Wednesday, November 28, 2012

Main Street Capital's Dividend Isn't 'Special' Enough

Just about every company paying a dividend yield has had extremely strong stock gains over the last year. Main Street Capital Corporation (MAIN) has been no exception to this rule. Though the company continues to raise the dividend, the current yield has dropped to 6%.

The company is a principal investment firm that primarily provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies.

Now that the company has gained 69% over the last year, the question remains whether investing in a BDC that only pays a 6% dividend is worth it. The company has a primary focus in the lower middle market that has a favorable investment opportunity as fewer lenders have competitive offerings for this sector after the financial crisis.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 







Monday, November 26, 2012

Does Carrizo Oil & Gas Confuse Investors Too Much?

After reporting earnings back on November 6th, Carrizo Oil & Gas, Inc (CRZO) plunged over the next week. While the company beat earnings estimates, the market was clearly disappointed with some of the reduced production estimates even if it was due to previously announced joint ventures.

The company is an oil and natural gas exploration and production company focused on the shale plays: Eagle Ford, Niobrara, Marcellus, and now the Utica.

One has to wonder if Carrizo isn't running into some of the investor's frustrations as with Halcon Resources (HK) and SandRidge Energy (SD). The numerous joint ventures along with previous sales of Barnett Shale assets make the company difficult to value. With Wall Street focused specifically on quarterly production growth numbers, the constant shifting of assets leads to confusion.

Read the full article at Seeking Alpha.


Disclosure: Long CRZO. Please review the disclaimer page for more details. 



Savient Pharma: Still Struggling To Grow KRYSTEXXA Sales

After reporting Q3 earnings, Savient Pharma (SVNT) plummeted back to a $1 from the meteoric rise to nearly $3 during the quarter. The company reported disappointing sales numbers for the promising gout drug and failed to break out one-time costs to provide investors a clearer picture of the 2013 earnings view.

As written in a previous article, Savient Pharma: The Pharma Rising From The Dead, the company was able to complete a restructuring that provided time to build the revenue base. While all of those moves left the company better equipped to survive long enough for the promising new drug to thrive, Savient has yet to prove to the market that the drug will ever meet the original estimates. Will the lowered cost structure even be sufficient enough to survive?

The company is a specialty biopharmaceutical company focused on developing and commercializing KRYSTEXXA (pegloticase) for the treatment of chronic gout in adult patients refractory to conventional therapy.

Read the full article at Seeking Alpha.


Disclosure: Long SVNT. Please review the disclaimer page for more details. 



Sunday, November 25, 2012

Document Security Services Significant Patent Moneitzation Plans

When Document Security Systems, Inc (DSS) announced plans to merge with Lexington Technology Group, Inc (LTG), the company signaled a shift in business plans to focusing on monetizing IP assets. With DSS in the process of a lawsuit against Coupons.com over misappropriated trade secrets and breached confidentiality agreements, the merger with a manager of IP assets appears to provide benefits to both shareholder grou ps.

DSS is a leading developer and integrator of cloud computing data security, Radio Frequency Identification (RFID) systems and security printing technologies that prevent counterfeiting and brand fraud.

With the LTG merger, the company plans on becoming a dominant patent monetization company with the goal of being the Blackstone Group LP (BX) of the sector.

DSS Q3 Highlights

Below are the highlights from the Q3 earnings report:
  • Revenues for Q3 2012 were $4.2 million, a 15% increase over Q3 2011.
  • Gross profit for Q3 2012 was $1.5 million, a 20% increase over Q3 2011.
  • Absent the merger costs, net loss for Q3 2012 would have decreased 19% from Q3 2011 to a loss of $635,000.
  • The company reached a significant financial milestone in September 2012, achieving the company's first month of operating profitability as measured by adjusted EBITDA.
  • Adjusted EBITDA was a loss of $61,000, an 89% improvement from Q3 2011.
  • The company reported positive adjusted EBITDA for the first month in September. While a good sign, this further questions the ability to finance patent litigation if the company has operations that drain cash.
The relatively low revenue totals highlight how the company hasn't previously been successful at monetizing assets. The technology appears to be widely used by governments around the world yet the company has been unable to obtain payments for the technology.

Lexington Technology Group Merger

Back on October 2nd, the company announced the merger with LTG that will effectively place the management team from Lexington in charge of the operations. The planned new CEO, Jeff Ronaldi, and CIO, Peter Hardigan, have extensive experience in the monetization of patents from previous work at Turtle Bay Technologies and IP Navigation Group (IPNav), respectively.

The combination of the companies provides a solid base of IP assets with the extensive patents held by DSS combined with the LTG patents recently acquired from Bascom Research. The assets provide not only the ability to expand markets, but they also provide a platform for adding patent portfolios in the future.

A primary reason for selecting a merger with DSS is that LTG needs an operating company to not only demand injunctions and lost profits, but also to provide access to the public markets if the company needs to raise capital in the future for patent deals. A non-operating, non-public entity lacks the necessary structure needed to build the patent monetization platform.

DSS IP Assets

While most of the focus on the merger has been on the IP assets of LTG, DSS has significant IP assets in the security printing and cloud security services areas recently estimated with a present value of $245M by ipCapital Group.

That amount doesn't even include the ongoing lawsuit against Coupons.com for breaching confidentiality of printable technology shared with the firm on a trial basis back in 2006. The company thinks Coupons.com has placed that technology on billions of internet generated coupons during this time period. A licensing agreement or positive verdict could amount to millions of dollars in royalties.

Along with more than 50 patents, DSS has a solid technology base for the future management team to implement the patent monetization platform.

Bascom Research Patent Suits

On October 3rd, LTG via Bascom Research announced the filing of patent lawsuits against social and business networking companies Facebook (FB), LinkedIn (LNKD), Jive Software (JIVE), BroadVision (BVSN), and Novell.

The claims are based on patents filed by Tom Bascom of Bascom Research that provide for the basic data structure of sharing and storing objects via social networks.

John Ford details some possible revenue outcomes via an article, Facebook Lawsuit Could Send Document Security Systems Share Price Soaring. The figures are staggering considering the combined merged entity would only have a market value approaching $150M.

Those Facebook revenue estimates are unlikely to be met in future years. The company is unlikely to grow revenues by 33% each year for the next 5 years. Regardless, it will have a substantial revenue base and a massive user base of over 1B people that could generate substantial fees for LTG. In fact, LTG would prefer royalties based on incremental users rather than revenue.

Besides the size of Facebook, LinkedIn has a 2013 revenue base forecast to hit $1.4B. Also, analysts forecast Jive to hit $150M in revenue for 2013 with 35% revenue growth. The combined revenue estimates for those three firms hits nearly $8B in 2013. Using the 1.5% license rate suggested by John, the fees would amount to $12OM.

In addition to the lawsuits, the company has initiated a licensing program via IPNav in order to obtain license fees from hundreds of other companies utilizing the technology created by Mr. Bascom. The potential is significant considering a majority of these companies are still in the early growth phase.

Patent Platform

The company has bigger plans than capitalizing on the existing IP assets of the merged entity. The new DSS wants to establish a platform for acquiring patent assets where the company forms a partnership model with acquired patent holders, thereby reducing the risk via spreading the wealth across the platform.

In a way, the idea is similar to how biotech firms look for multiple drugs so that the company is not dependent on the FDA ruling on one drug. Conversely, DSS doesn't want to be dependent on one patent portfolio or one lawsuit.

The ultimate goal is to obtain 5 to 7 IP portfolios that will allow for a constant flow of patent claims from the early and mid stage to the verdict or royalty collection stage. Again the process would be similar to the different phases of the drug approval process to reduce the risk of one failure.

Starting with the two existing portfolios via patents from Bascom Research and DSS, the company hopes to add a couple portfolios by the end of 2013 dependent on opportunities in the market. Once a successful platform is proven, the company might be able to attract top patent assets to participate in the rewards of a proven concept.

The platform also includes the building of the management team with significant experience in patent monetization. Not only does the company now have an experienced CEO and CIO, but also the board will include Warren Hurwitz that is very experienced in enforcing and protecting the rights of IP assets via this firm, Altitude Capital Partners. Also, the former CEO of LTG, Will Rosellini, will remain on as an advisor. Will previously worked as a scientific advisor for IPNav.

Capital Levels

One of the biggest concerns with the combined entity will be the ability to monetize these assets based on the limited assets currently on the books.

A part of the merger announcement, the company finalized a private placement for $2.7M. Considering the $10B cash hoard of Facebook, the company faces a steep challenge with limited resources compared to the defendants.

LTG is expected to have anywhere from $7-10M in cash at the time of the merger that will provide enough capital to complete the initial litigation process. Don't forget that any litigation costs remain with LTG until the merger is complete so the DSS cash level isn't important to that business at this point.

Stock

The stock remains at 52-week lows due to the weakness with the general micro cap stocks. Not to mention the recent turnover of executives isn't going to help investor confidence.

The stock has had little to no reaction since the announcement of the merger agreement with LTG. Surprisingly the news of the potential license revenue has had no impact on the stock.

1-Year Chart - Document Security Systems




For any investor with limited patent knowledge or the inability to derive the likely outcomes of the lawsuits, the current price action is concerning. The market must expect a major capital raise or some other materially negative event for the stock to remain this low. Possibly the market just doesn't grasp the potential yet, though the support at $2.50 suggests the stock might be finally bouncing off the bottom.

Patent Stocks

Based on the VirnetX Holding Corp (VHC) stock results, the market reaction on DSS has been surprising. Investors might not be aware of the stock and the potential yet. In fact, after an initial bump in the daily volume, trading has dried up to less than 100k shares per day. Another hot patent stock, Vringo, Inc. (VRNG), has averaged over 8M shares traded on a daily basis.

Another example of the relative obscurity of DSS is that only 285 investors subscribe to article alerts on Seeking Alpha. VirnetX has over 2,100 subscribers and Vringo tops the group with more than 4,700 subscribers. Clearly a group of investors interested in technology patent stocks has yet to discover DSS.

For investors not aware, VirnetX traded for less than $2.50 at the end of 2009. After huge gains in 2010, the stock shot from $12.50 to $40 in a few months in 2011 based on the expectations of a solid outcome on a patent suit with Google (GOOG). The stock has been very volatile lately due to disappointment over the recent Google award of only $30M and the large verdict against Apple (AAPL).

DSS Total Return Price data by YCharts


Interestingly, VirnetX trades at a $1.6B market value or nearly 10x the expected merged value of DSS. Could DSS eventually see major stock gains from the expectations of a large royalty?

Conclusion

Based on the recent stock weakness, investors might want to place this stock on the watch list for now. Based on the chart below, VirnetX had a consistently upward movement prior to its significant jumps in August 2011 and March 2012.

3-Year Chart - VirnetX Holding



The company has incredible potential for creating a patent monetization platform rivaled by none. Until the market realizes the potential or some positive outcome jolts the market into realizing this potential, investors might be disappointed with a stock stuck in a trading range.

In reality, until the merger finalizes in early 2013, DSS doesn't have the Facebook lawsuit or the experienced IP monetization management from LTG on its team yet. Maybe this significant fact is holding back the stock. Regardless, current investors in DSS get access to an IP portfolio that exceeds the current valuation of the stock and a breakeven technology business. The risks appear low while the rewards could be substantial. Investors should stay alert for when the market realizes the potential of this stock.


See printable version on Seeking Alpha.


Disclosure: Long AAPL. Please review the disclaimer page for more details. 



Buying Alongside Halcon Resources Insiders

Ever since the old Petrohawk management team purchased Ram Energy and invested millions of dollars last December, analysts have suggested buying the new Halcon Resources Corporation (HK). Unfortunately, unless investors bought during the first two days, anybody holding now is under water. In essence, any investors buying the stock this year have lost money.

The domestic land E&P firm is building positions in leading unconventional shale plays, such as the Eagle Ford, Bakken, Utica, and the Tuscaloosa Marine. Investors now though get the option of following those insiders who made significant purchases in the $5 area last week. Oddly though, after a strong surge Tuesday on the news of the insider purchases, the stock has started sinking again. Should investors jump in with the insiders or dump the stock?

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 




Tuesday, November 20, 2012

Glu Mobile Rebounds On Insider Purchases

Glu Mobile (GLUU) has absolutely plunged the last few months as the mobile game developer struggled with a slew of failed games during Q3. Unfortunately investors continue to forget that short-term failure shouldn't lead to the outright collapse of the stock. Long-term valued can still exist.

The company still expects over $100M in revenue next year and appears to be setting up a premier development platform. So why do investors continue to sell growth stories into oblivion? This company reached a market value below $150M yet recent deals for fast growing companies have hit 10x revenue.

6-Month Chart
























The stock slumped from $5 to $2 based on the game failures during Q3 that lead to 5 games being delayed during Q4 to allow the new President to review the monetization plans.

Considering a director bought nearly $10M worth of shares back in early October at around $3, why should the new purchases prop up the stock nearly 10% today? Maybe it shouldn't though continued buying by multiple insiders sure beats following a group constantly selling the stock. 

List from Insider Moneky:











Considering the low value of the stock now, these purchases will quickly add up to a large percentage of the stock.



Disclosure: Long GLUU. Please review the disclaimer page for more details. 




Westport Catalysts Remain Too Far Away For Investors

Westport Innovations, Inc. (WPRT) remains a leading way to invest in the transition to natural gas as a transportation fuel. As previously noted, the market is no longer impressed with the growth rate of this once market darling. The company expects to benefit greatly from the building of the natural gas highway by Clean Energy Fuels (CLNE) and a new engine from the Cummins Inc. (CMI) joint venture, though in both situations the catalyst remains months away.

The company is a global supplier of proprietary solutions that allow engines to operate on clean-burning fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen, and renewable natural gas (RNG) fuels.

Prior to the recent quarterly report, Westport dropped revenue expectations for 2012 from greater than 50% growth to a still strong 30% growth rate. These reduced numbers, while remaining strong, unfortunately point to higher than expected losses into 2013. All signs point to a strong future as US and China demand surges, yet the stock continues to show weakness as profits remain a big question mark.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



SandRidge Energy: Should Tom Ward Go?

On first thought, the announcement by TPG-Axon that SandRidge Energy (SD) should fire the CEO that founded the company and brought it to this position seemed ridiculous. After more research, the investor might just have a point.

The activist investor submitted a letter last Thursday arguing that the Board of Directors should be realigned and the CEO should resign.

SandRidge is an oil and natural gas exploration and production company that primarily focuses on the Mid-Continent, Permian Basin, and Gulf of Mexico.

CEO Tom Ward has become a prominent leader in the oil exploration field making it further unlikely that he will be ousted. He was an original founder of Chesapeake Energy (CHK) that left to start SandRidge. The combined experience suggests that he has the knowledge to make this company successful.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned: Please review the disclaimer page for more details. 



Friday, November 16, 2012

Windstream's 12% Dividend Remains Solid

When Windstream (WIN) reported earnings last week, investors took the stock down to 52-week lows over concerns the company wouldn't have the ability to pay the dividend going forward. The local telecommunications provider missed earnings yet again, but more disappointing is that capital expenditures continue to creep higher.

In order to maintain that juicy 12% dividend, the company must produce enough free cash flow to cover the cash distribution. Lately that equation has come into question even with an increasing revenue base as capital expenditures have soared.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



The Taxing Situation At Weatherford

Over a year after announcing accounting problems in the tax department, Weatherford International (WFT) continues to struggle to complete the restatement. For investors, the most boggling aspect of the tax restatement is that the company moved headquarters to Switzerland in order to reduce tax liabilities, yet the company continues to incur the highest in the industry.

The international oil services provider guided to an effective tax rate of 45% for all of 2012. More importantly the guidance for 2013 is for the effective tax rate to drop to a more historical 34% rate. The real improvement will come in later years as the company finally benefits from expected reduced rates.

So how should investors value the earnings of a company with temporarily high tax rates? The market spoke with dramatically lower stock prices to the tune of a 52-week low.

Read the full article at Seeking Alpha.


Disclosure: Long WFT. Please review the disclaimer page for more details. 



Monday, November 12, 2012

Mobile Monetization Index - November

This article is the second in a monthly series to analyze the stocks at the forefront of the monetization of the trend towards mobile data traffic. The original mobile monetization index highlighted the leading public companies. The concept was created as the market continuously lumped the new mobile stocks into the original failures of the relatively old companies such as Facebook (FB) and Google (GOOG). Recently Facebook reported a huge improvement in the monetization of mobile traffic providing hope for the sector

A range of companies benefiting from this shift to mobile traffic continues to grow. The industries range from Advertising to Real Estate to Travel with varying degrees of success and profits.

Read the full article at Seeking Alpha.


Disclosure. Long AAPL, GLUU, VELT. Please review the disclaimer page for more details. 



Thursday, November 8, 2012

SodaStream Commercial - Set The Bubbles Free

SodaStream (SODA) just released a new commercial today attacking the likes of PepsiCo Inc. (PEP) and The Coca-Cola Company (KO). As a long time investor in SODA my only hope is that it doesn't attract the angry of the sleeping giants. SODA doesn't have the balance sheet to fend off these companies yet.

Though a buyout around $100 would be nice. lol See the new commercial below:





Definitely an innovative story that should get the attention across regarding the ability to save the environment in the process of using the soda maker. One advantage to SODA is that the product can also be cheaper providing less incentive for PEP or KO to compete against them.



Disclosure: Long SODA. Please review the disclaimer page for more details. 


Top 10 Net Payout Yield Stocks For November

This article is a continuation of a monthly series highlighting the top net payout yield stocks that was started in June (see article). The series highlights the best stocks for the upcoming month.

Net Payout Yields Defined

The net payout yield is the combination of the dividend yield and the net buyback yield added together to calculate the yield returned to shareholders. The net buyback yield adds stock repurchases and subtracts shares issued. The yield is calculated using the amount of buybacks over the last four quarters divided by the current market cap.

Read the full article at Seeking Alpha.


Disclosure: Long COP, DTV, GS, KSS, MSI, WLP. Please review the disclaimer page for more details. 





Was The Stratasys Sell-Off Overdone?

The Direct Digital Manufacturing and 3D printing sector remains hot with the strong results reported by Stratasys, Inc. (SSYS) Friday morning. The stock, though, was smashed 12% as investors fretted over inline Q4 guidance.

Stratasys engages in the development, manufacture, marketing, and servicing of three-dimensional (3D) printers, rapid prototyping (RP) systems, and related consumable materials for office-based RP and direct digital manufacturing (DDM) markets.

As written back in September, with the stock trading on Objet highs, Stone Fox Capital warned that investors were placing too much emphasis on a complex merger. At that point, the stock was valued as if the merger would complete without any hitches.

Read the full article at Seeking Alpha.


Disclosure: No position mentioned. Please review the disclaimer page for more details. 


Monday, November 5, 2012

ConocoPhillips: Was Buffett RIght To Add Phillips 66?

Back in April, ConocoPhillips (COP) split off Phillips 66 (PSX) to create a company focused on upstream exploration and production. The ultimate goal was to release the company from the regulatory and margin pressures common in the refining business of the new Phillips 66.

A few months after the split, Buffett's investment arm of Berkshire Hathaway Inc. (BRK.B) famously increased investments in Phillips 66, to the surprise of most. The refining business has long been suffering due to low cost foreign imports and domestic regulations. Buffett and others though were interested in the potential of the chemicals and pipeline division. As we highlighted back then, the majority of the profits in that company will be derived from the refining arm for the foreseeable future.

So was Buffett right to invest in Phillips 66?

Read the full article at Seeking Alpha.


Disclosure: Long COP. Please review the disclaimer page for more details. 



Net Payout Yields Model Hits 2 Years on Covestor

The Net Payout Yields model continues to rack up impressive gains with the 2nd year of being offered on Covestor completed on November 1st. The model has provided a 15.1% annualized return compared to the 9.4% return of the S&P 500 during those 2 years. The performance remains more remarkable considering the model was immediately 2% in the hole back in November 2010.

As the Performance results show below, the model has been successful in outperforming the S&P 500 in every period tracked whether 2011, 2012 YTD, or the past 30, 90, or 365 days. The model continues to be a slow and steady overachiever.












The model may not be exciting, but it sure provides solid returns for a volatile market over the last 2 years. Investors wanting to sleep well at night should review the below Risk Metrics.



















All of the risks remain attractive for a model that has outpeformed the market over the last 365 days. The portfolio has an Alpha over 8% while the Beta is below 1. Any Beta below means that the portfolio has less risk than the market. The combination makes for an ideal risk/return scenario in the equity markets.

Investors interested in this model can contact Stone Fox Capital at info@stonefoxcapital.com or contact Covestor directly.


Disclosure: Future returns can not be guaranteed. Please review the disclaimer page for more details. 


3D Systems Earnings Smash Short Theory For Now

As mentioned prior, the 3D printing sector has appealing growth potential, but the valuations of the two main players have typically been at elevated levels. The stocks of 3D Systems (DDD) and Stratasys, Inc. (SSYS) were expensive in spite of the fast growth rates until the September swoon. Now 3D Systems can add a short attack to the equation.

The company is a leading provider of 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and consumers alike.

As written back on October 10th with the stock around $34, the sell-off provided a good entry point into the stock and the sector. A great Q3 earnings report helped counter the short theory and sent the stock surging to over $42 before the market closed for two days.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



Sunday, November 4, 2012

Riverbed: An Accretive Deal To Rule The Market

The mantra continues to be that "cash is king." This mantra highlighted companies with cash on the balance sheet and generating strong cash flows, but it placed no emphasis on the use of that cash. Now after years of absurdly low interest rates, those companies hoarding cash might soon find out that using that cash for an accretive deal might rule the previous king.

Prior to the market open on Monday that never happened due to Hurricane Sandy, Riverbed Technology, Inc. (RVBD) announced the deal to purchase OPNET Technologies, Inc. (OPNT) for cash and stock. The deal provides Riverbed with more access to the application performance management (APM) sector and ties in perfectly to extend the network performance management (NPM) of Riverbed's Cascade product.

Read the full article at Seeking Alpha.


Disclosure: Long RVBD. Please review the disclaimer page for more details. 



Thursday, November 1, 2012

Terex: Margin Improvements Are The Key To Stock Gains

The poor man's Caterpillar Inc. (CAT) appears to have finally turned the corner. Terex Corporation (TEX) continues to report solid margin expansion even with limited sales growth. In the past, the company routinely reported substantially lower margins than the market leader even in high growth periods.

The company is a diversified global manufacturer focused on aerial work platforms, construction, cranes, material handling and port solutions, and materials processing.

While investors might have been disappointed with lower than expected sales during Q3, the more important number remains the solid margin expansion. Generating free cash flow and improving the balance sheet is more important than growing revenue.

Read the full article at Seeking Alpha.


Disclosure: Long TEX and MTW. Please review the disclaimer page for more details.