The Blog of Evermore

Other (mostly) Small Cap Stocks

May 3rd, 2010

A run-down of some of the other stocks in my portfolio.

AMAT – Applied Materials

I’ve traded around a little with this one over the years and got back into it when it was down in the $8 range in February, 2009 and then added some more in the $11-12 range in February of this year. I recently took some of it off the table at $14.32 after their Q2 earnings release.

This is a stock I like for the long haul. I recently sold my Intel holdings and put that money into AMAT. I did this because the way I figure it, the demand for semiconductors will only increase as the middle-class in other areas of the world continue to grow. However, knowing which semiconductors is more difficult to determine. While Intel is a strong company, I spooked myself a little when I imagined a Chinese-based company acquiring AMD. Such an acquisition could pretty much take China and perhaps other areas of Asia off the map for Intel.

But regardless of what semiconductors are designed and constructed, the equipment to build those semiconductors will be in demand.

Throw in AMAT’s foray into solar panel manufacturing equipment and a very strong balance sheet, and I’m very comfortable holding this stock.

DVD – Dover Motor Sports

On the other side of the safety spectrum from AMAT is DVD. This is soley an asset play as the company is not profitable, has a weak balance sheet (at least on a GAAP basis) and has limited growth prospects. This is a stock I typically would run away from except for two things. The first is they have assets whose true value is not reflected on their balance sheet. The fact that they host two NASCAR Sprint Cup races and operate a unique race track that can hold well over 100,000 people. There has also been insider buying recently which might be an indicator of something positive happening soon.

There has been some discussion of selling the company but the owners (this is a closely held public company, meaning it is actually controlled by a few people) do not want to let it go when it’s valuation is in a trough.

I won’t have a lot of patience with this one, but as long as insiders continue to buy shares, I’m comfortable looking for a buy-out.

PPHM – Peregrine Pharmaceuticals

This small biopharmaceutical company has been around a long time and burned through a lot of cash. It has a couple of drug candidates that are nearing completion of phase II trials. Progress reports appear positive; however, I am by no means qualified to judge the scientific data. What I can tell is that one director of the company has loaded up on the shares and if there is anything to what they’re relaying about their products, there is significant upside for this company. The company’s drug candidates can be used in combination with other drugs for potentially a wide range of cancers.

Another aspect of this company I like is that while they are moving these products through the pipeline, they also operate a subsidiary that performs contract manufacturing services for biotechnology and biopharmaceutical companies. This, in theory, will help them generate some cash-flow and reduce future shareholder dilution; a concern for a company with over 51M shares outstanding already.

I’m holding a modest position in this company and keeping a close watch on the activity. Something will need to happen over the next 12 months in terms of partnering for phase III trials. I don’t think they have the resources to go it alone.

CAMP – Calamp

Calamp, formerly known as California Amplifier, has been around a long time. The company describes itself as a “provider of wireless communications solutions that enable anytime/anywhere access to critical
data and content.” The products of theirs you would be most famaliar with are the ubiquitous satellite TV receptors you see on every other house.

Back in 2007, the defect in one of the products they were shipping to a major customer was discovered, resulting in the halting of orders. It was a big blow to the company and although sales have resumed with this customer, they have yet to get back to where they had been.

Now, you might think that this market is saturated and the prospects for growth are therefore limited. In part this is true, however, as cable, internet, and satellite providers rush to provide more and more services, the need for new equipment for existing customers is created.

Additionally, they have other segments they participate in included public service communications, industrial monitoring and most recently getting involved in “smart grid” initiatives (adding intelligence to the electrical grid). The company recently (4/5/99) announced three new supply contracts worth $15.3 million within the rail, public safety, and utility smart grid sectors. To put this in perspective, the company had total revenues of $98 million in its last fiscal year.

LIME – Lime Energy
This company is involved in helping businesses and governments improve their energy efficiency. This is an industry that is still very fragmented and LIME is helping to consolidate it through acquisitions.

There is tremendous focus on identifying and developing alternate and new sources of energy to meet future worldwide demand. The less glamorous side of this coin is reducing an organization’s costs through energy efficiency. Demand for this service is not likely to reverse anytime soon as more of the world joins the devleoped nations as large energy consumers.

In spite of these longer term trends, delays by some customers have slowed things at LIME recently. Some of this is attributable to the bureaucracy related to the stimulus plan. They are expecting (hoping?) to see stimulus related revenue pick up in the latter half of the year. The slowdown now could represent a good entry point (I’m currently sitting at a modest loss).

Another variable is that recent improvements in drilling for natural gas has helped drive the cost of natural gas down significantly over the last six months. This is probably not beneficial to a company such as LIME where you would expect demand to be impacted by people’s cost of energy. It could be a while before the impact of utilities and other enterprises switching to natural gas as their primary energy source will bring the cost of natural gas back in line with its historical relationship with the price of oil.

So LIME is definitely a long term prospect. One thing I like about them that I think is largely lost in all the noise of energy is that they are also involved in helping customers in the conservation of water. I think that water conservation will eventually become more critical than energy efficiency.

T/VZ – AT&T/Verizon

Here’s my take on these two communications companies. First and foremost, they’re stable. Even when the bottom of the market was falling out from under it a year ago, these stocks only dropped a few dollars from where they are today. Throw in a dividend in the 6% range and you’ve got a certain degree of security built right in.

But are these really stodgy old utility-like companies? I suppose they could be. The cell phone market is largely saturated at this point and wireline service is on the decline, so yes, there is some reason to expect low growth. But there’s one thing that I’m not sure people are pricing into their valuation at this point. These companies are not just internet companies, they ARE the internet. Between them, they operate a large percentage of the actual fiber that makes up the internet around the world.

I know there is a strong desire to keep the internet open and free for anyone and everyone to use; however, I have a hard time seeing how the Googles and Netflixes of the world can expect to be able to throw out immense traffic onto the internet and not be expected to pay for it in some manner. So are AT&T and Verizon just expected to continually lay fiber and upgrade their networks for free so that people can watch Netflix movies without disruption? Someone is going to have to pay in some way, whether it be the companies who are streaming large quantities of data or the consumers who are consuming them. Google’s planned high-speed test plan in certain metro areas aside, the barriers to entry to building out the internet are immense and I don’t see anyone jumping in to challenge the current owners and operators of the internet.

Going forward, I see two things of value regarding the internet. One is the content. Without content that people are interested in, the internet is only a giant email and phone network. The other thing of value is owning the actual conduit of the internet. The Tier-1 carriers to be exact. These are the companies that own and operate the internet backbone.

If I were a Netflix shareholder (which I’m not), I’d be a little concerned about my business model. Netflix is a company that takes other people’s content and delivers it to customers on another company’s network. They are nothing more than an intermediary and I predict that without merging with someone, their days are numbered.

To be sure, there are regulatory and political obstacles facing AT&T and Verizon, but at the end of the day I don’t see how they get the shaft and end up simply the maintaining of the internet for everyone else to exploit and make money on.

There are other Tier-1 carriers such as Sprint, Quest and Level 3. I’ve got my eyes on them as well, but these are less stable and also carry a lot of debt. I would not be surprise to see them merge with other companies at some point because of their assets however.

Entry Filed under: Finance