I take strong exception to the term "pumped".
From the Nov.22 edition of the Alert Investor:
THIS WEEK'S PICK
To add to the evidence of the amazing opportunities in the micros, take a look at a couple of small web-related stocks we had planned to write up but never had the chance, as they exploded and kept running to the hills (though, fortunately, we were able to trade them in our accounts). E-Base (EBAS) went ballistic, up 20-fold, Centura Software (CNTR), moved from $1 to $11 in a week, V-One (VONE - a stock we plan to revisit next week), doubled overnight, Cornerstone (CNRS) went from $2 to $7 in 2 weeks, Leapnet (LEAP) went from 2 3/4 to 6 1/2 in 2 weeks, MRVC went from $18 to $32 in two weeks etc etc. The point is that there are always gems to be found in the seaweed, and this week's selection is another such case.
Why Socrates Tech (SOCT,11/16,NAS) is a cheap as it is would be one of the mysteries of the universe, were it not for the fact that no one does real small-stock analysis anymore (only hype). They have 2 exciting divisions, providing systems in the small- to -medium-sized enterprise (SME) space. The company used to be called MVSI when it was run by a retired general, and it was a tech "box-maker" with some exposure in machine vision. As Socrates was making a couple of key acquisitions this year, the stock formed a major double top in early 1999 at 4 and kept declining until September. The new CEO, Tim Keenan took a broom to the place recently, repositioned their 2 core businesses and is looking at explosive growth in the SCM (Supply Chain Management) and ASP (Application Service Provider) businesses going forward. To give you an idea of what these two stock groups have done lately, look at an SPM play like ITWO, that's gone from 25 to 90 in 3 months, or three ASP's like FLNK (9 to 36), USIX (15 to 72) and the above-mentioned EBAS (1 to 16) - all that in the last 2 months. SOCT's ASP revenues next year will be about $25M, about half that of leader USIX, except that USIX's market cap is $2.6 billion and SOCT's is $11 million. USIX will lose big bucks on the business next year, while SOCT will be profitable (see the Nov.2 PR). Go and figure....
The 4th quarter will show $6M in revenues, up 50% sequentially, and it will be break-even. As for the 3rd quarter, pull apart the pieces in their most recent 10-Q, which is full of extraordinary charges, and what you're left with is very exciting. The Technet division has built an excellent reputation in Supply Chain Management, with many household names among its customers, including the World Bank (with its PAMIS funds transfer system), Pechiney, fragrance-makers of the L'Or‚al and Ralph Lauren brands, American Stock Transfer and many other undisclosed names. SCM is a fast-growing $24 billion global software market, supplying manufacturers of all kinds with extranet sytems to integrate their information, so that info about orders going out the front door are "funneled" through the process flow system all the way up to vendors, raw materials, production scheduling, inventory control and e-commerce. Remember "JIT", Just-In-Time manufacturing? This is the new, high-tech version of that information system, for the web age. The broader industry group is also referred to as ERP (Enterprise Resource Planning) and if you own any of those stocks, you've made a lot of money lately too. Technet will do $10M in revenues next year and bring about 8-10% to the pre-tax line, or about 5c a share.
What's unique about Socrates is that there are terrific synergies between the two divisions. While Technet uses PeopleSoft solutions, for example, in its offerings to the smaller enterprises, the newly-acquired Networkland division - which is an ASP with over 2,000 customers - is actively pursuing partnerships with hardware VARs (Value Added Resellers) for the very same market, as well as offering network integration capability. The companies that build the networks, host the applications and create the software to run these complex systems will do well no matter what company's applications users are demanding. ASP is such a means for smaller enterprises to use more expensive enterprise applications software ($100,000 and up) on a "leased" basis. Why is this technology so exciting? Because it shifts the economics of software: companies like MSFT and SUNW will still get paid for delivering industry standard software products, but higher profit margins will go to companies downstream that create customized versions of standard products. (For more on ASP's, you might look at our 10/4 and 10/11 Alert Investor on our website, featuring FLNK). Socrates, again unlike its ASP competitors, is using the networked excess capacity of major 24/7 data centers like Qwest, for example, and is able to forego the need to build its own expensive data centers. That's why Networkland will make about 5-6c a share next year while the other players will continue to bleed red ink. Networkland's business model - again different from that of USIX and the others - is to have the VARs, with long-standing client relationships but no network or extranet capabilities, do the selling of the apps and the customer care, making the resident CTO (Chief Tech. Officer) look like a genius. Win-win, all the way around ! Gotta love it.
The company is now practically debt-free (except for some related-party debt) and cash-flow-positive. So much housecleaning took place in the last couple of weeks - divisions, investments, management payroll and other overhead - that the new company is hard to recognize. Since SOCT is a fully reporting company, you can add a little research of your own and you will recognize the stock as one of your new friends. There are about 16 million shares outstanding and about 2/3rds are in the float. How long can a story like this remain a secret? Not long.
SOCT's chart has been bullish since it bottomed out around 50c in September and October. The cup-and-handle configuration you see on SOCT is one of the most bullish patterns known to chartists. The MACD has been neutral for months, as the stock bottomed and turned bullish, but there were a few volume blips lately, indicating accumulation. Typically, the up move on these saucer patterns is symmetrical to the decline, but I think you'll see a much more dramatic rise on SOCT, given its pedigree. The first bit of resistance is at 1 1/8, but I am sure you would regret selling there. Give this company a little time to get its story out and enjoy the ride.
This newsletter has received no compensation whatsoever from Socrates Tech, but that cup with the big saucer would look nice on the mantelpiece. |
