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Virtual Stock Portfolio Update: July

In July my virtual stock portfolio was up only 1.1% compared to the NASDAQ's blistering 6.2% gain thanks to fact that I got clobbered on a couple of short positions.  On average my stocks were off almost 6% thanks to two smaller short positions, Convera and Wave Systems, that had inexplicably huge months.  Both stocks have cult followings and the cults appear to have won this month.  My longs all did well this month though, so I was able to avoid a net loss.  I guess that's what is supposed to happen in a long/short portfolio but it is still not fun to under perform.

Overall, my portfolio is up 21.6% YTD vs. 0.4% for the NASDAQ, so I am still nicely ahead of the market, but I am overdue for a bit of portfolio re-engineering so I am going to make a few changes this month.  First I am going to cover two of my poor performing shorts, and Convera, because they both look like the momentum guys have gotten a hold of them.  Second, I am going to reduce my exposure to one of my longs, Neteller, and add a new long that is related to Neteller, FireOne, but trades at a significantly lower multiple.  I am also adding Kana as a short, as I see it following a path similar to what Broadvision did (i.e. going private at a big discount to its current price).  With these changes, I am somewhat net long on a cost basis, so I will try to look for a decent short this month to get the portfolio back into balance by September.

Long Picks

: SPSS Ticker: SPSS
Sub-sector: Business Intelligence
Investment Thesis: SPSS is a 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: +38.1%  Jul vs. Jun: +2.2%
Comments: The stock has been somewhat quiet recently but has been slowly trading upward so I will keep my exposure for the time being as the BI space remains hot and the multiple laggards in the space (such as SPSS and MSTR) are slowly closing the gap the the premium plays (BOBJ and COGN).

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.  I like the content management space as a consolidation play.
Performance: Since 6/30/04: -1.1%  Jul vs. Jun: +12.7%
Comments: Strong month that made up a lot of lost ground, but this stock has been somewhat of a disappointment as it appears to range trade with no real direction.  Probably worth swapping out with something more attractive at some point in the near future.

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 on-line 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 on-line 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: +409%  Jul vs. Jun: +27.2%
Comments: The energizer bunny of stocks, it keeps going and going and going up.  Still only trading at a mid-20s PE despite the huge run-up.  It has gone up so much that it represented a disproportionate portion of my portfolio, so this month I trimmed my position back to be much more in line with the other positions.  I also added another stock, FireOne, that is basically in the exact same business, but trades at 14X earnings, so I still am overweight in terms of portfolio exposure to Internet payment processing for gambling companies.

Company: Sportingbet Plc. Ticker: SBT.L
Sub-sector: Internet Gambling
Investment Thesis: Sportingbet is the largest on-line gambling operator in the world. At 23-25X 2005 EPS this stock is still attractive relative to its growth rate (25-30%) and especially attractive relative to other Internet commerce plays. 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 a major player in an important on-line commerce player at an attractive valuation.
Performance: Since 11/30/04: +120.5%,  Jul vs. Jun: +11.3% 
Comments: This has been a pretty easy play on Internet gambling and I don't see any reason to get out yet despite the good gains to date, although the stock may suffer as more Internet gambling companies get listed in the UK (for example Party Poker's (PRTY.L) recent listing).

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  From what I hear, businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +42.2%,  Jul vs. Jun: +45.5%
Comments: MSTR had a huge month in July thanks to a strong earnings report combined with a big repurchase announcement.   The repurchase should give the stock a bit of a floor in the next few months, so I will hold on to it, but I think all the easy money is now off the table as it is trading much closer to the other plays in the space now.

Company: FireOne Group Ticker: FPA.L
Sub-sector: Financial Services
Investment Thesis: FireOne operates an Internet payment service very similar to Neteller.  It is used primarily by on-line gamblers to transfer money around.  I added FireOne to the portfolio because I wanted to maintain overweight exposure to the these kind of Internet payments plays without putting all my eggs in one basket (Neteller).  It helps that FirePay trades at 14X earnings compared to Neteller's 24X, but FireOne is admittedly not as big or well run as Neteller.  I seriously considered adding, Optimal (OPMR), the parent of FireOne and an 80% owner, instead of FireOne, but the relative valuations suggested it was better just to go with pure exposure to FireOne.
Performance: Since 7/31/05: NA,  Jul vs. Jun: NA
Comments: Hopefully FireOne will be able to close at least part of the considerable multiple gap between itself and Neteller.  Given the lagged nature of its results vs. Optimal it may be possible to make very good guesses at its performance well in advance of a public announcement, so I should be able to get a bit of a "head's up" on any particularly good or bad news.

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. 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: +17.2%  Jul vs. Jun: -7.3%
Comments: Ever since AUTN delisted from the NASDAQ and relisted with the LSE, it has been a much quieter stock and has traded up a bit as well.  I think a lot of this has to do with the much lower reporting requirements of the LSE, but it's hard to tell.

Company: Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies use 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: -81.0% Mar vs. Feb: -15.0%
Comments: I got killed on this short and can't take it any more so I am covering this month.  The company continues to have a crazy valuation (9X EV/Sales), but the management team is doing a good job telling the growth story and is also keeping revenues growing faster than I thought they would.  As the poster-child of software as a service the stock gets a lot of trend money as well.  I am not going to fight the trend anymore.

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, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: -28.6%  Jul vs. Jun -50.0%
Comments: In July Wave was running out of cash and probably has two months cash left at most right now, yet the stock was up 50%.  This means one of two things either A) they are in talks to sell the business at a premium or B) someone is manipulating the stock.  Given the history of the stock, I think that B is much more likely as the stock has mysteriously run up in advance of two prior PIPES (giving the buyers the opportunity to short their positions in advance), however it will take a month or two to know for sure.  I am still hanging on to this short despite last month's blood bath because its clear that the company is approaching the end of its rope.

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 here...
Performance: Since 11/30/04: -79.6%  Jul vs. Jun: -85.6%
Comments: The stock went on a huge run this month thanks to a PIPE from Legg Mason and lots of speculative interest in Convera's upcoming Internet search initiative which won't even start selling until Q4.  I  clearly underestimated how much people were willing to pay for hope and given that they won't get any real sense of how the new product is doing until Q4 now, it makes sense to cover and cut my near term losses.  I will be back to short this in Q4 though as the company is trading at 15X EV/Sales which is just silly given that there's no proven demand for their new product and it's not like the existing Internet search guys are going to roll-over.

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: +4.0 Jul vs. Jun: -8.4
Comments: Still range trading a bit.  I still think that the equity is going to get pimped by the debt at some point before the end of the year, so it's worth waiting around for that day of reckoning.

Company: Kana Software Ticker: KANA
Sub-sector: CRM
Investment Thesis: Kana has been in a long decline ever since the bubble burst.  Once a CRM darling, it is now generating only about $2M in license sales/quarter and $10M in total revenues.  It continues to lose millions a quarter despite having only ~$10M in cash.  In addition, the CEO recently left in the wake of getting censored for expense account abuses and the company hasn't filed a 10K or 10Q because they have new auditors that are taking much longer than expected.  The new CEO is going to have to undertake a major restructuring to get this place profitable.  This company may ultimately experience the same fate as Broadvision in that it goes private at a big discount.
Performance: Since 7/31/05: NA Jul vs. Jun: NA
Comments: They need to file a 10K by the end of the end of the month.  I can't imagine that the 10K will have lots of good news in it.

August 3, 2005 in Internet, Software, Stocks, Wall Street | Permalink


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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.