Virtual Portfolio Update: 02/05

My virtual stock portfolio had another good month with the average stock up 3.5% compared to the NASDAQ's 0.5% decline and the overall portfolio up 8.3% thanks to continued strong performances from some of the portfolios biggest winners.  Online gambling continued to be a white hot sector with Sportingbet and Neteller basically carrying the water for the rest of the portfolio.  I had a fairly poor short month though with a couple of my shorts (CRM and CNVR) moving strongly in the wrong direction.

I am making a couple changes this month.  I am covering my short in RSAS and replacing it with a short on MANU.  In terms of RSAS, it was fun finally shorting it, but I don't want to be too greedy and the stock always tends to walk up after sustained weakness.  I am replacing RSAS with MANU.  I am a little late to the party and should have shorted it a long time ago, but better late than never.

I wish I could spend more time on this portfolio but I am in the midst of fund raising and that's a priority right now.

Long Picks
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: This is a turn around story in the hot business intelligence space. Reporting is becoming more important as more users get access to core business data.   The stock should recover as a new product release cycle drives license revenues.
Performance: Since 1/26/04: -23.3%, Feb vs. Jan: 6.7%
Comments: The Q1 report was good enough to get some more people interested in the stock and as a result there was some decent upside movement.  At 27X 05 EPS it is now trading in the range with the other BI players, however there is hopefully some significant leverage as they start to grow revenues again.   Still on probation, but at least it is starting to make decent progress.

Company: SumTotal Ticker: SUMT
Sub-sector: E-Learning
Investment Thesis: SumTotal was formed by the merger of Docent and Click2Learn which closed in mid-March 04. I liked Docent before the merger because as it was relatively cheap, had good products, and was in a space still seeing good corporate spending (E-Learning). The combined companies promise to be solidly profitable after the debris from the merger clears which should help the overall valuation as they cement their leadership position in the e-learning space.
Performance: Since 1/26/04: -26.5%, Feb vs. Jan: 2.5%
Comments: The Q1 report was fine, but the stock failed to sustain the momentum which briefly took it above $6/share.  Not very encouraging.

Company: SPSS Ticker: SPSS
Sub-sector: Business Intelligence
Investment Thesis: SPSS is another player in the business intelligence space with a particular emphasis on predictive analytics, something that is particularly hot right now. The stock has been battered by a restructuring that the company went through last year as well as an accounting restatement. My thesis is that the new product set is strong and the accounting trouble is overblown.
Performance: Since 4/30/04: 36.4% Feb vs. Jan: 21.6%
Comments: A great month thanks to a solid Q4 report and decent forward guidance. It looks like they have now fully put the 2003 accounting problems behind them.  At 27X 05 EPS it is now trading right in line with the big boys of BI, so it make make sense to swap this out next month

Company: Stellent Ticker: STEL
Sub-sector: Content Management
Investment Thesis: Stellent is a relatively sleepy, but well established, content management company that is attractively priced. Q1 was the first quarter of positive cash flow in awhile and Q2 saw pro forma, but not GAAP positive, EPS. With $20-25M/quarter in revenues, Stellent has a lot of room to work on expenses and should be able to return the company to solid GAAP profitability at which point the stock should recover from its current 1.5X ev/sales to something much closer to 2X.
Performance: Since 6/30/04: 5.3% Feb vs. Jan: 5.1%
Comments: Finally crawled out of the hole that I fell into with the first month of this stock thanks to a decent Q4 with solid GAAP profitability.

Company: Neteller Plc. Ticker: NLR.L
Sub-sector: Financial Services
Investment Thesis: Every portfolio needs a flier and this sure counts as one. Neteller is Europe/Canada’s answer to PayPal and it has been making a killing by servicing markets, particularly online gambling, that PayPal has been pressured into exiting by the US Justice Department.  I know, I know, this is not a software stock, but I still follow online financial services quite closely and I feel compelled to point out this stock because it is such an attractive buy.
Performance: Since 6/30/04: 316.5% Feb vs. Jan: 24.1%
Comments: Still "en fuego".  Now trading at about 28X my 05 EPS, so starting to become reasonably priced relative to its growth rate.  Hard to sell in the face of such a strong run though.  Rather than exiting the building I will just wander over to the exits at this point.

Company: Sportingbet Plc. Ticker: SBT.L
Sub-sector: Internet Gambling
Investment Thesis: Continuing my trend of UK-based non-software stocks, I feel compelled to add Sportingbet.com to the portfolio.  Sportingbet is the largest online gambling operator in the world and just last month executed an accretive deal to buy one of the largest online poker sites on the net (Paradise Poker).  At 16-17X 2005 EPS this stock is very attractive relative to its growth rate (25-30%) and especially attractive relative to other internet commerce plays.  In addition, in November the World Trade Organization ruled that it is illegal for the US to prevent US citizens from placing bets on non-US Internet sites.  While the US is appealing the ruling, it raises the possibility that US citizens will be able to legally gamble on-line which could lead to further industry growth.  I don’t like the big options overhang in this stock or the poor margins (due to sports betting business) but this is a chance to own the #1 player in an important online commerce player at an attractive valuation.
Performance: Since 11/30/04: 110.9%,  Feb vs. Jan: 39.8%
Comments: The best performer in February.  At 18X 05 EPS it may still have a ways to go.  It will be interesting to see how the IPO of Party Poker affects the stock.

Short Picks
Company: Autonomy Ticker: AUTN
Sub-sector: Content Management
Investment Thesis: Autonomy is a UK-based purveyor of advanced enterprise search software a space I know well from some of my VC investments. The enterprise search space is crowded and getting even more competitive with the entry of folks like Google. Autonomy’s secret sauce, its categorization software, is increasingly being duplicated by it competitors. Autonomy continues to trade at a premium to the market at 3.9X enterprise value to sales however its decline has brought it to a more reasonable level. This premium appears to be largely an artifact of the fact that autonomy is a bit of a cult stock in its home country of the United Kingdom.
Performance: Since 1/26/04: +28.3%  Feb vs. Jan: -18.6%
Comments: Not a good month for this short.  I guess delisting from the NASDAQ really did help them.  If the positive trend continues I may have to cover next month.

Company: RSA Security Ticker: RSAS
Sub-sector: Security
Investment Thesis: I have always wanted to short RSAS. I covered the security sector when I was an analyst and basically came to hate the sector due to the fact that almost every company blows up once every 12-18 months and does so with no warning whatsoever. RSA used to be called Security Dynamics and its main product remains a "hard token" called Secure ID which they already have sold to just about everyone on the planet that is going to buy one.   Right now the street is infatuated with an AOL deal which I think has no legs.
Performance: Since 8/1/04: +12.2% Feb vs. Jan: +7.2%
Comments: I am going to cover the RSAS short this month after another strong performance this month.  What looked like a disaster at first, turned into a decent return, but I don't want to press my luck given that hope always seems to spring eternal on this stock.

Company: Salesforce.com Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: Salesforce.com is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies used it, but it is expensive the longer you use it and the larger your company gets. CRM is 2nd most highly valued stock in the software space despite the fact that it is facing increased competition from the big boys of enterprise software and that it’s very hard to rapidly grow subscription-based revenues. Any misstep and this stock will down 25% in a heartbeat.
Performance: Since 1/26/04: -23.4% Feb vs. Jan: -17.2%
Comments: Last month I thought I make might money on this short, this month I am not so sure again.  CRM beat its numbers and guided up, prompting a big run in the stock.  Despite this I can't bear to cover given that it is still trading at 115X 05 EPS.

Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, almost $14M in cash burn during the first nine months of this year and only $6M in cash left, Wave finally appears to be approaching judgment day. It may take a few more quarters, but I fully expect Wave to follow in the footsteps of CMRC or to wash out the existing common with a new financing.
Performance: Since 10/1/04: -26.4% Feb vs. Jan: -9.5%
Comments: A negative month for WAVX but really not much new news which is actually good news for my short as with every passing day Wave gets closer to another dilutive financing. 

Company: Convera Ticker: CNVR
Sub-sector: Content Management
Investment Thesis: I ran into Convera when I was on the board of Stratify.  I was unimpressed with Convera’s business then and I am unimpressed with it now.  They have a decent market niche in the government sector but have never been able to really expand out from there and face increasing competition from the likes of Google, Verity, and Microsoft.  The stock is up strongly in the past few months thanks to the company’s announcement that they are going to enter into the web search market. This hype has disguised very poor license sales of the core product and a continued high burn rate (averaging about $4M-5M a quarter). Eventually the chickens will come home to roost and investors will realize that these guys are a just a third rate enterprise search vendor.
Performance: Since 11/30/04: -25.3% Feb vs. Jan: -22.9%
Comments: Humm.  Someone appears to believe CNVR's search story and that could spell trouble for my short.  The company is doing a good job putting out lots of "its just around the corner" statements about their new search product which is starting to attract some dumb retail money looking for the next Google.  I will be paying close attention to this quarter's report (they still haven't reported Q1!!).  I may have put the cart before the horse on this short.

Company: Manugistics Ticker: MANU
Sub-sector: Supply Chain
Investment Thesis: Manugistics is in a tough spot strategically and financially. Strategically it's facing increased competition from the big ERP players who are successfully bundling more and more supply chain functions into their core offerings.  Financially, Manugistics has a crushing debt load and a negative tangible book of $55M.  It's going to be very hard to pull this company out of the tailspin.  The debt holders may ultimately convert to equity and save the day, but things will have to get a bit worse on the equity front before they are willing to talk turkey.
Performance: Since 2/28/05: NA Feb vs. Jan: NA
Comments: Q1 should be a tough quarter as the VP of Sales just quit and they are in the middle of a re-org.  Tough to hit the numbers with all those balls in the air.