowdown at present. Smart management, high margins, good earnings. Expect that future could be bright and high growth could resume...if company can become a leader in its business, which involves a satellite system to provide unprecedented ease of communications for marine use, and related products (hardware/software/services, now attempting to diversify the business I understand). This isn't some promo for some untried gizmo with a `huge market', hey, these guys went to Yale and they ARE in business, they helped make that market and are making a good buck on a reliable product already which seems to have gained widespread acceptance. So will it provide superior growth, or just plod? Convince me.
HTEI Well, HTEI sure is no value play at 80X current year EPS. They make pretty much any kind of software your little town might need to keep itself running and in the black, and they are proud of a long tradition of service. Voice recognition for parking tags, billing systems, planning systems, and NEW...tax collection & property appraisal systems...much, much, more. At first blush these folks seem both boring and a bit flakey. I have a close relative in the municipal planning business, and the way they buy computer equipment makes me worry. Especially in small towns. Will they ever bother to upgrade their software? Aren't they notoriously cheap? On second thought, though, I believe that growth potential is huge, and if this company can position themselves in the thick of it, they will be one remarkable story considering that they are unheard of. There are a whole lot of trends in running a small to medium-sized municipality efficiently that I like the sounds of. So what do folks think? Can HTEI be like some kind of sleeping giant, like a Tyson Chicken of municipal operations? Or will slicker competition come and take their market? Or is it just plain not worth it to the 'slicker' companies (hence the genius of investing in the one already in this market?)?
MRVC has grown so much in the last 5 years...now at $600 mil market cap. I wonder if its best days are behind it. At first glance it appears to be still growing faster than its 30X multiple would indicate...so it should get a boost this year...unless competition and its Asian sales (13% of total) start to eat into profits enough to change the luck. I'd like to recommend it but I see some risk and not much `getting rich' potential. Agreed, it's undervalued. I need more convincing.
The following are value plays, but should we bite?
TEAL Bank/gov't software, a lot of UNIX. Can't be called a growth co. at this point but seems to be extreme value trading at or below cash. Reason for current valuation: little accounting problem in the recent past. Accounts receivable kept growing, kept the impression of good earnings & growth, but then the not-altogether-unexpected happened: company declared a chunk of it `uncollectable'. This spooks the street and thus the $19 mil market cap for this co. Would be a bet on a return to profitability. Since price is so low, any kind of certainty about the future and the company's `ability to forecast its business' would convince me to own some as a value play.
LTXX Some kind of chip stock. Not growing much (?), trading cheaply at 8X next year's EPS...sounds like there are earnings warnings and Asia fears on the horizon? What gives here? Is another shoe about to drop?
Fortunately there are volunteers to cover the next couple hundred posts (I just looked at 1-100). Can we adopt the following convention, please. If your stock isn't mentioned AT ALL...then this was likely deliberate on the part of the `amateur analyst' (me or volunteer). It didn't make the cut. It was not chosen, most likely for reasons of valuation, risk or other obvious criteria. There will be good stocks that do not get chosen. We cannot recommend them all. By all means mention your stock again (once) if you feel it was unjustly excluded. But after that, please conduct debates on unrecommended stocks via e-mail.
Hey you volunteers, the world awaits your short lists. |
