30 November 2005

Parsing 5 Cheap Stocks from Forbes.com

Last night, the Kirk Report offered up a quick link to Forbes.com, offering up five under-$10 stocks that may not belong in the bargain basement. (Note that I have cleaned up the excerpt for ease of reading):

Are these five stocks hidden gems?

It's not unusual for investors to shun stocks priced under ten bucks,
which in the minds of some suggests poor quality. But these five
companies, all profitable over the past 12 months, have posted
five-year sales growth of more than 5% (annualized), while analysts
expect their earnings to advance at a 10%--or better--clip for the
next three to five years. In addition, all these stocks show trailing
12-month price-to-earnings multiples below their five-year averages.
Bell Microproducts (nasdaq: BELM)
Cholestech (nasdaq: CTEC)
CyberSource (nasdaq: CYBS)
Encore Medical (nasdaq: ENMC)
Southern Community Financial (nasdaq: SCMF)

First off, I ran each of these tickers through CNBC's Stock Scouter. Each rated either a 3, 4, or 5, so dismal to merely mediocre.

Next, I checked each ticker on SmartMoney.com's competitive analysis screen to check out each company's numbers, and those of some of their competitors. This process quickly weeded out SCMF from further consideration, as numerous statistics lagged its competition, including its net profit margin, PEG, price/cash flow, and ROE/ROA/ROIC.

So let's do a quick run-through of the remaining four stock ideas.

ENMC is an Austin, Texas-based designer and manufacturer of orthopedic devices. Check out their site for some impressive graphics of implantable devices for the knee, hip, shoulder, and spine. If you click on the link, you can actually make a game out of trying to figure out which futuristic device is surgically inserted into which part of the body. But if you're too lazy to do that, here's the image below. The spine is the easiest to pick out.

ENMC trades at around $5.40, about 25% off its 52-week high. Attractive numbers from SmartMoney.com include its PEG, at .94, a Price/Cash Flow of 9.40, and 5-yr Sales Growth of 53.28%. However, ENMC's Net Profit Margin is a low 3.40% and its ROE is 4.80%.

Free cash flow, from Morningstar, has been positive and significant since 2001, with a hiccup in 2004: '01 6.1; '02 8.1; '03 8.1; '04 (5.5); TTM 10.3.

CTEC makes and markets diagnostic products that help assess the risk of heart disease, diabetes and certain liver diseases outside hospitals and laboratories. Its numbers aren't so lovely: Price/Cash Flow is 15.30, ROE is 10%, 5-yr Sales Growth is 9.52% and Net Profit Margin is 11.10%. The CEO, Warren E. Pinckert, has been selling shares: over 19K in October, 20K in September, and 12K in August.

Free cash flow has been mixed since 2000, but positive in the last year: '00 3.6; '01 (1.9); '02 3.6; '03 0.8; '04 (4.6); '05 7.1; TTM 9.3.

These mediocre-at-best numbers plus the significant insider selling makes me profoundly uncomfortable with continuing with CTEC.

BELM is hard to describe in one sententce, so here's what I pilfered off of their website:

BELM...is an international, value-added provider of a wide range of high-technology products, solutions, and services to the industrial and commercial markets. The Company's offering includes semiconductors, computer platforms, peripherals, and storage products of various types including desktop, high-end computer and storage subsystems, fibre channel connectivity products, RAID, NAS and SAN storage systems and back-up products. Bell Microproducts is an industry-recognized specialist in storage products and is one of the world's largest storage-centric value-added distributors.

SmartMoney calls BELM an electronics wholesaler. Its numbers shine against the industry competition, garnering top marks in 5-yr Sales Growth of 11.55%, a PEG of .89, and Price/Cash Flow of 11.00. Its ROE/ROA of 6.90%/1.80% lag, as have the stock's returns to investors over the last twelve months and three years.

Free cash flow has been mixed since 2000, and it plummeted in the last year: '00 (70.8); '01 24.2; '02 15.2; '03 (45.5); '04 15.1; TTM (47.6).

Finally, we have CYBS, which provides online commerce transaction processing services. Very sexy. This company trades at around $7.50 and has a market cap of around $250M. Its PEG, of 1.46 is not that attractive on its own, but compares nicely within the business software and services sector. The Net Profit Margin of 14.60% is solid, with a ROE/ROA of 13.90%/12.00%.

Free cash flow may look ugly, but the numbers have moved in the right direction year after year: '00 (60.3); '01 (30.1); '02 (8.6); '03 (5.0); '04 0.9; TTM 1.7.

I think we're left with three stocks worthy of more investigation. I guess the lesson for me here is top 5 or top 10 lists are neat little packages for magazines to publish. Some would say these lists are a crutch for the editorially lazy and uncreative. In fact, I say it. Why do you think I'm blogging about a top 5 list? I'm using a news crutch for a blog crutch. How meta.

Anyway, the real lesson: These lists can contain some crap. This one sure does. I know it's just a short piece based on a simple stock screen. Once the stock screen filters out the obvious garbage, it is then up to the Pig to sniff out the subtler refuse.

When it's time to start the portfolio, I'll revisit ENMC, BELM, and CYBS.

29 November 2005

Lifecell (LIFC)

Upon a rare visit to one of the Hudson News locations in Grand Central, I picked up Monday's IBD. Why the Monday edition, after the long Thanksgiving holiday weekend? Certainly not for the IBD editorial page that eschews nuance and makes publications like the WSJ and Weekly Standard seem downright pink (and I'm not talking paper; the FT has dibs on that.) My first motivation for grabbing the IBD was for its proprietary ratings system and the IBD 100, a list of top stocks according to its evaluative methodology. Secondly, I am trying to whittle down the list of oil stocks on the WershovenistPig Stock Watch List to a couple of top investible choices.

Paging through IBD, I found a nifty table of ten "Market-Leading Medical Stocks". When my wife stumps me with health questions, I am quite fond of replying cheerily, "Lawyer, I'm a loy-yer. Not a doctor. Ask me questions if you get sued." Because I am a good husband, I then check WebMD or the Mayo Clinic website to get answers. I say this because I am quite ignorant of the medical profession and the attendant companies that work within it. So it goes without saying that I appreciate IBD finding and presenting potentially attractive medical stocks. But I said it, or wrote it, so I guess it goes with saying.

Number 6 on the list is Lifecell Corp (LIFC), the developer of AlloDerm, a human skin grafting product and process.

This Branchburg, New Jersey-based biotech firm has some quality IBD ratings:

SmartSelect Composite Rating - 97
Earnings Per Share Rating - 99
Relative Strength Rating - 94
Sales+Profit Margins+ROE Rating - B

These figures caught my eye, as well as LIFC priced at over 20% off its 52-week high.

Next I checked out the LIFC competition over at SmartMoney.com. What I found is LIFC is a small company, with a market cap of around $620M, and earnings of $12M on revenues of $84M. SmartMoney offered up companies like Amgen ($100B market cap), Gilead Sciences ($24B market cap), and Genentech ($100B market cap)for comparison's sake. Still, LIFC has solid comparable figures, as well as the lowest PEG of the group, at 1.33.

The free cash flow story from Morningstar is telling, as LIFC first generated positive FCF only in 2002, and has climbed nicely in the last two years:
'96 (4.2); '97 (6.1); '98 (8.7); '99 (14.0); '00 (13.5); '01 (2.2); '02 1.9; '03 (1.7); '04 5.6; TTM 11.1

So why is the stock significantly off its 52-week highs?

This is a small company and a volatile growth stock where bad news, even of a minor variety, can significantly affect earnings and the share price.

Last month, the AP reported that LifeCell received problematic tissue from one of its suppliers, prompting a recall:

FDA Warns About Unscreened Human Tissue; N.J. Company Under Investigation

WASHINGTON (AP) -- The Food and Drug Administration said Wednesday it is investigating a New Jersey-based company that sold human tissue to processors for eventual implantation into people because it may not have been properly screened for infections.

The New York Daily News reported earlier this month that the district attorney's office in Brooklyn, N.Y., is investigating the company, Biomedical Tissue Services of Fort Lee, N.J., on allegations the firm illegally bought body parts from funeral homes to sell to tissue processors. An FDA spokeswoman would not comment on those allegations.

The recall affected LifeCell's earnings, which came in lower than analysts' optimistic expectations:

LifeCell (LIFC:Nasdaq - commentary - research - Cramer's Take) dropped 10% after the company lowered its 2005 earnings guidance. The company, which develops products made from human tissue for use in surgical procedures, reported third-quarter earnings of $2.5 million, or 7 cents a share, on sales of $24.5 million. Results were hurt by a pretax charge related to the write-off of $1.4 million in inventory and by a $469,000 reserve for product returns related to a recall. Analysts expected earnings of 10 cents a share, with sales of $24.4 million. A year ago, the company earned $1.1 million, or 3 cents a share, on sales of $15.6 million.

For the full year, LifeCell now expects earnings of $11.7 million to $12.3 million, or 35 cents to 36 cents a share. Previously, the company projected it would earn $12.1 million to $13.3 million, or 37 cents to 40 cents a share. The company narrowed its sales projection to $92 million to $94 million from $90 million to $94 million. Analysts had forecast earnings of 39 cents a share and sales of $93.1 million. Shares were trading down $1.92 to $17.03.

This price dip could be a good opportunity to get into LIFC. LIFC is good enough for the IBD, and after this bit of due diligence, it's certainly good enough to get added to the WershovenistPig Stock Watch List.

28 November 2005

Creme Eggs and Licorice Ropes

As candy goes, I love the buttercreamy fondant center of Creme Eggs, and could live without the taste of licorice in my candy. As stocks go, figuring out whether or not I want to invest in the makers of these confections is more complicated than taste.

Jim Cramer started me down the winding Candy Land path of this post. From the 11/22/05 recap of Mad Money:

Beverage and confectionery company, Cadbury Schweppes (CSG:NYSE - news - research - Cramer's Take), announced Monday that it would sell its European beverage business, and analysts applauded, said Cramer.

He believes that Cadbury can take a hint and will sell its American beverage business, which includes Dr. Pepper, 7 Up, and Schweppes.

Cramer said candy is growing faster than soft drinks, and Cadbury's P/E multiple is being held down because of the beverage business. Cadbury trades at about 16 times earnings, said Cramer, while pure-play candy companies such as Hershey (HSY:NYSE - news - research - Cramer's Take) and William Wrigley Jr. (WWY:NYSE - news - research - Cramer's Take) sell at 23 and 28 times, respectively.

Cramer's enticing thesis is that investors will profit if Cadbury spins off its soda business and focuses on making Creme Eggs, Caramellos, and other gooey chocolate confections. Wall Street rewards growth, and would reward CSG for sloughing off its slower growth soda business. His "addiction by subtraction" thesis reminded me of my recent Greenblatt readings about spinoffs. I like this kind of counterintuitive thinking.

Taking Cramer's numbers and fleshing them out, CSG is trading at around $39 a share, with earnings per share of around $2.45, giving an approximate P/E ratio of 16. Doing some very simple arithmetic manipulation, if CSG's P/E ratio were to rise to between 23 and 28, where HSY and WWY trade, shares of CSG would trade at between $56 and $68, an increase of 44% to 74%. This is a lucrative thesis, indeed. But a thesis riding on a huge contingency:

Cadbury's multiple is sure to expand, if it sells off its American beverage business, he said.

Management has been coy about its plans, though, said Cramer. So, if it becomes apparent Cadbury isn't going to sell, the investment thesis is void, and you should get out the stock.

CSG is not such an attractive stock to own in its current form. Looking at numbers from SmartMoney.com, CSG has a PEG of 2.26. The stock has appreciated 11% in the last year and 60% over the last three, leaving CSG's current share price a bit rich when you look at its competitors in the soft drink industry. Coke (KO) and Pepsi (PEP) both have lower PEGs (2.09 and 2.02, respectively).

Among CSG's confectioners competitors is the second stock for today, an obscure producer of licorice flavorings that grabbed my attention with impressive 5-year earnings growth and net profit margin numbers, M & F Worldwide (MFW).

Here is the company's website, a simple affair that explains the diverse array of industries and products that utilize licorice flavoring. MFW even proclaims itself "The World Leader in Quality Licorice Products Since 1850" from the very, um, humble locale of Camden, New Jersey.

MFW has a profitable niche to itself. Forget commodities like precious metals and oil, MFW is minting money out of licorice root. Here are some more attractive numbers from Morningstar:

Free cash flow has been fairly steady, and impressive for a company with a market cap of $325M:
'96: 8.0M; '97: 23.0M; '98: 30.2M; '99: 26.9M; '00: 29.5M; '01: 65.3M; '02: 36.5M; '03: 33.4M; '04: 22.2M; TTM: 30.1M

MFW has a low Price/Cash Flow ratio (10.3) compared to other stocks in its industry (12.0) and the S&P 500 (14.4). Morningstar says that this low ratio can signify a good value if the cash flows are sustainable or can grow. Using the FCF history of MFW as a guide, cash flow looks solidly dependable.

MFW is about 40% above its 52-week low, and just 5% off its 52-week high. The Short Interest is 11.7, meaning there are a lot of shorted shares of MFW. SmartMoney says that "A short interest ratio of greater than 2.0 is often considered a sign that a stock's price will soon go higher. The rationale is that the large short position must be covered in the future, thereby creating buying pressure and driving the stock price up."

But not all of the numbers are cotton candy and lollipops. Earnings are down slightly from last year:

Basic earnings per common share were $0.32 in the 2005 quarter and $0.34 per common share in the 2004 quarter.

No earnings growth, no PEG.

There's also this odd bit of company diversification reported in the November 9 press release:

On October 31, 2005, the Company announced that it entered into a Stock Purchase Agreement, dated as of October 31, 2005, with Honeywell International, Inc., pursuant to which the Company will acquire all of the issued and outstanding shares of Novar USA Inc. for a purchase price of $800 million. Novar USA, Inc. is the parent company of the businesses operated by Clarke American and related companies, including Alcott Routon, Checks in the Mail and B2Direct. Clarke American provides check-related products and extensive servicing to financial institution customers. Alcott Routon provides direct marketing programs based on analytics and predictive modeling to help financial institutions target customers. Checks in the Mail supplies checks and other financial documents directly to consumers, and B2Direct offers customized business kits and treasury management services to businesses.

The company acquired an unrelated check printing business with their piles of ducats. The synergistic possibilities here elude me.

So we have some negatives to contend with:
1. Negative earnings growth;
2. Licorice business tied to the tobacco business which may be growing abroad, but is stalled here; and
3. Paying bills online should be hurting the check printing firms, right?

Candy is a sweet and tasty treat. It also can make you hyperactive. Candy can put a smile on your face, or contribute to unsightly tooth decay. Not to mention a flabby middle. I'm really stretching this metaphor, but these pros and cons, risks and rewards, are reflected in CSG and MFW. These stocks have been sweet to their investors, but is the flavor about to run out?

22 November 2005

Battle Royale - NASDAQ Winners

This is the battle of NASDAQ 52-week highs (from last week) that I promised in the first Battle Royale post. Let's begin, without any Michael Buffer-style announcements.

Comparisons may be difficult to make with these apples and oranges, so I'm throwing out some extra numbers for your edification.


Numbers from SmartMoney.com: PEG 2.94, ROE/ROA/ROIC 343.96%/-23.46%/363.72%, Total Debt/Equity -.03
Free cash flow numbers from Morningstar.com: '00 - 18.3; '01 - (33.7); '02 - (21.0); '03 - 16.8; '04 - 37.3; '05 - 20.7
CNBC Stock Scouter Score: 10

Profile excerpts from Yahoo! Finance:
Aspen Technology, Inc. and its subsidiaries supply software and services to the oil and gas, petroleum, chemicals, pharmaceutical, and other industries that manufacture and produce products from a chemical process. The company develops software to design, operate, manage, and optimize its customers’ key business processes, including plant and process design, economic evaluation, production, production planning and scheduling, and managing operational performance.

I appreciate that AZPN is no start-up clamoring for quality clients. Check out this bit of immodesty from AZPN's website:

AspenTech boasts a client list that includes some of the major names in the process industries, including:

23 of the top 25 petroleum companies
47 of the top 50 chemical companies
19 of the top 20 pharmaceutical companies
16 of the top 20, and all of the top five, engineering, procurement & construction companies

AZPN could be an interesting derivative Fort McMoney oil play.

I'm having real trouble gathering quality information that would explain AZPN's sudden increase in share price. Some IBD and technical analysis-types are paying attention, as AZPN's trading volume is up along with the price, at its resistance level. Here is a pretty graph that back up my brief ignorant foray into the world of technical analysis.

I need a shower after that.

AZPN is interesting, with some decent, erratic positive free cash flow. The PEG is high, and the there's some debt, two negatives. I'd like to learn more about this one.


Numbers from SmartMoney.com: PEG N/A, ROE/ROA/ROIC 148.57%/-7.29%/-10.58%, Total Debt/Equity -9.63
Free cash flow numbers from Morningstar.com: '00 - (4944.0); '01 - (2184.0); '02 - (645.0); '03 - (167.0); '04 - (352.0); TTM - (368.0)
CNBC Stock Scouter Score: 6

Profile excerpts from Yahoo! Finance:
Level 3 Communications, Inc. provides communications and information services worldwide. It offers softswitch services, including managed modem for the dial-up access business, wholesale voice-over-IP (VoIP) component services, and consumer oriented VoIP services; Internet protocol and data services, such as Internet protocol transit and network interconnection solutions; and transport and infrastructure services that include high-speed Internet access services, wavelengths, and dark fiber services.

LVLT's debt load is astounding, and presumably correlates to their significant negative free cash flow. Analysts predict increasingly negative earnings over 2006. VoIP is a technology full of potential. Growth investors gravitate to trendy tech, but the cool factor only hastens my retreat from this stock.

Stephen D. Simpson at Fool.com sends LVLT to the showers in these excerpts:

There were also some encouraging words behind the numbers. Prices are declining more slowly, and demand is still firm. Of course, the capacity problem remains -- demand for network capacity is strong and growing, but there's still a glut of available capacity. Services like broadband Internet and voice over Internet protocol should take up more and more of this surplus, but that's going to take years.

No doubt Level 3 has good technology and customers -- including the likes of SBC (NYSE: SBC), Time Warner (NYSE: TWX), Microsoft (Nasdaq: MSFT), Comcast (Nasdaq: CMCSA), and Verizon (NYSE: VZ) -- but it's also got $6 billion in debt. Unlike the cable or cell phone companies of the '80s and '90s, Level 3 can't assume that its large initial losses will be offset by concurrent revenue growth and potential monopoly power.
Anyone who holds these shares today is likely a trader or speculator. That, or they have a great deal of faith in the idea that all of Level 3's built-out capacity will turn into real profits and shareholder value. Since I neither speculate in stocks nor invest on faith, I'll be staying well away from these shares.


Numbers from SmartMoney.com: PEG .20, ROE/ROA/ROIC 4.06%/2.57%/3.23%, Total Debt/Equity .26
Free cash flow numbers from Morningstar.com: '00 - 32.0; '01 - 2.6; '02 - (7.1); '03 - (17.9); '04 - (3.0); TTM - 0.7
CNBC Stock Scouter Score: 7

Profile excerpts from Yahoo! Finance:
RealNetworks, Inc. provides network-delivered digital media content and services worldwide. It also develops and markets software products and services that enable the creation, distribution, and consumption of digital media. The company primarily offers its products under two categories, Consumer Products and Services (CPS), and Business Products and Services (BPS). The CPS category offers digital music products and services, including Rhapsody, an ondemand digital music subscription service; RadioPass, an Internet radio subscription service; and the RealPlayer Music Store, which enables consumers to purchase and download individual digital music tracks.

Fool.com delivers more useful insight into RNWK:

Investors keep buying into different versions of RealNetworks (Nasdaq: RNWK). Some have invested on the heels of its settlement with Microsoft (Nasdaq: MSFT), which will fatten its already cash-stocked balance sheet. Others have bought into RealNetworks for its popular Rhapsody digital music subscription program, which continues to gain new listeners. Still others are buying into RealNetworks for the lucrative deals it brokers with wireless giants. Last night, as it does every three months, the company revealed the sum of those parts in its latest earnings statement.

RealNetworks posted earnings of $0.06 a share on a 20% spurt in revenues. The profit reversed a year-ago loss, though the company has been in the black for all three quarters of 2005. The current quarter will be a winner, thanks to Microsoft's nine-figure apology. RealNetworks will earn between $1.42 and $1.48 per share for the period. Obviously, though, that will be a one-time boost -- don't even try to incorporate those lofty sums into the company's earnings multiples.

Rhapsody's subscriber base has doubled over the past year to 1.3 million users. Yes, this is a competitive niche. Even though RealNetworks was a pioneer in digital music, it has to compete against the likes of Napster (Nasdaq: NAPS) and Yahoo! (Nasdaq: YHOO) in music subscription services, as well as Apple (Nasdaq: AAPL) and Microsoft when it comes to paid downloads.

Given its 184 million diluted shares outstanding, I'd really like to see RealNetworks use some of its balance sheet greenery to buy back even more shares. As strong as RealNetworks may appear to be, its earnings are getting watered down among all that stock. Unless RealNetworks is planning to buy out Napster or make any other synergistic acquisition, it's not likely to need all the money that's collecting cobwebs in its coffers.

Good to hear complaints about a company having too much cash. (I know, companies like MSFT and XOM have too much cash, and it becomes increasingly difficult to find ways to get a good investment return on that cash hoard, etc. etc.)

I wonder if that sexy PEG is a result of the MSFT settlement figured into earnings?


Numbers from SmartMoney.com: PEG N/A, ROE/ROA/ROIC 15.35%/13.18%/15.35%, Total Debt/Equity 0
Free cash flow numbers from Morningstar.com: '00 - 1.0; '01 - (0.1); '02 - 0; '03 - 0.1; '04 - 2.5; '05 - 0.9; TTM - 0.9
CNBC Stock Scouter Score: 6

Profile from Yahoo! Finance:
U.S. Global Investors, Inc. through its wholly owned subsidiaries, provides mutual fund management services. It provides investment advisory services to institutions and individuals; transfer agency and record keeping services; mailing services; and distribution services to mutual funds advised by the company. The company primarily invests in early-stage or start-up businesses. U.S. Global Investors was founded in 1968 and is headquartered in San Antonio, Texas.

GROW sells 13 different mutual funds, several of which earn four and five-star ratings from Morningstar. This is a small purveyor of funds. So will GROW grow?

IBD gives GROW an overall score of 81, or a B. The S&P report reads in a similar B-grade, somewhat positive fashion. But the folks at Yahoo!, teaming up with IBD, have this stock at #3 on a top under-$10 stocks list.

This battle is too close to call between AZPN, RNWK and GROW. I would appreciate any readers comments on this one.

Battle Royale - NASDAQ Losers for November 21

This sad array of tickers appeared on the NASDAQ 52-week low list yesterday:


They're mostly unfamiliar to me, too. I weeded out the sub-dollar stocks, as well as the issues with narrow 52-week trading ranges, namely a couple of local banks. I noticed some stocks that appeared on the list last week. I left those free-fallers off. That left:


Quickly scanned the Key Statistics page at SmartMoney.com for each of the above to see if any had positive signs, or were profitable, so I wouldn't waste more time than I needed to on obvious duds.

And then there were three: DYII, HAST, and SYMC.

It's time for battle. Allez cuisine!

DYII - Dynacq Healthcare - Down $0.35 to $2.80. 52-week range: $2.81-$5.60

Here's what DYII does, as explained on their website:

Dynacq focuses on efficient, high-volume specialty surgical hospitals and ambulatory surgery centers to provide excellent healthcare for our patients. Our facilities specialize in a small number of higher-margin specialties and procedures – orthopedics, neurosurgery and general surgery.

DYII operates these surgery centers in Pasadena, West Houston, and Dallas, Texas, as well as in Baton Rouge, Louisiana. They are working on a joint venture project in China.

The Dynacq website is pitching pretty hard to surgeons, a refreshing relief from small companies who often seem desperate to woo investors on their websites. Dynacq plays up their business' benefits to surgeons: increased efficiency, numbers of procedures performed, and of course, income.

Why did the stock hit a 52-week low? Dynacq's press release for its 2005 fiscal year results explains:

HOUSTON--(BUSINESS WIRE)--Nov. 16, 2005--Dynacq Healthcare, Inc. (NASDAQ Capital Market:DYII) announced audited financial results for the fiscal year ended August 31, 2005. For the fiscal year ended August 31, 2005, net patient revenue decreased by $7,574,517 or 12% from $62,849,378 in fiscal 2004 to $55,274,861 in fiscal 2005 primarily due to declines in both net patient service revenue and patient procedures at the Pasadena, West Houston and Baton Rouge Facilities. Net loss increased by $3,528,674 from a net loss of $1,608,260 in fiscal 2004 to a net loss of $5,136,934 in fiscal 2005.

Dynacq's business declined at three of its four locations. And Dynacq is more unprofitable in 2005, than in 2004, with a net loss increase of 219%.

I don't know how this weak contender slipped into the competition. I can't find anything positive on their Key Statistics data sheet.

HAST - Hastings Entertainment - Down $0.54 to $4.96. 52-week range: $5.05-$9.99
Fool.com just posted a negative review of Hastings yesterday. I've included it here with some edits for clarity:

Hastings Wasted

By Nathan Slaughter
November 21, 2005

With Thanksgiving fast approaching, retailers far and wide are anxiously awaiting Black Friday, the start of the frenzied holiday shopping season. Cooler weather, enticing promotions, parking lots crammed with early bird shoppers ... it's an ideal time for a struggling company like Hastings (Nasdaq: HAST) to lift its sluggish sales out of the doldrums.

However, I seem to recall having a similar amount of optimism this time last year -- misplaced optimism, as it turned out. The one-stop shopping specialist has struggled ths year, and those hoping it might gain some traction heading into the critical fourth quarter will be disappointed. Yesterday, the company announced that third-quarter losses widened from $0.14 to $0.24 year over year, while revenues that slipped 4.2% to $114.6 million.

The company's game and movie rental operations continue to deteriorate, faced with competition from online sources like Netflix (Nasdaq: NFLX) and consumers' increasing preference to buy films rather than rent them. For the quarter, rental revenues dropped 10% to $21 million. Unfortunately, the merchandise segment wasn't able to bail the company out this time, as comps for music, books, and video sales all showed a decline. Even the traditionally strong video game department registered a disappointing 9.4% same-store sales drop, though last year's impressive 51% gain made for difficult year-over-year comparisons.

After hearing the news, investors headed quickly for the exits. The stock tumbled 12% to a new 52-week low below the $5 mark. The sharp pullback has made these cheap shares even cheaper:

Industry Average vs. HAST
Price/Sales - 0.1 vs. 4.9
Price/Book - 0.7 vs. 5.0
Price/Cash Flow - 1.0 vs. 25.1
PEG - 0.8 vs. 1.0
EV/EBITDA - 3.5 vs. N/A

The format in Hastings' 150 superstores is a bit unconventional. Video game and movie rental sections share space with trade-in counters for used CDs and movies, along with sections for new books, software, DVDs, cassette tapes, stereo equipment, and greeting cards. Look hard enough, and you might even find a Ted Nugent eight-track tape tucked away somewhere.

While the stores are a convenient place to shop, their recent numbers have been less than encouraging. On the positive side, Hastings managed to expand its gross margins more than 200 basis points during the seasonally weak third quarter, and the lone analyst who tracks the company has pegged its long-term growth rate at a respectable 10%.

Still, until the higher-margin rental side of the business shows signs of leveling off and merchandise comps return to positive territory, even Hastings' compelling price tag may not make it worth buying.

I buy completely into the conventional wisdom that the brick-and-mortar media retail business model is a terrible investment. When I think of buying CD's, which is getting rarer these days, I buy online, or go to a specialty store like Other Music. DVD's come from DeepDiscountDVD.com and Amazon.com. If I were to rent DVD's, I would use Netflix. If I were stuck living near a Hastings, I doubt I would feel compelled to shop there. And I don't think I'm out-of-the-ordinary here.

However, HAST has some cheap numbers. Its Price/Sales, Price/Book, and Price/Cash Flow ratios are are very low. Its PEG is 1.01. HAST is profitable, but not very, with a Net Margin of 0.90%. ROE/ROA/ROIC is 5.50%/1.93%/3.59%, also lower than its competition. The Fool.com writer is spot-on that this is an mediocre company with an unfocused, unconventional business model in an unappealing sector. That's why the stock is cheap.

SYMC - Symantec Corp. - Down $0.47 to $17.96. 52-week range: $18.01-$34.05

I wrote a short description of SYMC, but then I found a surprisingly well-done overview and recommendation of the stock:

With innovative technology solutions and services, Symantec helps individuals and enterprises protect and manage their digital assets. Symantec provides a wide range of solutions, including enterprise and consumer security, data management, application and infrastructure management, security management, storage and service management, and response and managed security services.

Symantec is the world leader in providing solutions to help individuals and enterprises assure the security, availability and integrity of their information.

Symantec's recently completed merger with Veritas leaves no doubt: Symantec is the best security software company in the world. The announcement of the Veritas merger started a prolonged decline in Symantec shares that I believe culminated earlier this month when the company lowered its revenue guidance and announced the resignation of its CFO.

At this point, I believe all the bad news is priced into the stock. Yes, Symantec lowered its 2006 revenue forecast but is still projecting $5 billion of sales in the coming year, has minimal debt, more than $4 in cash per share on the books, and cash flow above $840 million in the past 12 months.

I would be a buyer right here in the $19.50 range. If you are a trader and like to book short-term profits, I would sell at the 21-day moving average of $21.69.

Because this company is so undervalued, I would set a stop-loss just above the 52-week low of $18.01. If it goes back to that area, I would buy more.

Y'know who wrote the above piece? Former Phillies centerfielder, Lenny Dykstra.

Why is SYMC down? A slew of analysts downgraded the stock this past month. Bear Stearns initiated coverage with an underperform call.

How about some numbers? PEG of 1.07. ROE/ROA/ROIC of 3.50%/2.51%/3.50%. Net profit margin of 7.30%. SYMC's numbers are lower than its competitors, Internet Security Systems (ISSX) and VeriSign (VRSN). For the PEG, that's good. For the others, not so much.

Lenny's poised for a SYMC comeback. It's certainly the winner of this battle royale, but noting the strength of this field of competitors, it's not much of a victory.

21 November 2005

NASDAQ Big Movers Battle Royale - First Up, The Losers

You caught me rummaging through the daily lists of NASDAQ 52-week highs and lows.

If you click on one of the sidebar links to NASDAQ's daily tally of 52-week highs and lows for the three major American exchanges, you'll see that it can be a random walk around success (new highs list) or daily Sisyphean failure (stocks appearing a few times a week on the new low list). It's also a list of logos (NASDAQ-only), from the colorful and eyecatching, to the black-and-white descriptive. These lists offer an opportunity to explore companies and stocks that are outside of my interests, and on the margins of the business media's radar. The only criteria on making this list is stock performance.

For this exercise, I immediately filtered out any stock trading below $1 on the new low list. For the new-high list, I left out any stock that's trading much above $10 since I'm also trying to dig up more obscure stocks.

I plugged each ticker into the Key Financials page at SmartMoney.com. I'm generally looking for some sort of profitability, maybe some decent ROE/ROA/ROIC numbers, even a favorable PEG ratio. I entered 25 tickers. Most did not survive initial scrutiny. Maybe that's for the best, because the ones that did will be put through potentially humiliating analysis, stripped naked and prodded, all to see if we can find a stock worthy of inclusion in the oh-so-exclusive Stock Watch List.

Here are the candidates:

First off, from the November 18, 2005 NASDAQ 52-week lows (boo!)


And from the NASDAQ 52-week highs (*clap* *clap*)


I'll review the four winning stocks in an upcoming post, but here they are if any reader cares to comment on them ahead of time.

First, let's deal with the losers, battle royale style. Last stock standing gets a coveted spot on the Pig stock watch list, where the ticker will appear daily, for all Pig readers to appreciate. (I'm going with Iron Chef-style rewards for victory: the respect of one's peers and glory in victory, but no cash or a showcase of prizes.) The others will soon be forgotten in the unvisited archives of the blogosphere. Oh what a damning fate.

First up Envoy Communications Group, Inc. (ECGI) operates Watt International, an advertising consultancy specializing in private label products. What does that mean? They help create, design, and market the no name store branded products you get at stores like Wal-Mart and Safeway. Watt International designed President's Choice-branded foods sold at supermarkets across the United States. They currently work on Wal-Mart's home and garden product line. Previously, Watt consulted on Home Depot store layouts and signage, and designed the CTV news studio, which should mean something if you're Canadian, I guess.

ECGI also operates Parker Williams Design, based in the UK. However, that company's website is currently being re-designed. Hmm, very reassuring.

ECGI just hit a 52-week low, dropping $0.17 to $1.54 per share. A negative 2006 outlook press release probably triggered the drop. Check it out:

Preliminary comment on fiscal 2005 results and 2006 outlook
- PR Newswire
TORONTO, Nov 18, 2005 /PRNewswire-FirstCall via COMTEX/ -- Envoy Communications Group Inc.'s (Envoy) preliminary information indicates that results for fiscal 2005 will substantially meet previously announced earnings guidance of $.28 per share. Fiscal 2005 results will be released in December after approval by Envoy's Board of Directors.

Looking forward, Envoy believes that there are a number of economic uncertainties, competitive challenges and business risks that will impact the client spending commitments of its operating companies. As previously announced with its third quarter results, Envoy is experiencing price pressure on its roll out production services in both the UK and North America. Envoy has recently taken certain efficiency related initiatives, including outsourcing programs to lower cost centres and concluding strategic alliances and joint venture arrangements with business partners in new geographic markets.

As a result of these initiatives, Envoy's Board of Directors has approved the immediate implementation of a restructuring plan. Accordingly, Envoy will incur a restructuring charge of approximately $1.6 million in the first quarter of the current fiscal year. The annual savings in salaries, benefits and other expenses associated with this restructuring is approximately $3.7 million. Management believes that, by implementing the restructuring plan now, Envoy will be better positioned to remain profitable, if its clients' historical spending patterns do not materialize in the short term. At the same time, management will be pro-active in implementing other initiatives to achieve organic sales growth, reduce operating expenses and improve efficiencies.

Envoy has strengthened its strategic and creative services, which has resulted in Envoy winning significant consultation assignments with several of the largest retailers in North America. Although the company will continue to provide world-class production roll-out services, it will increase its pursuit of strategic assignments, as such assignments have the potential to increase Envoy's profit margins in the future.

ECGI is apparently buying back its stock. It is authorized by the NASDAQ and TSX to buy back up to 400K shares per month. As of June 30, 2005, there were 21.6M shares outstanding, giving the company a market cap of about $33M.

According to SmartMoney.com, ECGI has a ROE/ROA/ROIC of 3.83%/3.35%/3.82%. The company is profitable, but ever so slightly. Free cash flow numbers from Morningstar.com were erratic:
'00 (2.8); '01 10.6; '02 (14.4); '03 2.8; '04 (2.3); TTM (2.3)

Martek Biosciences Corporation, MATK, was down $0.60 to $26.37, well off its 52-week high of $70.50. From the MarketWatch.com profile:

The Group's principal activities are to develop, manufacture and sell products derived from microalgae. These products include specialty, nutritional oils for infant formula; nutritional supplements and food ingredients to promote mental and cardiovascular health; fluorescent markers for diagnostics, rapid miniaturized screening and gene and protein detection. The Group also develops new fluorescent detection products from microalgae that connect fluorescent algal proteins to antibodies. The trademarks of the Group include Neuromins (r), DHA Gold (r), DHASCO (r), and ARASCO (r).

Yummy yummy microalgae. MATK is down as analyst earnings expectations for '06 have been lowered recently. However, MATK has an attractive PEG of .98. Its ROE/ROA/ROIC is 10.80%/8.35%/9.18%. Negative free cash flow has been the tune for MATK for each of the last ten years.

PDCO, Patterson Companies, a distributor of dental, veterinary and rehabilitation products, fell $7.19 to $35.01. Dow Jones reported on the 18th that PDCO lowered its second-quarter earnings expectations to 32 cents a share, down from 35 to 37 cents. It also lowered its 2006 profit forecasts from $1.54 - $1.58 a share, to $1.44 - $1.46. PDCO has a PEG of 1.26, and an ROE/ROA/ROIC of 18.88%/10.91%/13.86%. The free cash flow is consistently positive, although lower in the TTM:
'00 52.5; '01 70.1; '02 79.4; '03 75.4; '04 178.1; '05 175.8; TTM 131.3

A quick perusal of news releases on TheStreet.com showed that PDCO is getting sued by a bunch of shareholder-class-action plaintiff's firms over missed earnings in March 2005 and alleged SEC violations. This type of litigation getting pretty typical these days when earnings surprises occur, so it's important to note the potential litigation costs, but not to worry too much. The bigger worry is PDCO's continued inability to meet Wall Street expectations.

SAFM, Sanderson Farms, Inc. produces, processes, markets and distributes fresh and frozen chicken and other prepared food items. The stock was down $1.10 to $31.70. Its ROE/ROA/ROIC of 21.56%/16.62%/20.89% compare very favorably to its competitors' numbers, namely Tyson Foods, Smithfield Foods, and Hormel Foods. SAFM's free cash flow has been positive and healthy, except for TTM, which is (7.5).

SmartMoney.com noted SAFM on September 28 as an appetizing takeover target:

In addition to being oil country, the Gulf Coast states affected by Katrina are also part of chicken country. Mississippi alone accounts for 9% of U.S. chicken production. Sanderson Farms (SAFM: 31.70, -1.10, -3.4%), headquartered in Laurel, Miss., had a bit more exposure to the storm than some of its competitors. About two-thirds of its capacity is in Louisiana and Mississippi. Fortunately, none of the chicken processors fared too badly. Sanderson says it lost about $3 million worth of chickens and $1 million worth of meat ready for export, and that the hurricane didn't have any long-term impact on operations.

Last year Sanderson sold 1.5 billion pounds of chicken, collecting $1.05 billion in annual sales, or about 20% more than it made in 2003. Conditions were ripe as poultry prices had climbed about 17% year-over-year. Since then prices have dipped slightly, and Sanderson's stock chart has flattened. Sales are expected to decrease this year to $1.01 billion and to increase to $1.14 billion next year.

Shares slid about 8% on Aug. 23, when the company released its fiscal third-quarter financial results. Sales fell 10% on a 6% decline in whole chicken prices and a 41% drop in boneless breast meat prices. Profits plunged 29% to $24 million. Per-share profits of $1.19 missed analysts' expectations by 13 cents. Included in the earnings were seven cents per share in start-up costs for a new processing plant in Georgia.

Despite the earnings shortfall — and partly because of the stock's fall — there's much to like about Sanderson right now. Industry watchers say that it's the most efficient chicken processor in the business. Its gross margin of 16.9%, vs. 13% for Pilgrim's Pride and 6.7% for Tyson, supports that claim. We've written in the past about how chicken processors are trying to mix more "value added" chicken products (preseasoned entrées and so forth) into their sales in an effort to boost margins. Sanderson seems to have taken the opposite tack, embracing the fresh chicken business that its competitors are lightening up on. Its new facility in Georgia will increase its capacity for tray-packed fresh chicken by 40%. Analysts say the company is shaping up to be the country's low-cost producer of fresh chicken.

Short-term cost fluctuations aside, analysts say that chicken pricing is more or less stable at the moment, and that the outlook is favorable. Domestic production is growing at about 3% to 4% a year. Domestic consumption is increasing at 2%, but exports are expanding at 10%. Sanderson's export sales accounted for just 6% of its overall revenue pie last year, suggesting that the company has room for growth.

Shares of Sanderson trade now at about 10 times the forecast for 2005 earnings, lower than an average of 12 for the group as a whole. With negligible debt and about $50 million in net cash on the books, the company's EV/Ebitda ratio stands at just under four. The average for meat processors is seven. Add to that a 1.1% dividend yield and Sanderson shares at their current price look plenty appetizing.

The last stock is Taro Parmaceutical. TARO. Its low PEG of .37 drew my attention. Then I saw its low ROE/ROA/ROIC numbers (5.51%/2.96%/4.89%) as compared to its competition. I then found the following bit of terrible news from TheStreet.com:

Shares of Taro Pharmaceutical (TARO:Nasdaq - commentary - research - Cramer's Take) were among the worst-performing health-related stocks Thursday, tumbling 33% after the company posted third-quarter results that fell well below Wall Street expectations.

The drugmaker earned $2.1 million, or 7 cents a share, on sales of $72.5 million. Analysts polled by Thomson First Call expected earnings of 28 cents a share, with sales of $80.7 million. During last year's third quarter, the company earned $4 million, or 14 cents a share, on sales of $73.3 million. "Our results reflect the competitive nature of the generic drug industry and our continuing investment in the development of proprietary and generic drugs," the company said. Shares were trading down $7.12 to $14.78.

The Pig is pleased that Sanderson is a poultry processor, and stays away from the pork. I'm also pleased to add SAFM to the Stock Watch List as the first winner of the NASDAQ Big Movers Battle Royale.

Do you think I made the right call? Did I find a pearl among swine, or did I just polish a turd?

18 November 2005

Why Men Should Be Involved in Wedding Planning

While digging up research on Jones Soda, I noticed TheKnot.com (KNOT) pop up along with it, as a small stock to watch. I vaguely recall the site from the days and months before my wedding.

Apparently, I should have paid more attention to TheKnot(and to wedding planning, as well). Investors have paid attention, and paid increasingly more for shares over the course of 2005.

Rick Aristotle Munarriz at fool.com called attention to KNOT twice this year, on March 10 and June 22. Here are the knotworthy excerpts from each date:

TheKnot.com (OTC BB: KNOT): $6.10. While it's easy to spot the flaw in the wedding resource site's plan -- it's an attractive draw for brides-to-be and nervous grooms-in-waiting for just a sliver of time -- what a great time to have someone's attention. With an audience that's young and ready to spend a ton of money, it's easy to see why online advertising rose by 41% for TheKnot.com last year. It turned a modest profit of $0.06 per share, and I like what I see in the company's recent moves to grow its audience beyond the current 1 million active members.

TheNest.com is the company's new site for newlyweds. It's an underserved and lucrative niche. The company also acquired a pair of dating sites a few months ago. Put together, you have a dynamic company that is now reaching out earlier in the courtship cycle, while also extending its grasp to the other side of "I do."

The Knot (Nasdaq: KNOT): $6.70
If you've ever walked down the aisle in the name of matrimony, you've probably had plenty of practice by the time you formally say, "I do." It's often a question the bride and groom ask themselves in the planning process. You need bridesmaids' dresses? "I do?" You'll need a DJ lined up for your reception? "I do?" That's where The Knot comes in. For those tying the titular knot, TheKnot.com is a resource for all those wedding details. The Knot has a killer brand that has been featured in various television outlets -- including a key role in the second season of "The Apprentice," when The Knot saved the day for one team.

It seems that the young and underprepared have been relying on The Knot -- the company's online advertising revenue rose by 41% last year. It's profitable, too.

However, what I most like about the company is how it has just started to capitalize on its strong position in drawing prospective newlyweds and broadening its wingspan. The company recently launched TheNest.com, designed to be a site for the newlyweds it helped get hitched in the first place. It also acquired a pair of dating sites, giving the company an even earlier hand in the courting process.

Since these pieces ran, TheKnot.com announced in September that it was teaming up with Zale Corporation, owner of Zales Jewelers, Gordon's Jewelers and Bailey Banks & Biddle. Together, they will cross-promote and cross-market each others brands.

I hope you ignored the outdated price quotes in the fool.com excerpts; KNOT currently trades for around $11.40 as I write this. So are we too late to the (wedding) party?

I think so. Let's look at some more numbers to make sure.

Free cash flow figures from Morningstar.com show much improvement. Between 1999 and 2002, KNOT had negative FCF, but I'm not surprised to see that in an internet start-up. In '03, KNOT had $3.1 in positive free cash flow. It dropped to zero in '04, but the trailing twelve months have seen a rebound to $3.0M. These are positive, but small numbers.

SmartMoney.com has some larger numbers that we need to consider. PEG is 1.31, so KNOT is no longer the bargain of six months ago. The P/E, a metric I don't bandy about much, is a lofty 102, based on a market cap of $255M. This should be unsurprising in a speculative growth stock.

Roughly half of all marriages end in divorce--we should wait and see if investors split up with their KNOT holdings, and then take another look.

17 November 2005

Watching the Watch List

It's time to check in and see what's going on over on the WershovenistPig Stock Watch List. Behind the scenes on this blog, I looked up historical closing prices on Yahoo! Finance for each stock on the List for the day it was added to the List, and for November 16, 2005. I also looked up just about every other stock I have mentioned on the blog, the closing prices the day prior to mention, and the closing price for yesterday, as well.

Much of the data is boring (and depressing, considering how crummy October was for the markets), so I'm keeping most of it to myself. But not all of it:

Best Performers on the Watch List
ATYT + 43.9%
ARXT + 33.4%
CTRN + 20.9%

Worst Performers on the Watch List
DWRI - 50.3%
MRH - 26.5%
SNAK - 21.1%

Best Left off of the Watch List
WPTE - 22.0%
ECA - 21.6%

Wish It Were on the Watch List
SIRI + 22.9%
COST + 19.0%

How are the individual groupings of stocks on the Watch List doing? Overall, pretty crappy, I'd say. But that's why it's a Watch List, and not the WershovenistPig Portfolio; the barrier to entry is much lower. By the way, the aforementioned WershovenistPig Portfolio is coming soon. There, I will put my money where my mouth is (a discretionary portfolio where my blog is?), by blogging my moves before and after I make them.

Well, shall we get back to scrutinizing the Watch List?

For the individual groupings, I weighted each stock equally, using the closing price of the date I added the stock to the List as the initial price.

Fort McMoney -9.0%
Other Energy -4.6%
Discount Shopping Thesis +5.6%
Trendy Shopping -9.8%
Casinos and Poker -4.8%
Security -0.5%
Buybacks=Greenbacks Basket +2.3%
Cheap Media (Not Bulk Blank CD-R's) -2.4%
The Doghouse +0.8%
Other Stocks at the Trough +3.1%

Four groups in the black; six groups in the red. Dividing out the Canadian oil sands stocks from the other energy stocks created the losing record.

16 November 2005

"I cannot finish a bottle, I just can't." - Jones Soda (JSDA)

That's a quote from the Jones Soda CEO, Peter van Stolk. If you look carefully at the label to the left, you'll see it's a bottle of smoked salmon soda (as opposed to regular salmon soda, and diet salmon soda with Splenda).

I think this is hilarious. It's also a brilliant bit of marketing that gets people talking, and apparently, blogging about a company. A funny CEO? A cool company? Hmm.

Fark.com brought the
salmon soda story
to my attention:

Bottler offers salmon-flavoured soda
Tue Nov 15, 2005 12:38 AM GMT

SEATTLE (Reuters) - For beverage connoisseurs tired of turkey-and-gravy or green-beans-and-casserole flavoured sodas, there's a new choice being offered this year by speciality U.S. soda maker Jones Soda Co.: salmon.

Jones Soda, the Seattle company that scored a hit during the last two holiday seasons with its turkey and gravy-flavoured sodas, said it is offering the orange-hued fish-flavoured drink this year in a nod to the Pacific Northwest's salmon catch.

"When you smell it, it's got that smoked salmon aroma," said Peter van Stolk, chief executive of Jones Soda.

The salmon-flavoured soda will be offered as part of a $13 "regional holiday pack" that also includes other unusual sodas such as turkey & gravy, corn on the cob, broccoli casserole and pecan pie.

While those five bottles will be offered locally, Jones Soda is also selling its similarly-priced "holiday pack" of turkey and gravy, wild herb stuffing, brussel sprouts, cranberry and pumpkin pie sodas across the country.

Thanksgiving, a U.S. holiday that falls on the fourth Thursday of November, typically features a dinner with turkey, gravy and other condiments.

Van Stolk, who built his Seattle-based soda company by selling traditional sodas as well as exotic flavours such as green apple, bubblegum and crushed melon, said that "the most important thing (about Jones Soda) is that we can laugh at ourselves."

Asked whether he liked his new salmon soda, van Stolk said: "I cannot finish a bottle, I just can't."

You know who is selling this holiday pack across the country? The cool kid of discount retailers, Target. I learned this from trudging through the comments section on Fark. Cramer also
positively noted
the JSDA/TGT connection back on August 25:

Is Jones Soda (JSDA:OTC BB - news - research - Cramer's Take) going places?

-- Dennis from Detroit

James J. Cramer: This is one speculative stock that I believe has solid potential. The company is expanding its footprint through Target (TGT:NYSE - news - research - Cramer's Take) and Starbucks (SBUX:Nasdaq - news - research - Cramer's Take). It will be some time until they're competing with Coca-Cola (KO:NYSE - news - research - Cramer's Take) and PepsiCo (PEP:NYSE - news - research - Cramer's Take), but I believe there is still plenty of room for Jones to grow.

But here's Mr. Consistency himself just two weeks before, on August 8:

What is your take on Jones Soda (JSDA:OTC BB - news - research)?

-- Jay from Tulsa, Okla.

James J. Cramer: Jones Soda has a deal with Starbucks and Target, but its high cost of growth is taking a toll on the bottom line. I like the long-term trends, but until I see this beverage play improve its operating execution, I would rather own Pepsi (PEP:NYSE - news - research).

Cramer's hedging his bets, as he should, since JSDA is a risky speculative stock trading under ten dollars OTC.

So I turned to a value investing blog I've recently discovered, called
Cheap Stocks. And to give credit where it's due, Cheap Stocks' editor, Clyde Milton, and his uncharacteristic analysis of JSDA, prompted me to write this post. Let's look at most of the details:

A Growth Stock? Out of my element…Lessons learned..and more

Jones Soda Co
Ticker: JSDA
Price: $4.88
Market Cap: $105 million
Shares Out: 21.4 million
P/E Ratio: you don’t want to know
2004 Revenue: $27.54 million
2004 Net Income: $1.33million

This is not the typical company we research here at Cheap Stocks. We are not oriented toward growth stocks; we wish were, but we just are not wired that way. We gravitate toward deep value plays, and Jones is far from deep value. So why dedicate valuable Cheap Stocks real estate toward a company trading at more than 100X earnings? Because this company reminds us our greatest investing mistake, Hansen(Ticker: HANS, $67.39).
Jones Soda Co sells it sodas (under the Jones Soda Co. and Jones Naturals labels), teas and energy drinks in 41 states, and Canada. You may have seen there distinctive looking bottles sold in supermarkets, at premium prices (in my eyes, anyway) and other stores, these feature interesting flavors, and ever changing labels, submitted by consumers. The company has also made a name for itself at Thanksgiving, selling a soda assortment that includes such flavors as turkey and gravy, and mashed potato (no joke, check it out on their website). I’ve also noticed a growing presence in Target Stores, where Jones sells 12 packs at somewhat inexpensive prices. Inroads into a major chain such as Target make this an intriguing story.

The Fundamentals
It ain’t cheap. There’s no other way to say it. At about 140 times trailing 12 month EPS, 2.8 times sales, and 19 times book value, this company should not be within 10 feet of the words “Cheap Stocks”. But, however, we at Cheap Stocks are warming up to the idea of paying up for rapid growth in certain cases, and this company may fit the bill…..We have to at least be open to the possibility

Jones 2004 fiscal year sales were $27.45 million, up nearly 37 percent from 2003’s $20.1 million. Net income was $1.33 million in 2004, for a net profit margin of 4.8 percent, up from 2003’s $324 thousand, and 1.6 percent. Through the third quarter of 2005, net sales are $32.4 million, up sharply $21.1 million for the same period last year. Earnings, however, are down, $720,000 for the first three quarters of 2005, versus $1.245 million for the same period in 2004.

The company does not have much to speak of in the way of assets ($9.7 million in total assets, $303 thousand in cash) nor does it carry much debt either ($116 thousand in LT debt). This explains the high price to book ratio, but also the company’s very high returns on capital and equity (more than 60% for each).

The Risks
Trading at such high multiples (to nearly everything imaginable) it appears that there is a great deal of growth priced into the stock. Still, trading below $5, the stock well off it’s high of about $8. While we are impressed by the company’s exposure in Target, we believe that the agreement expires in 2006, and are not aware of renewal prospects. Finally, the beverage market is extremely competitive, shelf space is difficult to secure, and margins are typically low.

While we don’t currently own Jones, we’ll be following the story, and perhaps looking for an entry point. A continued presence in Target, continued innovation in flavors and packaging, and growing brand recognition would all be pluses for this company. We’d imagine a great deal of price volatility moving forward. Finally, it is conceivable that ultimately, a bigger player takes Jones out.

Note the boldfaced quote. Milton is acknowledging that investing with a single philosophy has its (financial) shortcomings. I worry that he is regretting his unrealized Hansen gains, and trying to make up for it by backing another longshot in the soda business. But I appreciate his rigorous analysis that evaluates the negatives and the risks.

Fool.com weighed in with some insight back in September. Some excerpts:

You see, caramel apple soda is a staple in every kid's diet these days -- or so it seems when strolling through a Target (NYSE: TGT) store these days.

The eclectic soft drinks, sold in packs of four 8-ounce cans, are limited-edition Halloween flavors by Jones Soda (Nasdaq: JSDA). The odd pop is actually pretty tame by Jones' seasonal standards. Thanksgiving breeds the strangest of all concoctions from Jones -- Turkey and Gravy Soda.

The Halloween cans are an exclusive deal with Target. It follows the more conventional canned soda deal with Target that finds 12-ounce cans of flavors like cream soda or berry lemonade. Still, most sippers don't associate Jones with cans. It's the company's glass bottles with user-submitted photographs on the labels that generate most of the company's retail reach.

Jones' colorful bottled sodas can be found at select supermarket chains, as well as at your local Starbucks (Nasdaq: SBUX), Barnes & Noble (NYSE: BKS), or Panera Bread Company (Nasdaq: PNRA) location. It's a pretty impressive span for a tiny Canadian company out to compete against pop stars like Motley Fool Inside Value pick Coke (NYSE: KO) and Pepsi (NYSE: PEP).

Then again, it's that alternative beverage positioning and its offbeat flavors like Blue Bubblegum that have allowed the company to grow in the shadows. Last year, Jones Soda's profits tripled to $0.06 a share on a 37% spike in sales. Things haven't gone as well this year, with sales growing by just 20% and the company posting a $0.01-per-share deficit through the end of June.

That likely explains the wild ride that Jones Soda has provided for its investors. When I first wrote about the company back in March, shares could have been had for just $4 apiece. By early June, the stock had nearly doubled. It has since fallen back to roughly $5.

The prospects are promising as Jones Soda expands into energy drinks, juices, and even frozen pops. With its relationship with Target expanding (thanks to the new Halloween lines) and chains like Starbucks and Panera continuing to grow, Jones Soda should have little problem growing the top line. Getting margins back in line so that the company could continue to build on last year's profitability has posed the more serious challenge.

The variety and limited-time availability of holiday editions generates consumer excitement. JSDA getting its products in other top-notch retailers like Panera Bread is attractive. I'm excited enough to want to schlep to the Brooklyn Target to pick up the holiday pack. Especially for the turkey soda.

14 November 2005

Timberland Has the Pig on the Fence

Blog Hog John Coumarianos e-mailed that he was looking into Timberland (TBL), the maker of those ubiquitous tan workboots, as well as the black boots now advertised on NYC subways, as well as pictured to the left. The positives for TBL: "monster ROIC and very little debt." The negatives: declining sales and free cash flow, as well as the recent acquisition of SmartWool.

John's dilemma is clear. The Pig is here to the rescue, or more probable, to muddy the waters.

I tried to work out a DFCF model, but my numbers grossly overvalued TBL. Please notice that I've kept my gaudy numbers and the boring calculations to myself. Let's just say I didn't trust the 5-year FCF growth average of 19.4% to continue, even though that's how the numbers worked out.

Charlotte's Web will come through for the Pig. The Motley Fool delivered several articles of note. Here's the first and most recent in its entirety:

Timberland's Stuck in the Mud

By Nathan Parmelee (TMF Doraemon)
October 27, 2005

Let's jump right into the mess today. Timberland (NYSE: TBL) had a
mediocre third quarter, and its guidance was even less inspiring. So
far today, the shares are down by more than 11%. Therefore, the
question is whether we've now hit the level where there is some value.
Given that the company's P/E ratio is now around 12, I think we're
close but not quite there.

Sales for the quarter came in 2.4% higher than last year; the growth
was driven entirely by international sales gains of 14.1%.
Unfortunately, sales in the U.S. portion of the business, which is
approximately the same size, came in 6.1% lower than last year. On the
earnings front, the company posted $1.02 per diluted share versus last
year's $0.96, a 6% improvement. The $1.02 figure includes a
restructuring charge, which should be one-time in nature. If you back
the restructuring charge out, earnings were up 9% to $1.05.

The performance for the quarter was fair, but the company's flat
guidance for the fourth quarter, as well as its statement that it
faces "challenges" to growth in revenues and earnings in the first
half of 2006, is what really appears to have investors worried. While
I share that sentiment a bit, this is a company with a balance sheet
free of long-term debt and a history of repurchasing shares during
tough times. Indeed, earnings growth was stronger than sales growth
this quarter primarily because the company's share buybacks have
decreased its diluted share count by 5.2% in the past year.

For many retailers, the fourth quarter makes or breaks the year for
free cash flow, and Timberland is no exception. Through the first nine
months of this year, free cash flow was a bit softer than last year,
mostly because the company is recognizing the transfer of title on
inventory shipments earlier. (Higher inventory translates into lower
cash flow.) Assuming things balance out, and the fourth quarter is
flat with last year, free cash flow should come in at roughly the same
$154 million (excluding tax benefits from options) the company has
averaged over the past two years. Given that scenario, the shares
trade at a price-to-free cash flow multiple of 12. This is pretty
cheap, but it's important to remember that the fourth-quarter numbers
aren't yet certain.

Furthermore, 12 times cash flow is not dirt cheap, given the growth
"challenges" that management forecasts in the first half of 2006, and
given the tough competition from Wolverine Worldwide (NYSE: WWW) and
others in the shoe industry. For a company facing a low- to no-growth
situation, I'd like to see that cash flow multiple in the single
digits. Bottom line: Investors are probably wise to wait for a better
price. For those who really want to jump into retail and take
advantage of the recent stock market swoon, companies like Home Depot
(NYSE: HD), Wal-Mart (NYSE: WMT), and Costco (Nasdaq: COST) are safer

Parmalee has changed his tune, and is much more negative on TBL. Two consecutive crap quarters, plus pessimistic guidance has taken its toll on the author. Back on July 26, 2005, Parmalee thought shares looked cheap, but he now thinks that investors should wait for TBL to get cheaper. Let's look at some excerpts when he was more optimistic:

Timberland Chopped Down

By Nathan Parmelee (TMF Doraemon)
July 26, 2005

It's tough to look at what Timberland (NYSE: TBL) had to say about its
second quarter and feel positive about the results. But investors'
shock and disappointment about the quarter is a bit surprising,
because the company had mentioned that the results would be flat.
While some pundits may point to the poor quarter and recommend staying
away from the shares, I'm not in that camp. I get curious when I see a
12% haircut at a company that generates a mountain of free cash flow
on an annual basis. Based on the free cash flow and potential for
growth, the shares look cheap to me. You can say much the same for
competitor Wolverine Worldwide (NYSE: WWW). The primary difference is
that Wolverine rewards its shareholders with cash dividends and share
repurchases; Timberland only goes with the latter.

Here's some more from fool.com, back in October 2004.

Taking Timberland for a Walk

By Lawrence Meyers
October 15, 2004

A Hidden Gem?
Fortunately, it turns out that Timberland is a solid company. It just
isn't the hidden gem I thought I'd uncovered. At a market cap of $2
billion, it is larger than I'd prefer. Its EV/FCF/G ratio is 1.15 and
its PEG is 1.24, which suggests it is mildly overpriced. I can't
honestly say that its product has a sustainable competitive advantage.
Boots are boots, after all. Wolverine World Wide (NYSE: WWW), Nike
(NYSE: NKE), and a host of other private companies like The North Face
produce excellent footwear as well. Nor is Timberland out of favor and
thus undervalued.

A silver lining in ROE
There is, however, plenty of good news. A company can't generate a 31%
ROE without there being a few other things that shine through. It's
generating some healthy cash flow, has coin in the bank and zero debt,
and a strong net profit margin.
As fellow Fool David Meier has pointed out, it's taking over 100 days to
convert resources into usable cash flow for the company. Also,
Timberland is a retail business. Now, boots may not be as subject to
teen fashion fickleness as are products of Abercrombie & Fitch (NYSE:
ANF), Pacific Sunwear (Nasdaq: PSUN), or Hot Topic (Nasdaq: HOTT).
Still, boots are boots, boots are retail, and retail has that random
"fashion factor" that makes for dicey investments.

Meyers bought TBL based on its alluring ROE and ROA metrics. He subsequently sold it for a small loss after figuring out that TBL had no economic moat as it profits from fungible fashionable goods with healthy competition.

Continuing my adventures on the internet, I searched on Google News for "timberland boots". Out of the first ten hits, two articles concerned the SmartWool purchase, but two mentioned Timberland boots negatively with the new NBA dress code rules. One mentioned a Pennsylvania rape suspect last seen wearing tan Timberland boots, and another a Massachusetts man who had his Timberland boots stolen by a gang of youths. Yes, this was an unscientific snapshot, but one that made me think: Is Timberland a good and reputable brand? Or are these varied negative associations indicative of trouble?

Or am I getting too old? Perhaps the Timberland brand and its boots gets some street cred if hep cat NBA commish Daniel Stern is banning them, and gangs of youths are stealing them.

Before I make my pronouncement on Timberland, let's look at its pretty numbers, care of SmartMoney.com. A PEG of 1.00, oooh, a ROE and ROIC of 31.52%, ahhh. Wolverine World Wide (WWW), a competitor, has a PEG of 1.19, a ROE of 16.19% and a ROIC of 15.10%.

TBL is a case where I think the negatives still outweigh the positives in the near-term. The consecutive disappointing quarters, the SmartWool acquisition that sent the stock plummeting, and the declining sales are weighing on investors, in spite of the high quality metrics (FCF, ROIC, PEG) that would otherwise entice me to this seemingly undervalued stock.

The high quality metrics were of similar quality a year ago, and an investment in TBL then would have netted a small negative return over the the course of the year.

Investing in TBL is betting that Daniel Stern will loosen the Iverson Rule to allow NBA players to don the black boots. We're wagering that the sales numbers will rebound. But TBL is no lavish Michael Jordan-betting-at-golf situation. (I make no apologies for the basketball puns and references.)

Perhaps this stock is near its (parquet) floor. (Okay, now I'm sorry.) My gut feeling is this stock could go lower before it goes higher, but the downside is small. I'm concerned that the stock could go stagnant. TBL's relatively large market cap and lack of sales growth, according to the company, Parmalee, and Blog Hog John C., are factors that could limit returns.

I don't think there is a hurry to get into TBL. If you have patience on initiating a position in TBL and a willingness to hold the stock for some time, it could pay off. But if sales and FCF fail to improve, I would be ready to cut my losses.

11 November 2005

Sony Sucks

Blog Hog JVL writes that Sony (SNE) is committing corporate suicide by patenting a technology that would make unregistered software unusable in its machines.

In other words, if Sony puts this technology into action, you could no longer play borrowed, used, or rented games on your Playstation.

JVL goes on to mention Sony's rootkit CD copy-protection software problems and tellingly concludes that he's leaning towards the next-generation Xbox platform.

Should I listen to JVL, who anachronistically reveres his Sega Dreamcast, circa 1999? And should you, the reader, listen to the Pig, who last bought a video game system two years ago? For his Mom? And it was a PS One, at that.

Yes. Because I'm not trying to figure out which upcoming video game console is superior. I want to know if Sony's shenanigans are going to alienate video game retailers and consumers. I want to know how much Sony sucks.

Let's kick Sony while it's down with some news reports.

First, Pitchforkmedia.com stomps on Sony for its rootkit software:

Sony Music Sued Over Anti-Piracy Software

Jonah Flicker and Amy Phillips report:
In the slow and perhaps inevitable movement towards microchip implantation of the entire human race, Sony BMG Music just took the lead. According to the Washington Post, a class action lawsuit filed in Los Angeles Superior Court November 1 alleges that the label's anti-piracy software, installed in several recently released CDs, is harmful to computers.

The suit claims that when a copy-protected CD is loaded onto a hard drive, it installs a hidden program known as a "rootkit," which not only keeps track of the computer's activity, but depletes the drive's resources in the process. So Sony is basically eating up your hard drive space while keeping track of all the porn you watch, just because you actually spent money on a My Morning Jacket CD.

Thanks, guys. This is even better than getting the RIAA to sue us.

The rootkit also makes the computer more susceptible to viruses. Sony falsely states that its copy-protection software can be easily removed, when in reality, getting rid of a rootkit can be damaging.

Here's the crux of the suit, straight from the legal papers: "As a result of Sony's failure to disclose the true nature of the digital rights management ('DRM') system it uses on its CDs, thousands of computer users have unknowingly infected their computers, and the computers of others, with this surreptitious rootkit. This rootkit has been responsible for conflicts within computer systems, crashes of systems, and other damage."

The suit, which accuses Sony of "fraud, false advertising, trespass, and violation of state and federal statues prohibiting malware, and unauthorized computer tampering," claims that the suspect software has been included on certain Sony BMG Music CDs since this spring. Albums to watch out for include Amerie's Touch, My Morning Jacket's Z Kasabian's Kasabian, Neil Diamond's 12 Songs, Cassidy's I'm a Hustla, Kings of Leon's Aha Shake Heartbreak, and, appropriately, the Bad Plus' Suspicious Activity and the Coral's Invisible Invasion, among others.

In short: if you're about to load that new My Morning Jacket disc onto your hard drive, STOP. Sell the album back to the record store and buy something on Dischord.

Then Reuters gets in on the ultraviolence pile-on by reporting hackers exploiting the rootkit software's security breach:

Hackers use Sony BMG to hide on PCs

Thu Nov 10, 3:35 PM ET

AMSTERDAM (Reuters) - A computer security firm said on Thursday it had discovered the first virus that uses music publisher Sony BMG's (6758.T) controversial CD copy-protection software to hide on PCs and wreak havoc.Under a subject line containing the words "Photo approval," a hacker has mass-mailed the so-called Stinx-E trojan virus to British email addresses, said British anti-virus firm Sophos.

When recipients click on an attachment, they install malware, which may tear down a computer's firewall and give hackers access to a PC. The malware hides by using Sony BMG software that is also hidden -- the software would have been installed on a computer when consumers played Sony's copy-protected music CDs.

"This leaves Sony in a real tangle. It was already getting bad press about its copy-protection software, and this new hack exploit will make it even worse," said Sophos's Graham Cluley.

Later on Thursday, security software firm Symantec Corp. (Nasdaq:SYMC - news) also discovered the first trojans to abuse the security flaw in Sony BMG's copy-protection software. A trojan is a program that appears desirable but actually contains something harmful.

Sony BMG's spokesman John McKay in New York was not immediately available to comment.

I think Sony's going to pay for these clumsy manoeuvers. At the very least, Sony's going to pay the class-action attorneys filing suit.

The music business is in a downward spiral. The multinational record labels, including SonyBMG, are struggling with plummeting sales as iTunes, file-sharing, and downright thievery proliferates. The money made from people replacing their vinyl music collections to digital compact discs is ancient history. Young people do not miss album art, or owning a physical manifestation of music. They are increasingly ignoring albums altogether, preferring to load up their iPods with individual singles. This is not a growth business for SNE, or its investors.

The movie business, both theatrically and on DVD, is declining.

So I've already discounted Sony's music and film businesses. Is PlayStation 3 the silver lining?

No video game console maker stays on top for very long. In the last 25 years, the top maker list includes Atari, Nintendo, Sega (arguably with the Genesis)), and Sony. Every console generation offers companies a new opportunity to attain the dominant position. The new Xbox is out, whereas the next Playstation could be a year away.

It's time to do the finishing move on Sony.

Net Profit Margin: 1.9%
Forward P/E: 51.6
PEG: 5.58
ROE: 4.70%
ROA: 1.40%
ROIC: 3.80%
12-Month Return: -5.6%
3-Year Return: -21.6%
Consensus Analyst Recommendation: Moderate Sell
Free Cash Flow: '01:692.4; '02:2,782.9; '03:4,709.1; '04:1,806.9; '05:1,802.2

These are abysmal numbers, care of SmartMoney.com and Morningstar.com. An attractive PEG approaches 1.0, or goes below. 2.0 is ugly. 5.58 is unspeakable. The P/E is ridiculously rich. The free cash flow is down significantly since '03, and the return for investors has been consistently negative.

Finally, in analyst-speak, you don't often see anything below "hold", since everyone knows that "hold" really means "sell". When you see "moderate sell", that means SNE effing sucks.

10 November 2005

Just Fell Off My Charles Ghost Counter Stool


DWRI Last: 7.72 Change: -0.31 -3.86% Volume: 234,020 4:00pm 11/10/2005
After Hours: 4.50 Change: -3.22 -41.71% Volume: 59,260 5:46pm 11/10/2005

But how? And why?

"Given our third quarter results and outlook for the remainder of 2005, we are disappointed in our current performance," said Tara Poseley, CEO and President, Design Within Reach.


Gross profit margin was 43.8% in the third quarter of 2005, compared to 46.5% in the same period last year. The decrease is primarily a result of promotional activities, the strength of the Euro versus the U.S. Dollar, and higher shipping and handling expenses, due to higher fuel costs.

For the third quarter of 2005, selling, general and administrative expenses increased to $16.8 million, from $11.7 million in the same period last year, primarily due to costs associated with opening and operating new Studios, Sarbanes-Oxley compliance and unanticipated expenses associated with the Company's system conversion.


Net sales for 2005 are now expected to be approximately $157 million, about four percent lower than previous expectations.

That would do it.

Oil Sands Pile-on - Cramer's Two Cents

Cramer's got his own left-field Fort McMoney play. I thought I'd note it on the blog. Below is the excerpt from the Mad Money recap:

Oil in Alberta

Cramer is short-term bearish on oil, believing that the commodity is headed to the low $50 range from Tuesday's price of roughly $59.

But, as long as oil is over $35, he said, the oil sands of Alberta, Canada, "are going to be very profitable."

Cramer believes that "one of the least visible and best plays on the oil sands in Alberta" is Birch Mountain Resources (BMD:Amex - news - research - Cramer's Take).

Cramer said that although the mineral exploration and development company has rights to a million acres "full of mineral wealth," which "if it pans out, will be huge," the company also stands to benefit from the supplying of the infrastructure build-out and the processing of the oil sands.

The company is expected to supply quicklime, a necessary material for the processing of oil from oil sands, said Cramer.

Even though Birch Mountain won't start making quicklime until 2007, "when they do, they're going to own that business," he said.

Birch Mountain can ship quicklime for $85 per ton less than can competitors because they're the closest to the oil fields, he said.

Additionally, Birch Mountain should do well supplying aggregate for the build-out of the oil sands infrastructure such as processing plants and roads.

Be careful buying shares of Birch Mountain, though, said Cramer. It's a small, thinly traded company. He would recommend using limit orders.

I checked Morningstar for BMD's free cash flow numbers. Consistently negative cash flow of $1.7M-1.8M per year for the last few years.

This could be an interesting, purely-speculative play, even though the Mad Money-watching yahoos pushed the stock up. I'm thinking there's plenty of time to play wait-and-see with BMD. Cramer pointed out the 2007 date for quicklime production; that's an eternity to me.

I'll be patient and wait for the Mad Money viewers to get bored and move onto Cramer's next idea. In the meantime, I'm adding BMD to the Stock Watch List.

Shugr instead of Sugar

From my main source for random free shit, I received a cannister of 100 packets of Shugr.

Don't you love these intentionally mis-spelled products? We're already off to a great start.

Tried it in my coffee. Needed two packets as I've been brewing a pretty strong batch of beans from Porto Rico Coffee in the East Village.

The taste was sweet, with a bit of a bright bite, but no noticeable aftertaste. I flipped over the container to check out the ingredients: Erythiritol, Maltodextrin, Tagatose, Less than 0.0005g Sucralose.

Ahh, I remember reading about tagatose somewhere. I was particularly fascinated about the structure of tagatose. Its chirality allows our bodies to taste the sugar, but not metabolize it like our common natural table sweeteners. I'll find that article and post excerpts below, leaving out as much science-nerd blather as possible, as I've already reached my quota in the paragraph alone.

Reading down the label, after the company name, Swiss Research, came this surprise: (stock ticker: HESG).

Um, I'm very used to seeing web addresses, consumer information lines, y'know, that kind of crap on labels, but a stock ticker?

Curiousity killed the Pig, so I went to MarketWatch and typed in "HESG". It trades, if a daily volume of around 100K shares can be called "trading", at around 57 cents. On the OTC BB. I clicked on a not-so-recent February 2005 news story on HESG:

Alternative sweetener to hit shelves
Swiss Research says it has competitor to Splenda, Equal

By Rachel Koning, MarketWatch
Last Update: 4:16 PM ET Feb. 12, 2005

CHICAGO (MarketWatch) - Swiss Research said Saturday its Shugr sugar
substitute will be available in about 3,000 heath food and
natural-products stores beginning in March, with hopes for
distribution in large drug and food chains by year's end.

The Los Angeles company unveiled late last year its zero-calorie,
diabetic-safe sweetener, which it says is a more natural competitor to
the established sugar substitutes Splenda and Equal.

Shugr is made from a blend of erythritol, which occurs naturally in
many fruits and vegetables, the company said in a news release. It
also includes tagatose, which includes a pre-biotic fiber believed to
aid digestion.

The company is seeking a patent for its formula. It says the
ingredients carry a GRAS designation -- Generally Recognized as Safe -
from the Food and Drug Administration.

Shares of Swiss Research parent Health Sciences Group Inc. (HESG:

0.57, -0.03, -5.0%) closed at $1.17 on Friday, down 15 cents or 11 percent.

Let's parse this report for the worrisome stuff, like HESG is seeking a patent for its formula. Doesn't have that, yet. So if Shugr's sugar-substitute formula takes off in marketplace, there are currently no IP barriers to entry.

The natural food argument is a weak one. It's weaker still with the modifier "more" before natural. Isn't "natural" like "unique"? It either is "natural" or "unique", or it's not. It cannot be "more".

What about the cost of Shugr, versus Splenda? On Froogle, I found a special on Splenda at Walgreens, two 3.8 oz boxes of Splenda, the equivalent sweetness of 4 lbs of sugar, for $7.00. They regularly sell for $4.29 a box. If you want a box of 100 individual packets, that'll run you about $4.69 at Gristede's Supermarket. I found Shugr at Drugstore.com selling my cannister for $6.99. A 1.3 lbs container runs you $19.99. Shugr is meant to used pound-for-pound with sugar. And therein lies the rub: Shugr is too expensive. Too expensive for diet soda companies to use the product. Too expensive to move beyond niche health food store/diabetic markets. And it uses sucralose in the mix; why not just use the cheaper Splenda that's already dominating the market, if it's sucralose you want?

I found an OTC comment board full of HESG shareholders, discussing their tanking shares, and delusional hopes for a flawed product. It's a fascinating read, in a train-wreck kinda way.

Here are excerpts from the Wired article I mentioned above discussing the missed opportunity of tagatose.

On a sunny morning in his office in Beltsville, Maryland, 79-year-old Gilbert Levin is hunched over a press release from the Danish dairy company Arla Foods. The firm, which holds an exclusive license to food uses of tagatose, has begun production at its first commercial facility, with a second plant on the drawing board. Levin's company, Spherix, will earn a 25 percent royalty on Arla net sales. And in Levin's mind, Slurpees are only the beginning. He wants tagatosein chocolate, cookies, and cakes - and in sugar bowls.
In 1981, Levin patented 10 left-handed sugars for use in foods and began looking for ways to make them. "We found several that were quite good," he says, "but we could never manufacture them cheaply enough."
Most crucially, the Spherix team devised an inexpensive way to make tagatose. Tiny quantities occur naturally in dairy products, and the process to derive it starts with whey, a byproduct of cheese-making. Lactose is extracted by removing proteins and then dissolved to form glucose and galactose. The glucose is sold off, and an enzyme is added to the galactose to form tagatose in bulk, either as syrup or crystals. Spherix patented the process in the late '80s. Finding a way out of the lab and into the high-volume, low-margin food business proved daunting. Levin hustled for the money to build his own full-scale plant or find a partner, but talks with companies like Procter & Gamble fell through. Levin remembers the frustration. "They all told me, 'Once you've got the product developed and for sale, come back to us. We're not going to help you develop it,'" he says.
He hands me a baggie of pure tagatose. I hold it up to the light, dab a little on my finger, and try it. A dead ringer for table sugar.

In a crowded sweetener market, it has to be. In addition to standbys like saccharin and aspartame, there are a handful of entrenched substitutes on store shelves - acesulfame potassium, stevia, and sugar alcohols like mannitol and sorbitol - used in myriad combinations to feed our ever growing appetite for diet food. The most troublesome competitor for tagatose is sucralose, sold as Splenda by McNeil Nutritionals, a subsidiary of Johnson & Johnson.

Sucralose is derived from sucrose through a process that replaces three hydroxyl atoms with chlorine, creating a crystal 600 times sweeter than sugar. Unlike saccharin and aspartame (but like tagatose), sucralose is heat-resistant, so you can bake with it. But it behaves differently than sugar. Foods sweetened with sucralose won't brown as well and they cook more quickly, so recipes may need to be adjusted. Splenda hit the market in 1998 and has since made its way into hundreds of big-name products (see chart, opposite page).

For Levin, the success of sucralose is a frustrating case of what might have been. He licensed tagatose to Arla in 1996, but it took five years for the Danes to obtain the FDA's "generally recognized as safe" status in the US - and then only as a food additive. It's taken another two years for Arla to build the first plant. (Arla obtained approval for tagatose in Australia, New Zealand, and South Korea this summer and expects Japan and Europe to follow.) And while Arla was seeking regulatory approval, sucralose came to market.
Spherix and Arla are tied up in arbitration over the tagatose license contract. The patent on tagatose as an additive expires in 2006, the two patents on production methods a few years later. Levin hopes to see his sugar substitute flood the market before then.

This article ran two years ago. Since then, Splenda has bloomed into the dominant player in the artificial sweetener market.

Tagatose, a.k.a. Naturlose, seems to be relegated to flavoring toothpaste. Perhaps another superior product, a la Betamax, losing out in the marketplace for reasons of cost, marketing, and timing.

Shugr is in the ghetto of health food stores and the OTC BB.

Before I leave these alternative sweeteners behind, let's look at a quick comparison of the three relevant stocks over the past two years, since the Wired article ran:

JNJ, owner of McNeil Laboratories, the US distributor of Splenda.
Approximate stock price in November 2003: $51.00
Current stock price: $61.44
% difference: up about 20%

SPEX, Spherix, owner of tagatose and Naturlose.
Approximate stock price in November 2003: $7.00
Current stock price: $1.40
% difference: down about 80%

HESG, Health Sciences Group, owner of Shugr.
Approximate stock price in November 2003: $1.10-1.20
Current stock price: $.58
% difference: down about 50%