Burnham's Beat

Top 10 Software Stocks of 2007

2007's list of Top 10 Software Stocks is a mixed bag.  There is an IPO, a few turn-arounds, some SaaS companies and some security companies, but no consistent themes.  To be sure, Software as a Service and appliance-based software remain perhaps the most important software themes right now, but they don't dominate the Top 10.

To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service.  So, without further ado, here are the Top 10 Software Stocks of 2007:

1. ZIXI
   Price Change: 287% Ticker: ZIXI
   Comment: Pioneer in SaaS-based digitally signed e-mail and prescriptions sees stock soar as revenue growth picks up and speculators target stock.
2. VM Ware
   Price Change: 193% Ticker:VWW
   Comment:  The software industry's most anticipated IPO of 2007 lived up to its top billing.  VM Ware dominates the rapidly growing virtualization space and the market has rewarded it with a premium price.
3. Phoenix Technologies
   Price Change: 186% Ticker: PTEC
   Comment: Living up to its name, PTEC rose from its own ashes in 2007 on the backs of successful restructuring and new management team.
4. BlueCoat Systems
   Price Change: 175% Ticker: BCSI
   Comment: BlueCoat saw rapid growth in its core markets of WAN security and acceleration as well as increased adoption of appliance-based solutions by the security market in general.
5. EBIX Inc.
   Price Change: 162% Ticker: EBIX
   Comment: EBIX accelerated in 2007 as its focus on providing Internet solutions to the insurance industry helped it rapidly grow revenues while avoiding any fallout from the problems hitting the rest of the financial sector.
6. Innodata Isogen
   Price Change: 148% Ticker: INOD
   Comment: Innodata saw revenues accelerate as its "flat earth" approach to content management and production gained favor with customers.
7. Vasco Data Security
   Price Change: 136% Ticker: VDSI
   Comment: Years of trying to convince banks to deploy authentication software and tokens (as well as a few hackers making some big scores) finally paid off in 2007 as Vasco benefited from a  surge in interest in multi-factor authentication.
8. Broadvision
   Price Change: 130% Ticker: BVSN
   Comment:  After a near death  experience in 2006, Broadvision bounced back as a stable and profitable player in the content management space.
9. Concur
   Price Change: 126% Ticker: CNQR
   Comment:  This SaaS poster child benefited from its domination of online T&E reporting as well as software investor enthusiasm for all things SaaS.
10. Taleo
    Price Change: 118% Ticker: TLEO
    Comment: Taleo saw its stock rise as investors began to recognize the importance of the talent management sector and wanted to own the #1 player.
    

Top 10 Internet Stocks of 2007

2007's list of top performing Internet stocks provides a little bit of  de ja vu from 2006's list.  As was the case in 2006, China remained a hot investment sector, although this year's China winners are different than last year's.  Three of last' year's Top 10 performers repeat in 2007, something to be truly admired in the rough and tumble Internet sector.

To qualify for this list the company had to start 2007 with a market cap of at least $50M and its business had to be focused on the Internet.

So, without further ado, here are the Top 10 Internet Stocks of 2007:

1. China Finance Online
   Price Change: 392% Ticker: JRJC
   Comment:  The Chinese stock market was "en fuego" all year and what better way to play that market than an Internet company that sells online financial services products and information.
2. Baidu.com
   Price Change: 246% Ticker:BIDU
   Comment:  China's #1 search engine appeared to be pulling away from the pack in 2007 despite desperate attempts by Yahoo and Google to get in the game.  Right now the market seems to think Baidu is going to win.
3. Tradus
   Price Change: 184% Ticker: TRAD.L
   Comment:  Formerly known as QXL and a serious competitor to EBAY in Eastern Europe, QXL's stock was supported by takeover rumors all year, which turned out to be true in December when South African media group Naspers announced a deal to acquire it.
4. Acquantive
   Price Change: 168% Ticker: AQNT
   Comment:  Aquantive was acquired by Microsoft in the middle of the year after they scrambled to respond to Google's acquisition of privately held Doubleclick.
5. Priceline
   Price Change: 163%% Ticker: PCLN
   Comment: Last year's #10 performer, Priceline is back again, a very impressive performance for what was thought to be a mature company.  Priceline continued to school the rest of the online travel field, especially with its expansion into Europe.
6. Omniture
   Price Change: 136% Ticker: OMTR
   Comment: Last year's #7 stock moves up one spot to #6.  After a successful IPO in 06, Ominture grew quickly in 07 and announced the acquisition of its main public competitor (VSCN).
7. Amazon.com
   Price Change: 135% Ticker: AMZN
   Comment: The granddaddy of online retailing flexed its growing muscles in 07.  Thanks to growing revenues and somewhat decreased tech spending margins expanded quickly and earnings accelerated.
8. SOHU.com
   Price Change: 127% Ticker: SOHU
   Comment: One of China's largest portals saw impressive growth and benefited for investor appetite for all things China.
9. Gigamedia
   Price Change: 92% Ticker: GIGM
   Comment:  Last year's #2 stock, holds on to a  Top 10 position.  Unlike  other gambling stocks, Gigamedia's focus on Asia as well as its casual games help it buck the trend and keep growing without regulatory interference.
10. BlueNile.com
    Price Change: 84% Ticker: NILE
    Comment: The Internet's largest jewelry retailer saw its stock take off in 2007 and it reached critical mass and began to drive impressive margins.
    

Software and Internet IPO and M&A Lists

Every month I keep a record of all significant public company activity in the sectors I am most interested  in: Software & Internet.   I keep records of all IPOs in those sectors as well as all public company M&A.  I've decided to try out Typepad's relatively new "page" feature by open sourcing these transaction lists.

The links should be good forever and I will try to update the lists each month as I already do this internally.  The lists start in 2004 and are current as of 5/30/07.  Recently announced M&A deals are not listed because they have yet to close.  It's kind of fun to take a walk down memory lane, and see just what has happened over the last few years in each sector.  So without further ado here are the lists:

Internet IPOs
Internet M&A
Software IPOs
Software M&A

If you see anything missing or anything that needs a correction just e-mail me.

Private Equity's Software Buying Binge

In 2004 there were, by my count, about 18 acquisitions of public software companies and Private Equity firms made none of them.  By 2006 however, not only had the number of acquisitions risen to 32, but Private Equity firms accounted for 25% of them, up strongly from 11% of deals in 2005 (See table below).

                               

Year	Total Deals	PE Deals	% PE
2004	18	0	0%
2005	27	3	11%
2006	32	8	25%

At this rate I wouldn't be surprised to see private equity account for over 50% of deals in a couple years.

Who Said Maintenance Revenues Aren't Beautiful?
Private equity firms have taken a liking to software firms not because they believe software to be a great growth market but largely because most software firms have what PE firms might call "immature" balance sheets, with little or no debt and relatively high levels of cash.   Rather than targeting fast growing software firms, PE shops typically target "mature" software companies as they not only tend to have lots of cash but they also derive a large percent of their revenues from maintenance revenues.  These revenues are seen by private equity investors and, more importantly their lenders, as a stable source of cash flow that can be used to finance lots of debt.

Seven Steps To Carry
The basic private equity software play book goes something like this:

1. Buy software company
2. Do dividend recap in which you simultaneously lever up the balance sheet and dividend out all the cash you just borrowed plus most of the existing cash on the balance sheet.
3. Raise new fund off of massive IRR created by dividend recap.
4. Do lots of acquisitions to make organic growth impossible to discern
5. Raise prices, slash R&D, increase sales and marketing.
6. Take company public/sell it at same PE you bought it for to investor/large company apparently unfamiliar with the concept of enterprise value.
7. Repeat.

Now I admit this is a bit of snarky characterization of PE software deals because software offers some unique scale effects in SG&A, but I think this characterization is probably closer to the truth than a lot of mumbo jumbo about "value add" "synergies", etc.

And the Winner Is....
For my money,the most notable (and most ironic) private equity buyout of public company in 2006 was the acquisition of SSA Global by Infor. Why?  Because SSA Global was itself a private equity sponsored roll-up of public software companies (including Baan, Ironside, and Epiphany) which was public for all of a year before it was bought by another private equity sponsored roll-up of public companies, Infor, which now rather immodestly claims to be "the fastest growing enterprise software company in the world".

To have the two companies that are following the private equity playbook to a T merge with one another after the first one was only public for a year is just priceless.   I can't wait to see the prospectus for Infor and how they back up their claim to be the fastest growing enterprise software company in the world, it should be a classic.

Top 10 Software Stocks of 2006

Software stocks may have only performed in-line with the rest of the market, but these stocks were at the top of the class.  The easiest way to make this list in 2006 was to be bought by a strategic acquirer such as IBM, HP, pr EMC.  Other than that, it's pretty much a grab bag of stocks but medical software stocks were particularly strong, as were open source and VOIP related stocks.

To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service.  So, without further ado, here are the Top 10 Software Stocks of 2006:

1. Interactive Intelligence
   Price Change: 340% Ticker: ININ
   Comment: Pioneer in enterprise IP Telephony saw rapidly increasing sales as enterprises started to take VOIP seriously, especially call centers.
2. VA Linux
   Price Change: 183% Ticker:LNUX
   Comment:  Operator of  open source software portal "sourceforge.org"  and geek news site Slashdot.org saw shares rise as Sourceforge.net grew quickly and as it released an enterprise software version of sourceforge.org.  I will be moving this to the Internet sector for 2007 given that it is more much a content/e-commerce play now than it is a software company.
3. RSA Data Security
   Price Change: 149% Ticker: RSAS
   Comment: Early leader in hard tokens and public key encryption was bought by EMC this past summer for a nice premium.  May be first of several security acquisitions by EMC.
4. Smith Micro Software
   Price Change: 143% Ticker: SMSI
   Comment: Provider of a multitude of wireless software products and owner of the venerable Stuffit program, saw sales rise as carriers such as Verizon stuck deals for several of their software products.
5. Allscripts Healthcare Solutions
   Price Change: 101% Ticker: MDRX
   Comment: Strong demand their medical records management software thanks in part to government mandates helped propel this stock upward.
6. Quadramed
   Price Change: 92% Ticker: QD
   Comment: Another medical records software company.  I think I see a trend.
7. Acutate
   Price Change: 89% Ticker: ACTU
   Comment: Business intelligence vendor benefited from finally turning profitable and from it's emerging open source platform.
8. Mercury Interactive
   Price Change: 87% Ticker: MERQ
   Comment:  Application performance management vendor that  put enough of its accounting problems behind it to secure a sale to HP.
9. MRO Software
   Price Change: 83% Ticker: MROI
   Comment:  One of 3 public software companies that IBM bought in 2006.  Not sure how this fits into IBM's "we don't compete with our application partners" party line.
10. Mentor Graphics
    Price Change: 74% Ticker: MENT
    Comment: EDA tools vendor saw a nice rebound after a terrible 2005 as license sales picked back up.
    

Top 10 Internet Stocks of 2006

While 2005's Internet winners were dominated by the themes of online advertising and gambling, 2006's key themes were China and broadband.  Four of the Top 10 stocks were focused on China while 3 were focused on broadband infrastructure.

To qualify for this list the company had to start 2006 with at least $50M in market cap and its business had to be focused on the Internet.  So, without further ado, here are the Top 10 Internet Stocks of 2005:

1. Navisite
   Price Change: 458% Ticker: NAVI
   Comment: If you need proof that hosting is hot again, look no further than Navisite.  This once left for dead application hosting company  had a huge year including  a suspiciously  strong December.
2. Gigamedia
   Price Change: 243% Ticker:GIGM
   Comment: What do you get when you combine China with gambling? An incredibly hot stock that's what.
3. China.com
   Price Change: 197% Ticker: CHINA
   Comment:  The right ticker at the right time.  With anything China related hotter than a  Szechuan Spicy  Beef, it was China.com's time to shine.  It didn't hurt that  they made a major move in online gaming too.
4. Akami
   Price Change: 167% Ticker: AKAM
   Comment:  Internet video was white hot in 2006 and Akami's CDN serves the most video of anyone so investors saw them as platform level pure play on the growth of internet video.
5. Knot.com
   Price Change: 129% Ticker: KNOT
   Comment: After a successful merger with long time competitor The Wedding Channel, the Knot.com proved that near monopoly positions in attractive internet content niches can be quite rewarding.
6. C-Trip
   Price Change: 117% Ticker: CTRP
   Comment: China's top online travel agency benefited from the overall China craze and increased travel by the emerging chinese middle class.
7. Omniture
   Price Change: 117% Ticker: OMTR
   Comment: The only IPO on the list.  Omniture didn't go public until mid-year but made up for its late start as it became the SASS darling of online analytics and took market share quickly.
8. The9
   Price Change: 111% Ticker: NCTY
   Comment: China.  World of Warcraft.  Need I say more?
9. Internet Gold
   Price Change: 100% Ticker: IGLD
   Comment: Israeli ISP rises due to merger with rival and ventures in online video and broadband access.
10. Priceline
    Price Change: 99% Ticker: PCLN
    Comment: Rising hotel and airline fares combined with increasing business travel send consumers scrambling to find cheap deals the Internet.

Guess What? Internet Stocks Had A Terrible 2006

Lost amidst all the Web 2.0 hype, the eye popping deals like Google's $1.65BN for 18 month old YouTube and the huge increases in VC Internet-related investments is a open secret which many people in Silicon Valley don't seem to have fully assimilated: Internet stocks had a pretty terrible year in 2006.

While all the major indexes had decent years with the Dow up 16.3%, the S&P 13.6% and the Nasdaq up 9.5%, the Internet sector actually turned in a return of negative -2.8%.  Now that doesn't include dividends, but few if any Internet stocks pay dividends so I think it's safe to say that Internet stocks, as a whole actually lost money in 2006.

"Just how is that possible?" you might ask, well you need to look no further than the 5 largest Internet Stocks.

The table below lists the Top 5 Internet Stocks in terms of market cap:

                                                           

Ticker	Cap$BN	1/1	12/31	%Chg
GOOG	141	414.86	460.48	+11%
EBAY	42	43.22	30.07	-30%
YHOO	35	39.18	25.54	-35%
SCH	24	19.34	14.67	32%
AMZN	16	47.15	39.46	-16%

In aggregate the market cap of the Top 5 Internet companies dropped $18.5BN or 6.7%.   That's a huge hole for the rest of the sector to try and make up (which it didn't).  Matters weren't helped by the complete implosion of the online gambling sector either which lost well over half its value.  And don't try to blame it all on Yahoo and Ebay either, even small cap internet stocks had a bad year.  While they didn't lose money, they gained a paltry 2.6% compared to the Nasdaq's 9.5% return.  Even the Net's new standard bearer, Google, underperformed the market, a fact which could probably win you more than a few bar bets this week. 

So don't let all the hype fool you, the Internet remains a pretty treacherous corner of the market no matter how much AJAX and Adsense you throw at it.

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.

Internet Stocks Update: March 2006

Internet stocks slightly lagged the overall market in March with the Internet Stock Index up 2.4% compared to the NASDAQ's 2.6% gain. The average stock was actually up 7.5% though indicating continued strength in small cap stocks.  The big winner this month was hosting provider Navisite which soared 114% on the backs of a good Q4 report and some balance sheet restructuring while the big loser was online payments provider FireOne (-16.3%).

There was only one Internet related IPO in March, Online gambling technology provider Playtec went public on AIM and now has a cool $1BN valuation making it the 5th public online gambling company with a $1BN+ market cap.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.  The spreadsheet has been improved lately with detailed fundamental financial data and ratios for almost all of the stocks.

Software Stocks Update: March 2006

Software Stocks modestly outperformed the rest of the market in February with the Software Stock Index up 3.3% vs. the NASDAQ's 2.6% gain. The strength was largely due to strong performances from several large cap stocks, especially Oracle (+10.1%) and SAP(+6.9%).  The average stock was up 4.5% thanks to even stronger small call performance.  The best performing sector was Wireless (+12.3%) due to strength at Openwave and Inforspace while the worst performing sector was, one again, Clinical Apps (-4.6%).

There were, yet again, no software IPOs this month.  In fact there were no Software IPO's in the 1st quarter. The two M&A transactions this month were both private buyouts with Silver Lake buying Serena Software and Golden Gate buying business intelligence player GEAC.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.

Virtual Stock Portfolio: February 2006

After a very strong January, the Burnham's Beat Virtual Stock portfolio was down slightly in February.  The average pick in the portfolio was down 0.1% while the overall portfolio off 0.7%.  This still outperformed the NASDAQ, which was off 1.1%, but was no where close to last month's 12.8% gain.  This month's slight loss was almost entirely attributable to one stock, Convera, which is kind of frustrating because just about every company, including Convera, performed as expected at a fundamental level.

I am only making one change this month.  I am covering my short on Entrust as it is pretty much played out at this point.  This will leave pretty concentrated on the short side but I should have a few new picks next month.

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: +68.9%,  Feb vs. Jan.: -4.6%
Comments: Traded off a bit this month after a very strong January and a slight miss on its Q4 report.  Street numbers are still too low for this stock though and it has a decent product cycle coming up so I will continue to hold tight, but the stock is starting to approach the valuation levels of the other major players in the BI space.

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: +53.4%  Feb. vs. Jan.: -4.0%
Comments: Traded off in February after a blistering January.  Stock still has some life left because the street numbers are too low given a recent acquisition the company made.

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: +25.2%  Feb. vs. Jan.: +5.6%
Comments: Nice month thanks to a decent Q4 report.  The stock still trades at a big discount relative to the other content management names so there should be some upside remaining.  Short interest is really starting to perk up on this stock though so I am watching it carefully. 

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: +43.8%  Feb. vs. Jan.: +9.3%
Comments: A good Q4 report drove further gains in the stock.  Now trading roughly in-line with the rest of the online gambling comps (around 12X 06 EPS).  IPO of a competitor later this month may create a nice valuation gap though.

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: -4.7%  Feb. vs. Jan.: -4.7%
Comments: Not a great first month in the portfolio, as concerns about online gambling legislation combined with a CEO change depressed the stock.  Still looks like a good buy though given the continued momentum in the sector and their leadership.

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: +7.9%  Feb. vs. Jan.: +7.9%
Comments: Good first month in the portfolio thanks to a better than expected Q4 report.  Supply Chain/PLM may indeed be coming back to life.

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: +28.7%  Feb. vs. Jan.: +1.7%
Comments: As regular as clockwork, they dumped another 8.4M shares in mid-February to finance their slow sail into oblivion.  It is stunning indictment of the SEC and NASDAQ that a company like this can continually sell fully registered common shares with no lock-up at huge discounts  (24% discount to market and 19% at the money warrant coverage!) with no one taking legal or regulatory action.  They are lucky they have no institutional holders because they'd sue to force a rights offering in a heartbeat.  Instead, you have a cult-like group of retail investors who lap up the excess shares in the open market while a bunch of bucket-shop hedge funds laugh all the way to bank.  Amazing.  However, with 100M shares outstanding the scam is undoutedly getting a bit more difficult to pull off though.  Delisting is scheduled for April (although it will undoubtedly be appealed), so I see no reason not to hold this position to its logical conclusion.

Company: Entrust  Ticker:  ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products.  I know them from my days covering the security sector on Wall Street.  They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again.  It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +33.9% Feb. vs. Jan.: +8.2%
Comments:  It's hard to part ways with this stock, but with a 34% gain, likely support from continued buybacks and a much more realistic (but still too generous) 17X PE it's time to cover and move on.  Thanks for the memories.

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: -24.8% Jan. Vs. Dec.: -24.8%
Comments: Last month I said I was late to the party on this stock.  Boy was I ever.  Without CNVR, the overall portfolio would have been up 2% for the month.  The crazy thing about this stock is that they pre-announced Q4 revenues would be down close to 50% y/y early in the month and the stock barely budged.  When I saw that I got a sinking feeling in my stomach because it meant there were no sellers left at all.  Sure enough, a few days later they put out a press release announcing 3 beta customers for their new web search product and the stock gapped up 30%.  They also annouced a new $38M private placement which should come in handy given their prodigous burn rate.  How can a company with $3M/quarter in revenues, a management team that has led it down successive dead ends, and $5M/quarter burn rate be worth $490M+?  I don't know, but it is and it's kicking my ass for a second time.

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: +4.9% Feb. vs. Jan.: +4.9%
Comments: Good first month which pretty much went as expected in that the stock seems to be trading in line with mortgage/housing sentiment which I expect to get worse over the next couple of months.

Internet Stock Update: February 2006

Internet stocks badly lagged the overall market in February with the Internet Stock Index down 5.0% vs. the NASDAQ's 1.1% decline. Amazingly, the average stock was actually up 7.4% due so some very strong performances from small caps, but weakness at many of the Internet's biggest names was too much for the overall sector to overcome.  The big winner this month was Edgar Online which soared 125% on the backs of a good Q4 and improved earnings outlook while the big loser was Chinese wireless company Linktone whoose shares plunged 27.3% .

At a sector level, Information Services (-11.3%) was the worst performing sector thanks largely to weakness at sector leaders Google and Yahoo. Content Distribution (+33.2%) was the best performing sector thanks to good outlooks for both Akami and Loudeye.

There was one Internet related IPO in February, online auctioneer Liquidity Services and the only M&A deal completed was Liberty Media's acquisition of Provide Commerce.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.  The spreadsheet has been improved lately with detailed fundamental financial data and ratios for almost all of the stocks.

Software Stock Update: February 2006

Software Stocks underperformed the rest of the market in February with the Software Stock Index down 2.4% vs. the NASDAQ's 1.1% decline.  The average stock was up 1.2% thanks to a few crazy microcaps, but overall there were declines in small, mid, and large cap stocks.  The best performing sector was Collaboration (+11.3%) while the worst performing sector was Clinical Apps (-9.6%).

There were, yet again, no software IPOs this month but two more software acquisitions were closed with Intellisync going to Nokia, Micromuse going to IBM.  We're just 2 months into 2006 and already 7 firms or 2.7% of the total have been acquired.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.

Virtual Stock Portfolio: January 2006

January marks the 2 year anniversary of the Burnham's Beat Virtual Stock Portfolio and as it happens the portfolio closed out it's second full year on a high note, generating its second best monthly return ever at 12.8%.  Over the last 24 months the portfolio has had 27 different positions and is now up a total of 107% with the average pick up 28.7%.  The key to generating the returns has not only been stocking picking but keeping the portfolio roughly 50/50 in terms of long and short exposure as this has allowed it generate positive returns in good and bad markets with lower overall risk.

January was an exceptional month, so it will be a tough act to follow.  Both long and short positions made money which means it was a good stock picking month.  I am going to add a few new positions this month to try and spread out the portfolio a bit more and make the short side a little bit more "jumpy" given that February tends to be a very tough month for stocks.

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: +77.1%,  Jan. vs. Dec.: 16.3%
Comments: Another nice month which can't be good news for the shorts in this stock.  They reported on the last day of the month and missed their EPS a bit due to weak license sales, but not enough to cause serious damage.  A new release of their flagship product should be good news for license sales this quarter and with $100M in cash flow they will probably start buying stock back again in a few months as well.  Given this, I can't see why I won't hold this through the end of this quarter especially given that the shorts are going to continue to suffer.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Acutate 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: +59.7%  Jan. vs. Dec.: 28.7%
Comments: This stock was "en fuego" in December as folks bid it up in anticipation of a good Q4.  The company reported on the last day of the quarter and did in fact beat top and bottom, but people didn't like it's guidance for 06 and it traded off 7% or so.  I am still going to hold here for a bit as there seem to be some big buyers and with the stock trading in the mid-teens PE vs. mid 20's for the comps there is still some significant upside room.

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: +18.5%  Jan. vs. Dec.: 17.4%
Comments: Had a strong January after a weak December (perhaps driven by tax loss selling).  Looks like people think it will have a good report.  Still trading at a healthy discount to the rest of the content management group which has been on a tear lately.
 

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: 31.6%  Jan vs. Dec.: 18.0%
Comments: Nice month that eliminated some of the discount between CRYP and the rest of the online gambling sector, but still some room for improvement.

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.  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: 0%  Jan. vs. Dec.: NA
Comments: You could probably pair this up against SBT again (SBT is going to look very pricey once people figure in all the shares they are issuing), but I figure that PRTY is compelling enough by itself.  This is a volatile stock, but the valuation is just compelling, especially relative to the land-based casinos.

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: 0%  Jan. vs. Dec.: NA
Comments: The stock is about 35% off it's low so I am a little late to the party, but I think supply chain will see some renewed investor interest this year.

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: +27.5%  Jan vs. Dec.: 2.9%
Comments: Relatively quite month.  They will need to raise more money by end of the quarter and it's hard to imagine that they can offer a bigger discount than they did last time.  They may have decent Dell-related revenues this report which might spike the stock, but I will try to have patience.

Company: Citadel Security Software Ticker: CDSS
Sub-sector: Security
Investment Thesis: Citadel offers a subscription service to help companies spot security vulnerabilities.  It's a good idea, but a lot of other companies including a number of private companies offer the same service.  Lately Citadel's business has been falling off a cliff.  They are buring cash to the tune of $5M/quarter and yet the management team hasn't done any major cost cutting.  As a VC, I can tell you first hand that it is incredibly difficult to turn around this kind of situation even if you get some product momentum.  I haven't seen a single company in this kind of shape pull it out.
Performance: Since 9/30/05: 49.9%    Jan. vs. Dec: 3.1%
Comments: I am covering this position this month.  There's still a good chance the company is sold at a price below the preferred prefs and debt (thus wiping out what's left of the equity), but I've made a good return and it's important not to be too greedy.  In addition, the CEO has guaranteed the company's debt which shows some real conviction and the company continues to land large contracts which means that there is clearly something of value there that will sell for something.  I have no idea how they are paying the bills though...

Company: Entrust  Ticker:  ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products.  I know them from my days covering the security sector on Wall Street.  They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again.  It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +28% Jan. Vs. Dec.: +16.7%
Comments:  Like old reliable, Entrust disappointed again and the stock traded off nicely.  They actually hit their Q4 numbers but guided down for the year and people came to their senses and asked "why I am paying close to 30X for this stock again?".  I will keep it in the portfolio this month as February is usually choppy but I am worried that the management team may support the stock by continuing to their ill-advised buy backs.

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: NA Jan. Vs. Dec.: NA
Comments:  I am, admittedly, late to the party on this one give that it has traded off 40%+ in the last two months.  Despite the decline, the stock is still trading at a crazy 19X EV/Sales despite zero traction for the new product and a substantial negative cash flow.  I will have to be careful given the hype, but this should be trading lower six months from now.  I am a glutton for punishment.

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 analyze 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 #w, 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: NA Jan. Vs. Dec.: NA
Comments:  Close to it's 52 week high and not the kind of chart you like to bet against, but the mortgage industry is highly cyclical and can change on a dime.  I am bearish on long term rates/housing, so this is a good Internet related play on those themes.  Also, pay-per-click searching is undermining some of the growth in the referral market.  There are some other potentially good mortgage-related Internet shorts (NTBK, HOMS), but this is the most attractively priced.

Top 5 Most Shorted Software Stocks

Following up on a quick post I did on the Top 5 Internet Stock Short Positions at the end of 2005, I thought I would do the same analysis for the Software Sector.  It's interesting to note that most of the shorts are mid/small cap stocks even though large cap software stocks were some of the biggest losers last year.

To figure out just how short a stock is, I am taking the reported number of shares sold short as of mid-December and dividing it by the float (which is basically total shares out less insider shares).  Here are the Top 5 Software Shorts as of the end of 2005:

1. Clickcommerce    Ticker: CLCK
   % of Float Short: 41.4% 
   P/E: 16.2  Market Cap/Tangible Book: 31.0
   Comment: Kind of strange to see this stock so short given its low P/E, but apparently the pros think the earnings are bogus and a day of reckoning is coming.  Better come soon though as the stock was up 30%+ last year.
2. Rightnow   Ticker: RNOW
   % of Float Short: 29.6%
   P/E: 103  Market Cap/Tangible Book: 15.3
   Comment: One of the few public SaaS stocks and one that has a large % of the stock still owned by insiders.  Looks like some pros don't buy the SaaS hype as the short position on this stock more than tripled last year.  I met the CEO and he doesn't seem like the type of guy to sell, so insider selling is not going to bail out the shorts here, it's going to have to be poor performance.
3. TakeTwo Interactive    Ticker: TTWO
   % of Float Short: 21.6%
   PE: 31.6  Market Cap/Tangible Book: 3.3
   Comment: Maker of Grand Theft Auto series guilty of stealing from it's shareholders in the form of a 49% decline in it's stock price in 05. Pros apparently think the worst is yet to come as there are still over 15M shares short.
4. Microstrategy    Ticker: MSTR
   % of Float Short: 21.5%
   PE: 20.5   Market Cap/Tangible Book: 7.4
   Comment: A long time short favorite thanks to numerous run-ins with the SEC. Pros obviously think "once a crook, always a crook".  I am actually long this stock which means I am pretty stupid and/or very forgiving, we will see!
5. Convera   Ticker: CNVR
   % of Float Short: 20.4%
   PE: NA  Market Cap/Tangible Book: 10.2
   Comment: Enterprise search vendor that has shrewdly surfed the Google hype by announcing a series of web-based search initiatives.  My pick for "most likely to screw the pooch" in 2006.

Top 5 Most Shorted Internet Stocks

Starting off the year I thought it might be interesting to review just which Internet stocks have the biggest short positions on them. Short positions are typically taken by professional investors so looking at the Top 5 Short Positions is a good way to get of sense of just which stocks professional investors dislike the most.

Each month the stock exchanges publish the number of shares sold short in a particular stock.  If you compare the number of shares short to the total float (basically total shares less insider shares) it's a good measure of just how "short" the stock is .  As of the end of 2005 here were the Top 5 Internet Short Positions:       

1. Overstock.com    Ticker: OSTK
   % of Float Short: 59.8% 
   PE: NA  Market Cap/Tangible Book: 6.9
   Comment: The shortest of the shorts.  Overstock's CEO has been having a very public and highly amusing battle with short sellers which, thanks to the increasinly poor performance of the company, he appears to be losing.  Not only was Overstock was one of 2005's worst performing Internet stocks, but Overstock gave short sellers a belated Christmas present when they preannounced shortly after Christmas.  Sometimes the pros are right.
2. Netflix    Ticker: NFLX
   % of Float Short: 38.7%
   PE: 68  Market Cap/Tangible Book: 11.7
   Comment: Then again, sometimes the pros are wrong.  Despite a very strong short position all last year, Netflix closed out the year as one of the best performing Internet stocks thanks to an improved financial and strategic position.  The pros appear to think that Netflix is still destined to come back to earth, but it is clearly in a lot better shape than something like Overstock.
3. J2 Global Communications   Ticker: JCOM
   % of Float Short: 22.2%
   PE: 21.7  Market Cap/Tangible Book: 7.0
   Comment: The king of e-faxing which owns such websites as Efax and Onebox has seen its short interest increase substantially throughout all of last year apparently as people bet that faxing will go the way of the quill pen. (I for one will never fax another document after figuring out how to just scan and .pdf them).
4. Digital River    Ticker: DRIV
   % of Float Short: 21.9%
   PE: 24  Market Cap/Tangible Book: 11.6
   Comment: Short interest in this stock more than doubled in 2005 and yet the stock was only down 15% or so.  Looks like the pros are still expecting a big downside move.
5. Priceline    Ticker: PCLN
   % of Float Short: 19.9%
   PE: 16.9  Market Cap/Tangible Book: 49.6
   Comment : It's kind of ironic that both Priceline's customers and a lot of investors are all hoping to get a lower price but aren't sure what will happen.  While short interest is still high, it was almost twice as high at the beginning of last year, so many of the pros have clearly given up on this short already.

Virtual Stock Portfolio: Year End 2005 Review

The Burnham's Beat virtual stock portfolio closed out 2005 on a strong note up 4.6% in December vs the Nasdaq's 1.2% decline. Q4 turned out to be a great quarter after I spent some quality time in late September updating what had become an admittedly dated portfolio. Its 16.5% return was the second best quarterly return since inception.  Overall, 2005 was another good year for the portfolio as it was up a total of 37.1% vs. the Nasdaq's 1.4% gain.  This brings the total gain since the portfolio's inception in Freburary of 2004 to 84.0% vs. a 2.4% gain for the NASDAQ over the same period.

I only held one position the entire year and that was a short position in Wave Systems (+38% return on the year).  Other than that the entire portfolio turned over during the year.  My biggest gainers in 2005 were Neteller (Long, +116%), SportingBet (Long, +56%). SPSS (+53.5%) and  Microstrategy (Long, +52%).  My biggest losers were Autonomy (Short, -109%), Salesforce.com (Short, -39%), FireOne (Long, -13%) and my first trade in Actuate (Long, -5.9%).  Overall, 74% of my positions were positive which is pretty respectable.  I did end up shorting two of the year's best performing software stocks (Autonomy and Salesforce.com) but at least I limited my losses by selling out before they really hit their strides.

Repeating 2005's performance will be pretty difficult in 2006, but if the market stays choppy it should be continue to be a good environment for picking stocks.  To start off the year I am getting out of a few positions that seem to have run their course.  The first is the paired trade between Party Gaming (long) and SportingBet (short), by the end of 2005 the multiples of these two stocks had basically converged so its time to unwind this trade and move on.  I am also getting out of my short position in Emerge Interactive.  The company seems to have stablized a bit and I don't want to be too greedy as they have plenty of cash left.  I am also exiting FireOne group, one of the online gambling payment processors.  I just can't justify holding this stock when it trades at a premium the #1 player in the space (Neteller) despite lower margins and growth rates.

I am not replacing these positions this month, but will add a few more positions next month after the market settles down for the year.

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: +52.3%,  Dec. vs. Nov.: 11.9%
Comments: Nice month and still chugging along despite a big short position.  I am bit concerned that the stock will start to sputter now that they are tapped out from a buyback perspective, but they should report a decent Q4 and the stock will soon start to trade off of 2006 which reflects all the buybacks.

Company: FireOne Group Ticker: FPA.L
Sub-sector: Financial Services
Investment Thesis: FireOne operates an Internet payment service very similar to Neteller. It is used primarily by on-line gamblers to transfer money around.  I I added FireOne to the portfolio because I wanted to maintain overweight exposure to the these kind of Internet payments plays without putting all my eggs in one basket (Neteller). Now that I have closed out Neteller this will be sole exposure to Internet payments.
Performance: Since 7/31/05: -13.3%,  Dec. vs Nov.: -0.1%
Comments: Closing this position out after the market has moved to such an extent that Neteller (the #1 player in the market and an old long pick) now trades at a discount to Fireone despite the fact that FireOne has lower margins and growth rates.  If I were going to own any stock in this space now it would Neteller not this one.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Acutate is a business intelligence company with a particular focus on enterprise reporting.  I had a long postion 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: +24.1%  Dec. vs. Nov.: -4.8%
Comments: Cooled off a bit in December, after busting through $3/share without a problem.  If they exceed estimates this quarter it could move past $3.50.

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 managment 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: +0.9 % Dec. vs. Nov.: -5.6%
Comments: Weak in December, should recover in January (if it doesn't preannounce!).

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: 11.6%  Dec. vs. Nov.: -2.5%
Comments: I have been following the online gambling sector closely for the past two years and right now I really think that CRYP offers the best risk/reward of any of the stocks.  It trades at the lowest EPS multiple in the group right now (14X 2005) which is about a 30% discount to where the rest of the group now trades.  This despite the fact that CRYP is one of the only online gambling stocks to trade on a US Exchange and has a very diversified revenue base.  This should be trading at least 25% higher.

Pair Trades
Long: Party Gaming Ticker: PRTY.L
Short: SportingBet Ticker: SBT.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with an exclusive focus on poker.  Party went public this summer at 116p and got up to 140p before getting creamed when it talked down its revenue growth prospects on its 1st earnings call.  The stock is now below its IPO issue price and at this level it is not only at 12X earnings, but 12.4X cashflow (of $500M/year) for a cash flow yield of over 8%.  In comparison to Party, SportingBet is trading at a substantial premium (21X vs. 12X) even though much of the excitement surrounding SBT has to do with its acquisition of Paradise Poker (the #5 poker room).  It will be tough for SBT to sustain the premium to Party given Party's superior margins, cash flow and growth rates.  With the paired trade the legal risk facing the sector is minimized because both would likely suffer equally from any legal action.  Up until now these kinds of trades didn't make sense because all the names traded pretty much in line with each other, but with Party's somewhat unwarranted implosion this is a perfect opportunity to put on such a trade.
Performance: Since 9/30/05: +36%  Dec. vs. Nov.: +14.5%
Comments: This trade worked like a charm.  During Q4 party was up 43.4% and Sporting Bet was up only 7.2%.  The mulitples have now converaged, at least from a market perspective, so it's time to close this trade out and move on.  I actually believe that Sportingbet trades at a much higher multiple than the market seems to think (I would not be long the stock this year), but you can't fight that battle in a paired trade.

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: +25.3%  Dec. vs. Nov.: 15.0%
Comments: This company amazes me.  It makes CDSS look IBM, yet WAVX continues the ward off the grim reaper by raising more money.  Not that raising money is that hard when you issue fully registered shares at a 26% discount to the market with 18% at the money warrant coverage.  It's ridiculous the SEC let's companies do this without forcing them to make a rights offering.  What a scam.  Anyway, they were only able to issue about $3.5M in shares in mid-December which buys them less an full quarter at their current $4M+ burn rate.  Perhaps 2006 will finally be the year of reckoning for Wave.

Company: Citadel Security Software Ticker: CDSS
Sub-sector: Security
Investment Thesis: Citadel offers a subscription service to help companies spot security vulnerabilities.  It's a good idea, but a lot of other companies including a number of private companies offer the same service.  Lately Citadel's business has been falling off a cliff.  They are buring cash to the tune of $5M/quarter and yet the management team hasn't done any major cost cutting.  As a VC, I can tell you first hand that it is incredibly difficult to turn around this kind of situation even if you get some product momentum.  I haven't seen a single company in this kind of shape pull it out.
Performance: Since 9/30/05: 48.3%    Dec. vs. Nov.: 35.4%
Comments: I am going to be greedy and hold this 1 more month.  The management team all got employment agreements at the end of the month which means a sale is probably just around the corner.  They are running on fumes right now and nothing else.  Funny thing is that I think it will sell for at least $20M, but the preferred stock and debt will get all of that.

Company: Emerge Interactive Ticker: EMRG
Sub-sector: Vertical Applications
Investment Thesis: Do you need software to help trade and manage cattle?  Apparently not many other people do either, otherwise EMRG wouldn't have generated only $335K in revenues last quarter.  With cash finally running out after $205M in losses this company should be headed for the slaughterhouse shortly.
Performance: Since 9/30/05: +15.4% Dec. vs. Nov.: -15.8%
Comments: I thought it would be greedy to hold on to this after making 30%+ my first month and I was basically right.  Unlike WAVX or CDSS these guys actually have enough cash in the bank to last a few quarters at their current run rate, so the day of reckoning is not upon us and they will be able to spin a lot of "hope and prayer" stories before then that may cause this to back up