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04/04/2006

Virtual Stock Portfolio: March 2006

The Burnham's Beat Virtual Stock portfolio was up modestly in March.  The average pick in the portfolio was up 2.5% while the overall portfolio was up 1.7%.  This underperformed the NASDAQ though, which was up 2.6%.  This month's underperformance was almost entirely attributable to one stock, Bank Rate, which I will get to later.

For the 1st Quarter overall, the portfolio was up 13.8%  which is well ahead of the average quarterly return since inception of 8.9%.  This also compares favorably to the NASDAQ's 6.1% quarterly gain.  Short positions were flat (+0.0%)in the quarter and all the gains were generated by long positions.  Overall this quarter went very well with 8 out of the 11 positions profitable.  It would have been even better had I not pulled the trigger too early on a couple of short picks (CNVR, RATE).

As it happens, this will be the last month I post the Burnham's Beat Virtual Stock Portfolio.   It's been a lot of fun publicly picking stocks again and letting the chips fall where they may at the end of each month.  I'd love to keep doing it but I have to stop publishing this kind of stuff for some professional reasons.

For the record, the virtual portfolio makes its final close up 109.3% from the day I started it (1/26/04).  That compares the NASDAQ's 8.6% gain during the same period.   This equates to annualized return of 36% despite the fact that the portfolio's average market exposure was just 3.8%.  Of course, this was a "virutal" portfolio on a blog so it doesn't count, but it was fun to test myself against the market again.  For those that have followed my ups and downs, thanks for all your comments and criticisms.

Long Picks

 

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 has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +94%,  Mar. vs. Feb.: +14.8%
Comments: Great month which means it is finally trading back in range with the rest of BI players.  It may have a bit more room to grow here because the street estimates remain too low, but most of the easy money is out of this stock now and it's probably a good time to move on.  This stock is a good case study on how post-SARBOX accounting problems can cloud the street's judgement for companies with good products in strong markets.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Actuate is a business intelligence company with a particular focus on enterprise reporting.  I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +68.0%  Mar. vs. Feb.: +9.5%
Comments: Another strong month and with the stock trading at 19X 06, still some more room to grow.  I think the street is wrong on both top and bottom lines due to an acquisition at the beginning of the year.  We will see!

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +17.5%  Mar. vs. Feb.: -6.1%
Comments: Only long postion to lose money this month which concerns me.  I also don't like the deferred revenue trend in the business.  This is probably the weakest long in the portfolio right now in terms of Q1 exposure.

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: +47.0%  Mar. vs. Feb.: +2.2%
Comments: Trading in line with the other online gambling comps now.  A competitor, Playtech, went public this month and its growth rates may make Cryptologic look relatively unattractive.   Playtech may be the better way to play this trend as it is cheaper on a PEG basis.

Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well.  Some may recall that I had PRTY long in a successful pair trade in Q4 05.  After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet.  Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base.  By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses.  Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: -2.1%  Mar. vs. Feb.: 2.8%
Comments: Concerns about online gambling legislation continue to buffet the biggest online gambling stock.  2.5% dividend payment in May makes this easier to hold on to.


Company:
Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception. However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow.  It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: +18.7%  Mar. vs. Feb.: +9.9%
Comments: M&A speculation in the supply chain/PLM market is starting to heat up after Matrix One 's purchase and Agile is the primary beneficiary of this speculation.



Short Picks


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, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance
: Since 10/1/04: +34.1%  Mar. vs. Feb.: +7.6%
Comments
: While it was a good month I remain amazed the stock is not down more.  Delisting should be confirmed in April but appeals will likely push that off for at least a month or so. My guess is that they will reverse spilt the stock to stave off delisting but you never know.  Another financing needs to take place sometime by end of May, so it looks like a no-brainer to hold this for at least a couple more months.

Company: Convera  Ticker CNVR
Sub-sector
: Content Management
Investment Thesis
: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product.  That turned out to be a bad short as the hype around search was just too big of a reality distortion field.  Well, reality has begun to settle in and I am back for another beating.
Performance
: Since 1/31/06: -22.0% Mar. vs. Feb.: 2.2%
Comments
: After a disasterous first month in the portfolio, CNVR seems to have settled down a bit but it remains a very jumpy stock.  There may be more PR-driven pain in the coming months but it's inevitable at some point that people will realize it's crazy to pay a 66% premium to Google and a 233% premium to an already inflated Autonomy on a price to sales basis for a company with  0.2% the revenues of Google.

Company: BankRate  Ticker:  RATE
Sub-sector: Internet Content
Investment Thesis
: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyzing financial services related internet companies.  Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees.  With interest rates rising, I don't think they will have trouble hitting their Q4 #s, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
Performance
: Since 1/31/06: -14.6% Mar. vs. Feb.: -20.5%
Comments
: Ug.  After a decent first month this stock killed me this month, despite announcing a big secondary offering of shares.  It would be funny to watch all the retail investors piling in while the insiders bail out except for the fact that this one stock killed my overall performance.  I was obviously way too early on this and need to cover and wait for long term rates to really start to put the squeeze on.  I can't see that happening this quarter and don't want to stick around for the report.

April 4, 2006 in Internet, Software, Stocks | 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.