Tech Deep Values Part I: Sycamore Networks (SCMR)

Sycamore Networks Inc (SCMR)- Growth in an Asset Value Play
Sycamore develops and markets optical networking products for telecommunications service providers worldwide. They make intelligent bandwidth management products, optical switches, multiservice cross-connects, access platforms, and access gateways.

At a market cap of $1.14 Billion or $4.05 per share the stock is almost selling for its net current assets of $903.85 Mil. Net current assets is calculated by taking current assets and subtracting all liabilities. What is so special about this form of valuation you ask? These current assets are the most liquid(easily converted to cash) and are a rough liquidation value. Typically, companies in financial distress or that have very weak prospects trade below this level. They mostly aren't companies like Sycamore that is piling cash and has total assets of just over $1 billion and total liabilities of only $60 million. They also just have $1.6 million in long-term debt. This company isn't seeing financial trouble any time soon.

Revenue growth has been really good growing 78% for the year ending July 2007. Sprint Corporation and Vodafone Group PLC account for 53% and 16% of revenue. They have generated some nice free cash with $18 mil in free cash flow last fiscal and $19 million in 2006, an improvement from the red. Their balance sheet is flush with cash! They have cash and cash equivalents of $924.8 million as of July 31, 2007.

Last fiscal years loss was related to their acquisition of Eastern Research which they paid in all cash for $80 million. This should be a temporary not future set-back as earnings are expected to come in at $.15 a share this year and $.18 next year putting the stock at a forward PE multiple of 22. They are expected to grow at 15% a year going forward. The purchase of Eastern Research will allow them to diversify, increase revenue and grow their customer base.

Companies this solid with discounts to asset values don't come around to often. This company is worth picking up and adding to a diversified portfolio below its net current asset value of $3.22 per share.




full disclosure: no position in Sycamore Networks Inc. (SCMR) at the time of this writing.

Two Similiar Retailers, Two Different Stories: Best Buy vs. Circuit City

Trying to pick a winner in today's market can be a complicated task. Many things need to be considered and taken into account before making an investment decision. One of the most important of these factors is the competitive landscape. It cannot be ignored no matter how great an investment a stock looks.
Lets compare two electronics retailers, Best Buy (BBY) and Circuit City (CC).

Profitability
Best buys trailing PE is 16 and the price to earnings growth (PEG) is rather low at .98. Circuit City is in the red. Circuit City has grown revenues since 2004 but were only profitable in 2005 and 2006.

What Is Really Important
One of the best indicators of a successful company is when management can grow shareholder equity year over year. Circuit City has had declining shareholder equity over the last 3 years while Best Buy has compounded shareholder equity at over 30% annually from 2003 to 2006.

Key Comparison
Best Buy vs Circuit City

inventory turnover 6.6, 5
return on equity 30% , -8.36

The important thing to take away from this is Circuit City is taking longer to sell items on its shelves and hurting as a result due to its low inventory turnover.

Competitive Landscape
Compared to its rivals like Circuit City and Radioshack, Best Buy is doing fantastic. When you are a retail company and your competitor fires its most loyal, best floor employees your in a good spot. Best Buy was in this position earlier this year when Circuit City layed off thousands of its highest paid employees in an effort to reduce costs.

The Bottom Line
Best Buy is better than its competition and is attractively priced. An argument against Best Buy says Walmart,Sam's Club,Costco have more buying power and can sell cheaper electronics. It is a valid point but it isn't comparing grapefruit to grapefruit. Those stores aren't one stop, all your electronics needs destinations. Even if they have the lower prices on a handful of merchandise Best Buy has competitive advantages like The Geek Squad and managements ability to change in response to customers needs. Management has proven to be innovative. Furthermore, they are putting in Apple mini stores in a handful of Best Buy's. Best Buy's valuation and future outlook are strong. More importantly the competitive landscape has swayed in its favor. In conclusion, the smart investors choice is to go long Best Buy (BBY) and short Circuit City (CC).

This article is for the collegeanalysts.com contest. It typically isn't my intention to take short positions in stocks, especially when there is a possiblitiy of a buyout or small turnaround as there may be in Circuit City.

Best Buy against Circuit City Contest Update

full disclosure: author has no position in BBY or CC

Jack in the Box: Tasty Bargain Served By The Market

Jack in the Box (JBX)
Jack in the Box is a fast food company that has been around since the early 50s. They offer a variety of hamburgers,salads,tacos and desserts. The majority of Jack in the Box's locations are in California representing 900 out of the 2,100 that they operate according to their website. They are in 17 states including Hawaii. There is a reason I am bringing this up. Look at how many more stores they can open and markets they haven't even stepped foot in! Some of their competitors like McDonald's are basically saturated.

Keeping Things Simple
It is nice to see an annual report that doesn't try to spin everything to make the companies prospects look as amazing as possible. In the annual report on the fifth page they show diluted eps growth instead of eps growth. They are not trying to sugar-coat anything. The report is a little flashy and colorful but I can forgive them for this. I almost forgot one of the best parts of Jack in the Box, Qdoba Mexican grill. This is a quick serve type restaurant where you can customize your burritos and tacos before sitting down to dine or carry it out. Qdoba has higher prices but the quality is great. Jack in the Box has a value menu as well and relatively inexpensive items to appeal to a wide spectrum of fast-food customers.

Future Outlook
People get hungry 3 times a day so they should have a long-term ability to stay in business. The industry is very competitive but Jack in the Box satisfies its customers with a value priced variety of offerings. Both of their restaurants serve Mexican-American foods which I see as a good thing as the country slowly blends Hispanic food into its culture. The Hispanic population in the U.S. is growing enormously. The food in the future of the U.S. will be a blend of the new and old culture, just look at the history of other countries.

Fundamentals
Same store sales growth is the most important measure because its easy to just open new stores for revenue growth without growing the existing stores. Both have growing same store sales. Most recently, the company expects a 5.5 percent to 6 percent same-store sales rise at Jack in the Box outlets and a 3 percent to 5 percent same-store sales rise at Qdoba restaurants. They have also increased their guidance for fiscal 07' to between $3.62 and $3.66 per share.

Jack in the Box
market cap 1.93 billion*
return on equity 23%
total debt to equity .86
forward PE 15*

*low numbers.

Valuation vs Peers

Burger king
market cap 3.48 billion
return on equity 23%
total debt to equity 1.32
forward PE 17

McDonald's
market cap 66 billion
return on equity 10%
total debt to equity .52
forward PE 18

Yum Brands
market cap 16.9 billion
return on equity 60%
total debt to equity 1.64
forward PE 17

This kind of relative valuation to its peers with earnings multiples is only a piece of the pie in considering a company for investing. As an example of its limits as the sole method of valuation, look at the valuations of the tech companies like Cisco CSCO and Lucent ALU just before the market crash in 2000. To pick the most "undervalued" of those based on price to earnings would have been disastrous. CSCO after sporting a PE ratio of over 140 in 2000 lost over 70% of its value. Some professionals will use this peer comparison as the meat of their analysis. That analysis is incomplete. The company must be compared of course to its competitors but to much emphasis on relative valuation is dangerous.

Opportunity Cost
The risk free long-term government bond yield is 4.75%. At a an inverse PE of 15 Jack in the Box has an earnings yield of 6% right now and very conservative growth of at least 9% per year. Flip the PE and you get a more meaningful ratio.


Bottom Line
They can grow earnings just 10% a year buy entering those new markets for 5 years. As they do this they should have eps of at least $5.77 in 2012 assuming this growth. If then the stock trades at just a PE multiple of 15 then there is a 48% return or an 8% compounded annual return on an investment at $58 a share. If the market is feeling a little more ecstatic a multiple of 20 could easily be attained then the return is 98% and the yearly compounded return is 14%. Jack in the Box is a buy below $58 a share.

Welcome to Stock Pursuit

full disclosure: no position in JBX

Stock Festival

Welcome to a highly fueled edition of The Festival of Stocks #48! There are some great articles in this weeks Festival of Stocks. Let's get to the submissions.


Eric Schleien presents The Dark Side Of Warren Buffett posted at ValueSeeker.Net. I really enjoyed this article about Warren Buffett. It keeps perceptions of him in perspective and shows that he is human and has made mistakes among other things.


Leon Gettler presents The bear turns global posted at Sox First. The fallout from the US mortgage mess continues to hurt the US market and beyond. Clearly, issues once specific to the US are now flowing through to other markets as banks force borrowers to sell assets and investors scramble away from risk. And it will get worse.


George Courtney jr presents Despite Volatility, Stocks Are a Good Deal posted at The Authentic Bartender Blog.
Makes the case though stocks are still near all-time highs, they are nevertheless bargain-priced. Second, the credit crisis that has triggered the recent volatility really isn't all that threatening.


FMF presents Another Vote for Index Funds posted at Free Money Finance. Another reason to invest in index funds. Looks at what legendary fund manager Bill Miller has to say and makes some good common sense conclusions about index funds vs. actively managed funds.
I myself like index funds/mutual funds plus a handful of quality stocks for the competent individual investor.


Babak presents Time To Consider The Battered Financial Sector posted at Trader's Narrative. Time to scoop up cheap and beaten down shares in the financial sector (banks, brokers, insurance co's). After the recent market weakness this sector has gotten very cheap. Time to buy great companies like Goldman Sachs, Citigroup and the like at fire sale prices.


James presents Analyzing Some of the New Top 25: Shoes,Oil,and... His site that I highly recommend College Analysts. Here he looks at Steven Madden (SHOO), Valero (VLO), and New Frontier Media (NOOF), all of which he believes are solid buys given their low valuations. These are from a model that does a quantitative evaluation of about 1,500 stocks. The model generates a power ranking of stocks. The model is very useful for generating leads into some excellent and potentially under-priced businesses.


Blake Morphis presents Mad Money - Defense - ATK and RTN | Mad Money and Fast Money Recap & Fan Site posted at Mad Money and Fast Money Recap & Fan Site. Given the recent market volatility, Jim's recent recommendation on the new bull market in defense stocks.


Silicon Valley Blogger presents Shrug Off A Stock Market Slide! 7 Surefire Ways To Handle A Market Fall posted at The Digerati Life. Some good advice on how to handle these falling markets. Just a couple of the topics hit on are to not listen to the media hype and think like a contrarian. Excellent article here.


The Mad Money Analyst presents Option Premium Valuation: Time and Intrinsic Value posted at The Mad Money Analyst. A good review of how to effectively evaluate options premiums. This gives investors a clearer view of what exactly effects prices and premiums of options. Markets have lately been increasingly volatile and this will help you find those right entry points and calculate volatility profitability. Make more on your investments.


Super Saver presents 7/30/07 Stock Purchase Update - After The Carnage posted at My Wealth Builder. Some recent stocks they picked up during the market fall. This article like so many others in this weeks festival have a recurring theme that lower stock prices are sometimes a welcomed opportunity for the intelligent investor. A depressed Mr. Market can give us great opportunities sometimes in good businesses like Ben Graham said.


Steve Faber presents - Make Gains From the Chinese and Indian Markets Without Actually Investing There posted at Debt Free.


Matthew Paulson presents When You Invest at the Bottom, When Do You Sell? posted at Getting Green.


Eric Stanley presents Two Investment Mistakes posted at Personal Finance Blog Articles. Are you finding good investments for your new money? Or are you doing the right thing and also finding better investments for your OLD money?

Shadox presents SEC Fines? Double Whammy for Investors posted at Money and Such. Some SEC fines just don't make sense, since they are punishing the victims of the crime. This article is my analysis of the situation.

Personal Finance

Tim Ramsey presents How to Pay Off Credit Card Bills posted at My Debt Relief Blog. Trapped in credit card debt? You can get out of the credit card trap with my sure-fire way to pay off those pesky bills.


Eric Hudin presents My Estate Planning Career Blog » Blog Archive » Selecting a Good Trustee - Factors to Consider When Choosing a Trustee posted at My Estate Planning Career Blog. Wills and Trusts are an important financial vehicle for transferring wealth. But who should manage your trust? I'll tell you how to pick the best person.


Aaron Wakling presents Credit Cards - A Necessary Evil posted at The Credit & Credit Card Blog. Well you probabaly already know the answer to this one. I cover good uses for credit cards and bad ones. Its a good article for anyone concerned about if they should use their credit cards to make purchases.

Options and Trading

Dax Desai presents Fundamental Rule of Day Trading: Preservation of Capital posted at Dax Desai. Explains the importance of Preservation of Capital when day trading and gives examples of right/wrong ways of day trading.


Nabloid.com presents The Power of Options » Nabloid on Investing posted at Nabloid on Investing. Takes a look at the advantages of options.


Dax Desai presents Fundamental Rule of Day Trading: Preservation of Capital posted at Dax Desai. 1st in a series: Rules of Day Trading - Preserve Capital


Alvaro Fernandez presents Lifelong Learning for Top Performance posted at Brain Fitness Blog. Great advice from a trading guru.



Submit your best articles on stock market related topics for future festivals. This concludes another edition of the Festival of Stocks.

Baby Boomer Timeshares - Silver Leaf (SVLF)

Originally written November 2008, before the private equity buyout Silver Leaf Resorts is another timeshare and potential baby boomer stock like ILX that I mentioned in yesterdays article. Silver Leaf grew revenue in the first quarter this year at a little over 30% and diluted net income per share came in at $.17 a share vs. $.16. They grew shareholder equity 4% year over year. Earnings have been growing a little better than ILX over the past few years.

They have a bit of long term debt with notes payable and capital lease obligations of $276.765 mil. They have 6% $3.796 mil notes due this year,10.5% notes due in 2008 of $2.146 mil and $24.6 mil at 8% in 2010. They have a healthy current ratio of 1.44.

The stock has been in full bull mode and they haven't hesitated in issuing stock options and buying back shares because of it. This I don't like. They have been issuing shares which are currently at about $37 million from $11 million in 97'. Management has done a pretty good job over the last three years growing net margins, shareholder equity and earnings. The stock is up over 400% since early 2004.

The stock is currently trading for about $6.45 a share and has a trailing PE multiple of about 11 and a forward multiple of 9. It is trading for about 1.5 times book value. The valuations look compelling and the industry demand good. Baby boomers are retiring and not looking to spend money outside of the US with the weak dollar. In an interview on theStreet.com the CEO said they are in close driving distance with customers and gas prices aren't a big factor in the business.



disclosure: no position in Silverleaf Resorts, Inc.(SVLF)

Festival of Stocks #44

Welcome to the 44th edition of the Festival of Stocks! A blog carnival dedicated to highlighting bloggers best posts on stock market related topics. It is my pleasure to host the Festival of Stocks for the first time at Treasure Hunting Quest.


This Week’s Submissions

Leon Gettler presents Top 15 rules of investment posted at Sox First. about the top 15 rules for investing. And you can start off by checking the gray hairs on your financial advisor. If you see any, it means they've been around for a few cycles. Also, save your loyalty for your football team, not stocks.


Fat Pitch Financials presents Valuing the Tyco Spinoffs posted at Fat Pitch Financials. An estimate of the intrinsic values of the three companies
that formed from the recent Tyco International spinoff.


Matthew Paulson presents Single Stocks or Mutual Funds? posted at Getting Green. that shows which vehicle is more appropriate by weighing the risk and rewards for individual investors in choosing funds vs. stocks.


Average Joe presents Stock Analysis - Helix Energy Solutions Group Inc (NYSE:HLX) posted at Investment Jungle a look at Helix Energy Solutions Group (HLX) which is trading at a deep discount based on their analysis.


Average Joe presents Dividend Analysis - Washington Mutual Inc (NYSE:WM) posted at Dividends Matter an analysis of Washington Mutual Inc. which currently has a dividend yield of 5.03%.


The Skilled Investor presents Lifetime investment assets of renters -- with investment cost improvements posted at THE SKILLED INVESTOR Blog as Fran and Fred expect to pay investment costs that are typical of an average investor. This graphic is one of the reasons why The Skilled Investor keeps harping about reducing investment expenses. Even average investment costs are simply outrageous, and they can be the difference between success and failure of a family's lifetime financial plan.


Silicon Valley Blogger presents Our Investment Portfolio Update: Strong Gains Due To Stock Market Record Performance posted at The Digerati Life.
How their portfolio has fared in the stock market and discussion of their stock market investment strategies.


Rick Konrad presents Value Creation or Destruction-As Simple as (1), (2), (3)- Finding the Value Direction! posted at Value Discipline. It is about developing some insight into value creation or destruction by looking at three components of free cash flow.


Tyler presents Home Sweet Home Depot posted at Dividend Money. A look at Home Depot as a long term dividend growth investment.


KCLau presents Why Invest in Land? posted at KCLau's Money Tips. Most people think that land investment is only for real estate developers, who buy big parcels of land for commercial, or residential development. But actually, investing in land is one of the sound investment strategies available for common investor, both large and small.


Eric presents What is a Value Stock? posted at Stock Market Prognosticator with a theoretical argument on what constitutes a Vaue Stock.


Mark submits Lessons in Contrarian Investing from Peter Lynch posted at College Analysts.A look at one of famous portfolio manager Peter Lynch's investment decisions and what stocks might qualify today. James who runs College Analysts is a value investor himself.


Well, thats it for this weeks Festival of Stocks. I hope you enjoyed the submissions. Next weeks Festival of Stocks will be at Five Percent Stocks. Support future festivals as a host or contribute here.



Bookmark this site here!

Nyer Medical Group Inc. (NYER) Below Net Current Assets NCAV

I found this company when I was looking in the Pharmacy industry awhile back. It was up 12% today on about triple usual volume. Nothing particular jumped out when I found them weeks ago looking at some basic figures except that it was reasonably priced and I was looking for a small-capper rather than a giant like CVS,WAG,RAD,WMT.

NYER has been paying long-term debt down all of 06' and 07.' EBITDA 8 times enterprise value, insiders have 30% stake. On that note about insider ownership, many acclaimed and smart investors take it into account. But who cares? Many investors pay close attention to insider ownership along with their buying and selling and try to size up the company as a worse or better investment because of it. First, on the buying and selling, it is trivial unless one knows for a fact what reason management sold or bought. Maybe they sold to pay their kids tuition. Would that effect the decision to buy the company? Maybe management is blinded by their own vision of the company even if it has no chance of success and they pick up a huge block of shares.

Isn't it a messed up society if we assume that only the managers with large stakes in the companies they manage will look out for shareholders? How about integrity, work ethic and honesty? Where has it gone? I still believe there are great management even if they don't have a large ownership or any at all for that matter.

Disclosure: no position in NYER

Lessons in Contrarian Investing from Peter Lynch and Chrysler

This article is about famous portfolio manager Peter Lynch who headed the Fidelity Magellan Fund from 1977 to 1990. He began with $20 million in assets and grew into the largest fund with $13 billion in assets and still delivered over a 2,700% return during his time at the helm, over a 29% annual return. With such a large fund he may have actually bought more stocks than Samuel L. Jackson has starred in movies. Maybe. He is mistakenly known for his small-cap growth stocks. He invested in all kinds of industries and companies. Many of his investments like buying Volvo when it was selling for only its cash in the bank would be considered more value oriented. One of his keys to his success, he told Louis Rukeyser of Wall Street Week was he saw 200 companies and checked out 700 annual reports a year.

In the Spring of 1982 most professional money managers thought Chrysler the then number three auto maker was going to go bankrupt. Lynch thought otherwise and was not scared to go against the crowd. He did an enormous amount of scuttlebutt in companies. Seeing $1 billion on Chrysler's balance sheet in cash and government loan support, combined with great new products he bet against other investors fears in the hated automaker. He put the maximum 5% of his assets into Chrysler common stock. He said he would have put up to 15 to 20% if he could have.

Chrysler doubled after eight months thanks largely to the first mini-van and was a 50 bagger(increased 50 fold) by 1987. What can we learn from all this? By not making decisions based on what others are doing and using good fundamental analysis to find cheap beaten down stocks is a good foundation to investment success.


"Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sands of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now."

-Peter Lynch

World Equity Markets

Right now I'm bearish on the U.S. equity markets over the next 1 to 3 years. With escalating commodity prices, inflation, rising bond yields, unfavorable interest rates and likely Fed tightening I think the US markets and economy will flat-line or grow slightly. Of course lower stock prices mean better bargains and as investors flee short-term a wise investor buys long-term. Every bull market has its bear. The more overextended the bull is the more devasting the fall. History doesn't repeat itself, but it does rhyme.

I believe Americans are slightly underexposed to foreign markets. Is it a coincidence that the majority of their investments are in the country that gains from this allocation? All the huge long-term future growth is in emerging markets like India,China,Russia,Latin America and parts of Asia. Furthermore, the U.S. equity markets have returned around 7% this year compared to almost double that in other countries. The U.S. GDP is growing at around 3%. China's GDP is growing at 12-13%. Bursting of a bubble in China will present great long-term buying opportunities. This closed end fund Claymore/BNY BRIC (EEB) has no U.S. holdings and is allocated heavily in Brazil 47% of assets, Hong Kong 26%,India 13, China 7, Russia 5%. This all India vehicle isn't an etf but a debt security that tracks the Indian index. iPath MSCI India Index ETN NYSE:INP. It is not actively managed and is one of the best vehicles to invest in India. A guy in India just recommended to me ICICI Bank and a construction company DLF. To bad DLF isn't an ADR.

Lazare Kaplan International Inc. (LKI)

Maybe a hidden gem? Lazare is in the diamond business and is selling for less than its current assets minus all debts. About half of those assets are diamonds I assume in inventory and surely they have some worth in these assets. So if the company is selling for close to these hard assets not even including any other claims or plant property and equipment isn't the future growth of earnings and cash flow for this company basically free here. Looks like it could be a steal at $8.05. They've had some trouble with a joint venture and earnings recently came in lower than expected at a $.01 a share. Probably not a long-term setback.

*not recommending as a buy here.

Boss Holdings BSHI

In looking for a red tag sale on Wallstreet recently I've come across some interesting companies selling for less than their current assets minus all liabilities. Most of them don't make money consistently so maybe you could make the argument that they don't deserve to sell for book value. This company, however has been profitable more consistently. The business is pretty straight forward they sell gloves, boots, and rainwear products primarily to retailers, including convenience stores, mass merchandisers, and hardware and grocery stores; and industrial customers comprising companies operating in the agricultural, automotive, energy, lumber, and construction industries. They've been in business for decades. The only major macro obstacle I could foresee is if companies that manufacture with cheaper labor say in China and kill their margins. They are working on improving margins though and sales are more flat than hugely down with the exception of one segment that is growing. At $7.35 it is selling for a cheap valuation, however, it looks more attractive at $6 or $5. Had one picked up a company I wrote about, RCMT at $6.60 there was a 20% return in just some weeks.

RCM Technologies Inc. (RCMT

It looked pretty cheap by way of some valuation multiples when I found it a few weeks or so ago and wrote briefly on them. The stock has been pretty active in recent days, up 5% for one day and is trading for $7 and change from $6.06 in the past couple weeks or so. I like that they have free cash flow, profit margins aren't the best but I suspect customers may be loyal and revenue pretty consistent. This one deserves a closer look at the overall business and competition to see if people are missing something and it is in fact undervalued. It is a tiny company. I'm not sure what good it would do to compare its valuation to the larger competitors or use a discounted cash flow model because its operating results are pretty sporadic in such a competitive industry.

I've had a lot of success spotting undervalued larger companies with sustainable competitive advantages that are undervalued because often just by looking at the financial statements paying attention to obvious things and looking at valuation multiples like pe, pe/pe growth, roe, etc. you can get a rough picture about whether or not it is cheap because it is being avoided for good reasons or stupid reasons like short-term fears or following the herd.