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Virtual Stock Portfolio: January 2006

January marks the 2 year anniversary of the Burnham's Beat Virtual Stock Portfolio and as it happens the portfolio closed out it's second full year on a high note, generating its second best monthly return ever at 12.8%.  Over the last 24 months the portfolio has had 27 different positions and is now up a total of 107% with the average pick up 28.7%.  The key to generating the returns has not only been stocking picking but keeping the portfolio roughly 50/50 in terms of long and short exposure as this has allowed it generate positive returns in good and bad markets with lower overall risk.

January was an exceptional month, so it will be a tough act to follow.  Both long and short positions made money which means it was a good stock picking month.  I am going to add a few new positions this month to try and spread out the portfolio a bit more and make the short side a little bit more "jumpy" given that February tends to be a very tough month for stocks.

Long Picks

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.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +77.1%,  Jan. vs. Dec.: 16.3%
Comments: Another nice month which can't be good news for the shorts in this stock.  They reported on the last day of the month and missed their EPS a bit due to weak license sales, but not enough to cause serious damage.  A new release of their flagship product should be good news for license sales this quarter and with $100M in cash flow they will probably start buying stock back again in a few months as well.  Given this, I can't see why I won't hold this through the end of this quarter especially given that the shorts are going to continue to suffer.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Acutate is a business intelligence company with a particular focus on enterprise reporting.  I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +59.7%  Jan. vs. Dec.: 28.7%
Comments: This stock was "en fuego" in December as folks bid it up in anticipation of a good Q4.  The company reported on the last day of the quarter and did in fact beat top and bottom, but people didn't like it's guidance for 06 and it traded off 7% or so.  I am still going to hold here for a bit as there seem to be some big buyers and with the stock trading in the mid-teens PE vs. mid 20's for the comps there is still some significant upside room.

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +18.5%  Jan. vs. Dec.: 17.4%
Comments: Had a strong January after a weak December (perhaps driven by tax loss selling).  Looks like people think it will have a good report.  Still trading at a healthy discount to the rest of the content management group which has been on a tear lately.

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: 31.6%  Jan vs. Dec.: 18.0%
Comments: Nice month that eliminated some of the discount between CRYP and the rest of the online gambling sector, but still some room for improvement.

Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well.  Some may recall that I had PRTY long in a successful pair trade in Q4.  After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet.  Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base.  By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses.  Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: 0%  Jan. vs. Dec.: NA
Comments: You could probably pair this up against SBT again (SBT is going to look very pricey once people figure in all the shares they are issuing), but I figure that PRTY is compelling enough by itself.  This is a volatile stock, but the valuation is just compelling, especially relative to the land-based casinos.

Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception.  However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow.  It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: 0%  Jan. vs. Dec.: NA
Comments: The stock is about 35% off it's low so I am a little late to the party, but I think supply chain will see some renewed investor interest this year.

Short Picks

: Wave Systems Ticker: WAVX
: 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.
: Since 10/1/04: +27.5%  Jan vs. Dec.: 2.9%
: Relatively quite month.  They will need to raise more money by end of the quarter and it's hard to imagine that they can offer a bigger discount than they did last time.  They may have decent Dell-related revenues this report which might spike the stock, but I will try to have patience.

Company: Citadel Security Software Ticker: CDSS
Sub-sector: Security
Investment Thesis: Citadel offers a subscription service to help companies spot security vulnerabilities.  It's a good idea, but a lot of other companies including a number of private companies offer the same service.  Lately Citadel's business has been falling off a cliff.  They are buring cash to the tune of $5M/quarter and yet the management team hasn't done any major cost cutting.  As a VC, I can tell you first hand that it is incredibly difficult to turn around this kind of situation even if you get some product momentum.  I haven't seen a single company in this kind of shape pull it out.
Performance: Since 9/30/05: 49.9%    Jan. vs. Dec: 3.1%
Comments: I am covering this position this month.  There's still a good chance the company is sold at a price below the preferred prefs and debt (thus wiping out what's left of the equity), but I've made a good return and it's important not to be too greedy.  In addition, the CEO has guaranteed the company's debt which shows some real conviction and the company continues to land large contracts which means that there is clearly something of value there that will sell for something.  I have no idea how they are paying the bills though...

Company: Entrust  Ticker:  ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products.  I know them from my days covering the security sector on Wall Street.  They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again.  It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +28% Jan. Vs. Dec.: +16.7%
Comments:  Like old reliable, Entrust disappointed again and the stock traded off nicely.  They actually hit their Q4 numbers but guided down for the year and people came to their senses and asked "why I am paying close to 30X for this stock again?".  I will keep it in the portfolio this month as February is usually choppy but I am worried that the management team may support the stock by continuing to their ill-advised buy backs.

Company: Convera  Ticker CNVR
: Content Management
Investment Thesis
: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product.  That turned out to be a bad short as the hype around search was just too big of a reality distortion field.  Well, reality has begun to settle in and I am back for another beating.
: Since 1/31/06: NA Jan. Vs. Dec.: NA
:  I am, admittedly, late to the party on this one give that it has traded off 40%+ in the last two months.  Despite the decline, the stock is still trading at a crazy 19X EV/Sales despite zero traction for the new product and a substantial negative cash flow.  I will have to be careful given the hype, but this should be trading lower six months from now.  I am a glutton for punishment.

Company: BankRate  Ticker:  RATE
Sub-sector: Internet Content
Investment Thesis
: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyze financial services related internet companies.  Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees.  With interest rates rising, I don't think they will have trouble hitting their Q4 #w, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
: Since 1/31/06: NA Jan. Vs. Dec.: NA
:  Close to it's 52 week high and not the kind of chart you like to bet against, but the mortgage industry is highly cyclical and can change on a dime.  I am bearish on long term rates/housing, so this is a good Internet related play on those themes.  Also, pay-per-click searching is undermining some of the growth in the referral market.  There are some other potentially good mortgage-related Internet shorts (NTBK, HOMS), but this is the most attractively priced.

February 2, 2006 in Internet, Software, Stocks | 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.