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04/06/2005

Virtual Stock Portfolio Update: 3/05

In March my virtual stock portfolio had a relatively decent month with the average position gaining 1.1% compared to the NASDAQ's 2.6% decline.  However the overall portfolio on a position weighted basis was down 0.4% thanks to weak performances from one of it's previous big winners (SportingBet).  For all of Q1, the portfolio was up an 22.9% compared to the NASDAQ's 8.1% decline thanks to very strong performances by my online gambling related longs, combined with solid 10-20% gains by almost all of my shorts.   Of the 12 positions I had in the quarter 8 posted postive returns.

One painful thing I have noted is that I am very bad when it comes to the timing of exiting my positions.  Of the 5 positions I have exited since I started tracking this portfolio in 2/04, all five have generated positive returns since I exited.  3 of the 4 positions are up big (BLUE-L 32%, CNQR-S 32%, RSAS-S 41%).  RSAS is particularly frustrating as I covered that short last month (after making a modest gain) only to have them announce yesterday that they were missing their numbers yet again and having the stock trade down 29%. Ugg.

One of things I mentioned in my year end review is that I have been too slow to sell some of my losers and it is with this in mind that I am making some changes to my portfolio this month.  First off, I am getting out of my long positions in both ACTU and SUMT.  ACTU was a turn-around story was SUMT was a merger synergy story.  While both stocks still trade at very attractive multiples and I like the markets they are in, I don't see a lot of near term catalysts for the stocks and they have both clearly been abandoned by the institutional market.  I might come back to them later, but for now there are better fish in the sea.  I am adding just one new stock, Microstrategy, to the portfolio which will give me an equal # of longs and shorts in the portfolio.

Long Picks
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: This is supposedly a turn around story in the hot business intelligence space. Reporting is becoming more important as more users get access to core business data.   The stock was supposed to recover as a new product release cycle drove license revenues.
Performance: Since 1/26/04: -31.8%, Mar vs. Feb: -11.1%
Comments: Continued poor performance with decreasing trading volume leads me to finally cut and run on this stock.  I still like the valuation and the turn-around potential, but no one else appears to so rather than fight the tape I am going to try and find a long in the BI space with a little more life in it.

Company: SumTotal Ticker: SUMT
Sub-sector: E-Learning
Investment Thesis: SumTotal was formed by the merger of Docent and Click2Learn which closed in mid-March 04. I liked Docent before the merger because as it was relatively cheap, had good products, and was in a space still seeing good corporate spending (E-Learning).
Performance: Since 1/26/04: -29.2%, Mar vs. Feb: -3.7%
Comments: The stock had a decent Q4 report but quickly gave up much of the ground it recovered indicating very weak support and a lot of stand-by sellers.  The whole e-learning space is in the dog house thanks to the collaspse of Skilsoft.  No sense continuing to fight the trend at both a macro and micro level so I am selling out and moving on.

Company: SPSS Ticker: SPSS
Sub-sector: Business Intelligence
Investment Thesis: SPSS is another player in the business intelligence space with a particular emphasis on predictive analytics, something that is particularly hot right now. The stock has been battered by a restructuring that the company went through last year as well as an accounting restatement. My thesis is that the new product set is strong and the accounting trouble is overblown.
Performance: Since 4/30/04: 22.3% Mar vs. Feb: -10.4%
Comments: The stock gave up some ground this month after have a strong Feb/Jan.  I will still hold, but it looks like it may be capped out in the 25-30X consensus EPS range so further price appreciation will have to be driven by upward EPS revisions.  I'll wait one more earnings cycle to see if this materilizes and then pocket what the gains to date.

Company: Stellent Ticker: STEL
Sub-sector: Content Management
Investment Thesis: Stellent is a relatively sleepy, but well established, content management company that is attractively priced. Q1 was the first quarter of positive cash flow in awhile and Q2 saw pro forma, but not GAAP positive, EPS. With $20-25M/quarter in revenues, Stellent has a lot of room to work on expenses and should be able to return the company to solid GAAP profitability at which point the stock should recover from its current 1.5X ev/sales to something much closer to 2X.
Performance: Since 6/30/04: -1.5% Mar vs. Feb: -6.5%
Comments: Traded down with most of the other longs.  Still like the relative valuation.

Company: Neteller Plc. Ticker: NLR.L
Sub-sector: Financial Services
Investment Thesis: Every portfolio needs a flier and this sure counts as one. Neteller is Europe/Canada’s answer to PayPal and it has been making a killing by servicing markets, particularly online gambling, that PayPal has been pressured into exiting by the US Justice Department.  I know, I know, this is not a software stock, but I still follow online financial services quite closely and I feel compelled to point out this stock because it is such an attractive buy.
Performance: Since 6/30/04: 311.4%  Mar vs. Feb: -1.2%
Comments: Basically a flat month after a blistering Jan/Feb.  Still like the fundamentals despite its pricing becoming a lot more reasonable.

Company: Sportingbet Plc. Ticker: SBT.L
Sub-sector: Internet Gambling
Investment Thesis: portingbet is the largest online gambling operator in the world. At 16-17X 2005 EPS this stock is very attractive relative to its growth rate (25-30%) and especially attractive relative to other internet commerce plays. I don’t like the big options overhang in this stock or the poor margins (due to sports betting business) but this is a chance to own the #1 player in an important online commerce player at an attractive valuation.
Performance: Since 11/30/04: 72.3%,  Mar vs. Feb: -18.3%
Comments: After being the best performer in February this was the worst performer in March.  Still up 44% in Q1 overall though.   Lots of hot money moving in and out makes this a pretty volatile play.

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 is one of the cheaper stocks in the space at 17X earnings, yet it also has one of the better product portfolios and market positions.  From what I hear, businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: NA,  Mar vs. Feb: NA
Comments: Stock was weak last month when it was announced that the current auditor was resigning the account.  This either created a great entry opportunity or signals an impending accounting scandal.  New auditors often require restatements these days.  Hopefully that won't be the case here as MSTR should have learned its lesson when it comes to accounting by now.   

Short Picks
Company: Autonomy Ticker: AUTN
Sub-sector: Content Management
Investment Thesis: Autonomy is a UK-based purveyor of advanced enterprise search software a space I know well from some of my VC investments. The enterprise search space is crowded and getting even more competitive with the entry of folks like Google. Autonomy’s secret sauce, its categorization software, is increasingly being duplicated by it competitors. Autonomy continues to trade at a premium to the market. This premium appears to be largely an artifact of the fact that autonomy is a bit of a cult stock in its home country of the United Kingdom.
Performance: Since 1/26/04: +35.3%  Mar vs. Feb: +8.5%
Comments: Good month to be short anything including Autonomy.  This stock may be played out in the near term though, so I am going to take a hard look at it after its Q1 report.


Company: Salesforce.com Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: Salesforce.com is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies used it, but it is expensive the longer you use it and the larger your company gets. CRM is 2nd most highly valued stock in the software space despite the fact that it is facing increased competition from the big boys of enterprise software and that it’s very hard to rapidly grow subscription-based revenues. Any misstep and this stock will down 25% in a heartbeat.
Performance: Since 1/26/04: -15.2% Mar vs. Feb: +6.7%
Comments: Good month, but worst performing short in a month made for shorts.  May just be too many people believing the hype on this one.

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, almost $14M in cash burn during the first nine months of this year and only $6M in cash left, Wave finally appears to be approaching judgment day. It may take a few more quarters, but I fully expect Wave to follow in the footsteps of CMRC or to wash out the existing common with a new financing.
Performance: Since 10/1/04: -5.5% Mar vs. Feb +16.5%
Comments: WAVX issued more stock in March, this time selling $4.1M in stock, but at $0.88/share or a whopping 19% discount to the share price at the time.  This comes just 3 months (almost to the day) after selling $5.8M in shares at $1.05/share.   WAVX appears to have closed the deal with the promise that its Q4 results would prop up the stock but it didn't and the stock promptly collasped close to the issue price.  One has to imagine that this well is going to start going dry soon...

Company: Convera Ticker: CNVR
Sub-sector: Content Management
Investment Thesis: I ran into Convera when I was on the board of Stratify.  I was unimpressed with Convera’s business then and I am unimpressed with it now.  They have a decent market niche in the government sector but have never been able to really expand out from there and face increasing competition from the likes of Google, Verity, and Microsoft.  The stock is up strongly in the past few months thanks to the company’s announcement that they are going to enter into the web search market. This hype has disguised very poor license sales of the core product and a continued high burn rate (averaging about $4M-5M a quarter). Eventually the chickens will come home to roost here...
Performance: Since 11/30/04: -2.2% Mar vs. Feb: +14.7%
Comments: Q4's report seemed to splash a bit of reality water on the faces of the eager retail investors that have piled in here, however I worry that they won't remember this lesson for long.  CNVR takes so long to report their quarters that we won't get a Q1 report until May so there will probably be some more hopeful price appreciate between now and the next reality check.

Company: Manugistics Ticker: MANU
Sub-sector: Supply Chain
Investment Thesis: Manugistics is in a tough spot strategically and financially. Strategically it's facing increased competition from the big ERP players who are successfully bundling more and more supply chain functions into their core offerings.  Financially, Manugistics has a crushing debt load and a negative tangible book of $55M.  It's going to be very hard to pull this company out of the tailspin.  The debt holders may ultimately convert to equity and save the day, but things will have to get a bit worse on the equity front before they are willing to talk turkey.
Performance: Since 2/28/05: +16.4 Mar vs. Feb: +16.4
Comments: Stock was very weak heading into the end of the quarter which would seem to indicate that everyone is expecting a miss.  If they don't pre-announce it should recover a bit in April.

April 6, 2005 | 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.