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Hello Readers,
Since the last Newsletter, we closed three positions; one for an extremely good gain, maybe one of the year’s best, one for a breakeven, and another for a loss.
VASCO DATA SECURITY (2/5/02). Closed position 11/26/04 at $6.35 for a 115% GAIN.
CE FRANKLIN (5/5/01). Closed position 11/26/04 at $3.84 for a 2% GAIN.
DIGITAL POWER (2/20/01). Closed position 11/26/04 at $1.11 for a 44% LOSS.
In our nearly eight years of Internet publishing, we have made over 420 stock picks. Most of these positions were closed within 12 to 20 months, but we still have a small handful that are over two years old. That’s because as long as the balance sheet still appears to be decent we do not like giving up on them, even if the stock heads south. Many times, this strategy has worked. Such was the case with VASCO Data Security, which had fallen to under $2.00 in August, but over the past month or so, VDSI went on a raging tear thanks to new product innovations and apparent growth. CE Franklin has been a big disappointment, even with a good balance sheet, and that is rare. CFK’s stock was never able to budge much beyond current prices even though the company is in the oil industry; remember we had placed this on the “Endangered List”, as we also did with Digital Power. DPW hardly showed revenue growth over the last several years, and the stock price always reflected that; the final straw came with the latest financials.
The next few weeks could be bumpy as tax selling season approaches and the adjustments are made for the price of crude due to winter’s arrival. However, there is a ton of money still sitting on the sidelines, which leads us to believe that the markets will go on a major run during the first half of 2005.
Here are the headlines since the last Newsletter about companies in our Current Portfolio. Dates in parentheses are when we first recommended them.
Arotech (ARTX) (6/5/01). Receives $4 million in orders for armored vehicles.
Generex (GNBT) (8/5/02). Concludes discussions with Charmed Capital. Will aim efforts at pursuing strategic relationships with pharmaceutical companies, and we hope they do it, soon. Announces publication of Oral-lyn research study.
Art Technology (ARTG) (8/5/03). Navy Exchange’s online web stores will use ATG software. American Eagle Outfitters selects ATG to drive online revenue.
V.I. Technologies (VITX) (11/20/03). Some good news on the merger, maybe, and bad news on a trial. Remember, this is on the “Endangered List”.
Actuate (ACTU) (1/5/04). Named a top technology innovator by VARBusiness Magazine. Collaborates with Indusa Global on a tourist reporting solution for The Bahamas government.
Crossroads Systems (CRDS) (2/5/04). Changes earnings announcement from 11/29 to December 20.
Transgene (TRGNY) (3/5/04). Stock gets a megadose of new life thanks to a plug on BusinessWeek Online, and news that the company has moved forward with a new Phase II clinical trial with its vaccine candidate to prevent pre-cancerous cervical lesions.
Socket Communications (SCKT) (3/20/04). Delivers enhanced GPS Nav Kit with Bluetooth wireless technology, rich graphics and voice prompts.
NexMed (NEXM) (4/5/04). Closes enrollment for 400 patient Femprox study.
Palatin Technology (PTN) (4/5/04). New European patent granted for PT-141, a candidate for treating sexual dysfunction.
GlowPoint (GLOW) (5/20/04). Announces Web collaboration suite for video communications.
Network Engines (NENG) (6/5/04). United Way turns to NENG firewall to protect network assets and support open access to affiliate websites.
Bindview Development (BVEW or BVEWE) (6/5/04). Files 10Q late due to a probe of revenue recognition practices in its Latin American operations.
Altair Nanotechnologies (ALTI) (6/20/04). ALTI to receive $400,000 as subcontractor to perform research activities to enhance the capabilities of hydrogen refilling stations; this is part of an U.S. DOE grant.
TriPath (TRPH) (8/5/04). To present at the Lehman Brother T4 2004 conference on December 8 –10. Lawsuits keep mounting as company hires independent accountants. We’re adding this to the “Endangered List”.
Chordiant (CHRD) (9/20/04). Names a new CFO/COO and a VP of sales for Western Europe. Unveils process-driven branch teller solution.
Trikon (TRKN) (10/5/04). Reports that its in-Situ End Point Detection increases yield and reduces cost of dry etching for power semiconductors.
Corio (CRIO) (10/5/04). Announces on-demand testing for enterprise applications.
SCM Microsystems (SCMM) (10/20/04). Ships Smart Card readers to NTT. No longer in S&P SmallCap 600 index, but that shouldn’t be detrimental.
Net2Phone (NTOP) (11/5/04). To report 1st QT 2005 numbers on December 7.
Applied Micro (AMCC) (11/20/04). S&P’s Equity Research slashes AMCC’s FY 2006 earnings estimates as company initiates cost cutting plan; hasn’t yet hurt the stock.
Our picks for this issue are a NASDAQ-listed communication equipment provider and a drug distributor in China that trades on the AMEX.
ZHONE TECHNOLOGIES, INC. (NASDAQ: ZHNE) – $2.45. Twelve-month hi-low has been $7.38 – $2.26. Based in Oakland, CA, with about 230 employees, this equipment provider has 96.1 million shares outstanding, $134.7 million in total current assets, $338 million in total assets, (of which $158 million is goodwill), and $104.62 million in total liabilities, of which $46.6 million is long-term debt. Institutional ownership is around 24%. Two analysts rate the as a “hold”. http://www.zhone.com
At some point, in the very near future, telecoms will need to replace all of their legacy equipment with what is known as the “triple play”, and poised to benefit from this is Zhone Technologies, Inc. The balance sheet isn’t quite what we like, but the debt seems to be manageable, for now. Founded in 1997, and trading on NASDAQ for just over a year, Zhone was formerly known as Tellium, Inc. until late 2003. The company designs and markets a complete line of telecom products that offer voice, data, and video services to network service providers, while claiming to optimize bandwidth, reduce costs, and speed provisioning. These “triple play” products allow the service providers to migrate from traditional circuit-based technology to packet-based networks. Zhone’s products also allow the providers to add new subscriber services more quickly than is possible with conventional copper access solutions. It should be noted that the company’s main competitors are Alcatel and Lucent.
Zhone’s products are deployed by over 300 network service providers on six continents. Last year, their six largest customers were Motorola, Qwest, XEL, Verizon, Bell Canada, and North State Telecom. Its products span three distinct areas: Single Line Multi Service (SLMS) products, Digital Loop Carrier (DLC) products, and Multiplexer (MUX) products.
Zhone is another company that’s not short on news. During October, alone: Zhone ranked number 151 of the fastest growing companies in North America on the 2003 Deloitte Technology Fast 500. Was selected by Lakefield Telephone, of Wisconsin, for its new service deployments. Expects its 4thQT numbers to be above analysts’ estimates. Launched new ADSL2+ devices and integrated IP video decoders. Announced the availability of its new Raptor 100 DSLAM. At the end of September, Zhone expanded triple play over fiber carrier solutions with new PON ONU supporting IP video.
For FY2003, ending 12/31/03, revenue was $83.13 million with $17.18 million in losses. During the first nine months of this FY, ending 9/30/04, net revenue was $69 million with $31.8 million in net losses. Some of the losses can be attributed to Zhone’s acquisition of Sorrento Network in July.
As mentioned above, this is a play on how quickly the major telecoms set up the “triple play”. We think it will be much sooner than later.
Our 24-month target for the stock is $4.25 to $5.00.
For more information, contact ZHNE at 510-777-7013; investor-relations@zhone.com
AXM PHARMA, INC. (AMEX: AXJ) – $2.32. Twelve-month hi-low has been $7.30 – $1.80. Located in Las Vegas, NV and Shenyang, China, with about 35 employees, this drug distributor has 16.1 million shares outstanding, $4.03 million in total current assets, $9.65 million in total assets, little debt, and $1.2 million in total liabilities. Institutional ownership is 1.5%. http://www.axmpharma.com
It’s been over half a decade since we picked a mainland China stock. So, we’re going after one that has an okay balance sheet and has just gone through a rough patch. However, due to some recent developments, AXM Pharma, Inc. could see its fortunes improve over the next year or two.
Founded in March 2003 through a reverse acquisition between Axiom Pharmaceuticals and Shenyang Tianwei Werke Pharmaceuticals (STWP), AXM markets and distributes pharmaceutical products in China, as well as distributing herbal remedies, vitamins, and adjunctive therapies. Conducting business through its STWP subsidiary, AMX holds 43 licenses to produce OTC and prescription pharmaceuticals in the PRC. Of these, the company has commercialized four, from which it produces five products. These compounds include a treatment for upper respiratory infections; a cream for cleansing acne and other skin irritations; Cefalexine, which is a broad spectrum antibiotic; two other antibiotics for treating such maladies as skin oral infection and gastric and urinary infections; a treatment for TB; and a compound that helps treat symptoms of fatigue and depression.
AXM appears to have smoothed over a few bad bumps in its road. In July, all companies in China were required to obtain national drug approval licenses to manufacture each of their products. So, until this approval was granted on November 15, AXM was not allowed to make or sell any of their drugs. Also, the company had to build a new plant due mainly to zoning snags. This new facility with 120,000 square feet of production space is near completion and is awaiting certification.
During the past year, AXM garnered some nifty distribution deals. It now has a pact with Sunkist Growers to sell their trademarked products in the PRC, exclusive of Macao and Hong Kong; the product range includes vitamins and vitamin supplements. In August, AXM marked the first order for its new product lines when it received the first in a series of purchase orders for its feminine hygiene wash from Zwellig, which employs over 1000 sales reps.
Due to the obstacles over the last six months, the numbers are that pretty. For the nine months ending 9/30/04, revenue was $2.09 million with around $10 million in losses.
AXM seems to have set the stage for a nice run at the world’s largest concentration of consumers.
Our 20-month target for the stock is $4.50 to $5.00.
For more information, call AXJ at 702-562-4155.
Look for the December 20, 2004 Newsletter to be posted on 12/16 or 12/17.
Thank you,
George