Author: Gehman Capital
Covestor model: Undervalued Growth Companies
Disclosure: Long ANAD, DRWI, EZCH, FNSR, LSCC, MVIS
I believe that the stock market currently offers tremendous value to investors.
The world is awash in cash. Interest rates are low. Corporations are extremely liquid and are reporting very strong earnings. Even individuals are paying down debt and saving money. We have survived the Japanese Earthquake, the Washington budget fiasco, and high gasoline prices. The stock market has taken its summer dive, but I believe that within a month or two investors will be very happy to have purchased stocks at these levels.
The stocks in the Gehman Undervalued Growth Companies portfolio are extremely volatile. They have been battered and beaten – but I believe the stories are still intact.
EZChip Semiconductor Ltd. (NASDAQ:EZCH)
On August 3, EZCH reported Q2, 2011 earnings. The stock price has been on a roller coaster, but I believe the fundamental news is all good. The company confirmed earlier projections that their NP-4 chip is in the final stages of testing, and is expected to go into production in the last half of 2011. Eli Fruchter, CEO, confirmed again that profit margins on the NP-4 chips should be significantly higher than margins on both the NP-2 and NP-3. The NP-5 is expected to go into production in 2014 and should have higher capabilities and even higher margins than the NP-4 chip. EZCH expects all NP-4 customers to migrate to the MP-5 because their significant software expenses can be utilized. Fruchter said the way it looks today, all customers will have to use the NP-5 chip if they want to have a competitive product. EZCH also announced that the market for their chips is growing twice as fast as they expected.
Anadigics, Inc (NASDAQ: ANAD)
The company has developed sophisticated chips that occupy a niche in the market place. They built some extremely strong customer relationships – especially with Qualcomm.
Unfortunately, ANAD overextended and tried to build a plant in China. Qualcomm products were selling like hotcakes, but ANAD could not supply the chips. Qualcomm found some other suppliers.
ANAD management has changed several times, but I believe the company now has a good plan. They are developing new chips and rebuilding customer relationships. Hopefully this summer will be their low point and they will grow from here.
DragonWave, Inc (NASDAQ: DRWI)
DRWI supplies extremely high quality microwave broadband Ethernet/IP radio transmission equipment for cell towers. Clearwire (partially owned by Sprint) developed a plan to build a national (US) microwave network. DRWI supplied the great majority of Clearwire’s transmmission equipment, but unfortunately Clearwire ran out of money.
Sprint now has a plan to build its next-generation network. Fiber will be used in heavy density areas, but microwave will be used in less dense areas.
DRWI has a proven product that is significantly cheaper to install in low density areas than fiber. The company is expected to participate in a good portion of the Sprint network and also has projects developing in Latin America, Russia and India. I expect that DRWI will see a significant flow of business in the second half of 2011.
Finisar Corporation (NASDAQ: FNSR)
FNSR reported that stockpiles of inventory reduced the demand for their products. JDSU is their largest competitor. But I’m confident that demand for fiber optic products will continue to grow significantly. FNSR could have another quarter of reduced sales and because the company has a high fixed cost base, I expect the next quarter’s earnings will not be fantastic. Going forward, however, FNSR products will be in demand and I’m hopeful that the stock price will reflect that.
Lattice Semiconductor Corp (NASDAQ: LSCC)
LSCC is a niche player in the chip market, under the radar of some of the larger companies. They now work closely with specific customers to develop chips for special purposes. While I’m confident that this strategy should allow them to make significant profits, the stock has suffered recently with the broader market.
Microvision Inc (NASDAQ: MVIS)
Exciting developments with MVIS. Unfortunately, it has taken so long to develop their superior product that they keep selling equity to raise money to “stay in the game.”
The company announced that Intel will distribute and re-sell their SHOWWX+ product. This is the only pico projector that will slip in a shirt pocket and offers big screen, focus free display. SHOWWX easily connects with most electronic components, including most Apple products.
MVIS also announced an agreement with a major auto manufacturer to develop a projector that will display dashboard information on the car windshield. The developments at MVIS are very positive. Hopefully, product sales will come very quickly.
Quicklogic Corp (NASDAQ: QUIK)
Excitement is in the air with this name. QUIK is finally gaining commercial traction on its VEE/DPO technology. This technology reduces power consumption and also enhances the ability to read electronic products in the sun and shade. QUIK’s legacy business will likely suffer for a few quarters because of inventory digestion, but the VEE/DPO business should fill in the gap.
The first VEE/DPO product is a “tablet-phone” called the Pantech Vega 5 that is being marketed in South Korea. Hopefully customer acceptance will encourage them to make the product available worldwide. Also, QUIK announced that they are working with a manufacturer of a smartphone that could reach the market in Q4, 2011. Product reviews are very positive. Hopefully the stock price will also respond positively.
Tower Semiconductor Ltd (NASDAQ: TSEM)
TSEM fabricates chips. The company is now well-run and there is currently a trend for chip developers to outsource the manufacture of chips, as new chip manufacturing facilities are extremely expensive. The major problem with the stock is the capital notes that were sold to keep the company out of bankruptcy years ago. Eventually, these notes will probably be retired with some stock dilution, but that amount of dilution is still uncertain. In the meantime, we wait with what I consider a very cheap stock.
Towerstream Corp (NASDAQ: TWER)
TWER has three business models:
1. Wireless Enterprise Broadband Networks (legacy business)
2. WiFi Offload System.
3. Absorbing smaller Wireless Enterprise Networks with high fixed costs in the larger, cost efficient TWER Network.
In July, 2011, TWER did a capital raise through an equity offering. The stock was only sold to institutions and was priced below market price at that time. The pricing of the stock offering was the bad news, but the opportunities the capital presents to the company are significant.
Wave Systems Corp (NASDAQ: WAVX)
Another stock where we wait. The foundation has been laid:
1. A strong installed base of Trusted Computing Chips has been established on corporate computers.
2. Successful hacking attacks are being made on large corporations (Sony, Lockhead, etc.).
3. Trusted Computing is being endorsed by some government and private agencies as a means to increase computer security.
WAVX has developed software that allows companies to monitor their entire computer system. Only “trusted” computers are allowed on the system. Companies pay WAVX a fee to use their software. WAVX has written some contracts, but every negotiation is like pulling teeth. WAVX is hopeful that the need for security on mobile devices will create increased demand for their products. The company has a positive cash flow now – but any money they make is plowed back into development expenses. We wait.
XOMA Ltd. (NASDAQ: XOMA)
I don’t own many biotech stocks anymore. The rewards of success can be significant, but the waiting and success rates can be very painful.
XOMA has a number of drugs in development. Their key drug is XOMA 052 that could soon be going into phase 3 clinical trials. Any positive results could send the stock up significantly. I will therefore maintain my small position.
The market for small cap technology stocks was extremely “heavy” in July. I’m hopeful that my investments will benefit from the tremendous growth in demand for products related to internet activity. Each company has its own story, but my portfolio is built on the assumption that fundamentals should eventually drive the strong companies higher in price.
