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03/04/2006

Virtual Stock Portfolio: February 2006

After a very strong January, the Burnham's Beat Virtual Stock portfolio was down slightly in February.  The average pick in the portfolio was down 0.1% while the overall portfolio off 0.7%.  This still outperformed the NASDAQ, which was off 1.1%, but was no where close to last month's 12.8% gain.  This month's slight loss was almost entirely attributable to one stock, Convera, which is kind of frustrating because just about every company, including Convera, performed as expected at a fundamental level.

I am only making one change this month.  I am covering my short on Entrust as it is pretty much played out at this point.  This will leave pretty concentrated on the short side but I should have a few new picks next month.

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: +68.9%,  Feb vs. Jan.: -4.6%
Comments: Traded off a bit this month after a very strong January and a slight miss on its Q4 report.  Street numbers are still too low for this stock though and it has a decent product cycle coming up so I will continue to hold tight, but the stock is starting to approach the valuation levels of the other major players in the BI space.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Actuate 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: +53.4%  Feb. vs. Jan.: -4.0%
Comments: Traded off in February after a blistering January.  Stock still has some life left because the street numbers are too low given a recent acquisition the company made.

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: +25.2%  Feb. vs. Jan.: +5.6%
Comments: Nice month thanks to a decent Q4 report.  The stock still trades at a big discount relative to the other content management names so there should be some upside remaining.  Short interest is really starting to perk up on this stock though so I am watching it carefully. 

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: +43.8%  Feb. vs. Jan.: +9.3%
Comments: A good Q4 report drove further gains in the stock.  Now trading roughly in-line with the rest of the online gambling comps (around 12X 06 EPS).  IPO of a competitor later this month may create a nice valuation gap though.

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 05.  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: -4.7%  Feb. vs. Jan.: -4.7%
Comments: Not a great first month in the portfolio, as concerns about online gambling legislation combined with a CEO change depressed the stock.  Still looks like a good buy though given the continued momentum in the sector and their leadership.


Company:
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: +7.9%  Feb. vs. Jan.: +7.9%
Comments: Good first month in the portfolio thanks to a better than expected Q4 report.  Supply Chain/PLM may indeed be coming back to life.



Short Picks


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: +28.7%  Feb. vs. Jan.: +1.7%
Comments
: As regular as clockwork, they dumped another 8.4M shares in mid-February to finance their slow sail into oblivion.  It is stunning indictment of the SEC and NASDAQ that a company like this can continually sell fully registered common shares with no lock-up at huge discounts  (24% discount to market and 19% at the money warrant coverage!) with no one taking legal or regulatory action.  They are lucky they have no institutional holders because they'd sue to force a rights offering in a heartbeat.  Instead, you have a cult-like group of retail investors who lap up the excess shares in the open market while a bunch of bucket-shop hedge funds laugh all the way to bank.  Amazing.  However, with 100M shares outstanding the scam is undoutedly getting a bit more difficult to pull off though.  Delisting is scheduled for April (although it will undoubtedly be appealed), so I see no reason not to hold this position to its logical conclusion.

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: +33.9% Feb. vs. Jan.: +8.2%
Comments:  It's hard to part ways with this stock, but with a 34% gain, likely support from continued buybacks and a much more realistic (but still too generous) 17X PE it's time to cover and move on.  Thanks for the memories.

Company: Convera  Ticker CNVR
Sub-sector
: 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.
Performance
: Since 1/31/06: -24.8% Jan. Vs. Dec.: -24.8%
Comments
: Last month I said I was late to the party on this stock.  Boy was I ever.  Without CNVR, the overall portfolio would have been up 2% for the month.  The crazy thing about this stock is that they pre-announced Q4 revenues would be down close to 50% y/y early in the month and the stock barely budged.  When I saw that I got a sinking feeling in my stomach because it meant there were no sellers left at all.  Sure enough, a few days later they put out a press release announcing 3 beta customers for their new web search product and the stock gapped up 30%.  They also annouced a new $38M private placement which should come in handy given their prodigous burn rate.  How can a company with $3M/quarter in revenues, a management team that has led it down successive dead ends, and $5M/quarter burn rate be worth $490M+?  I don't know, but it is and it's kicking my ass for a second time.

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 analyzing 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 #s, 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.
Performance
: Since 1/31/06: +4.9% Feb. vs. Jan.: +4.9%
Comments
: Good first month which pretty much went as expected in that the stock seems to be trading in line with mortgage/housing sentiment which I expect to get worse over the next couple of months.

March 4, 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.