SmallCapInvestor.com: Fallen Angels

Fallen Angel: Tucows Inc.

Tue, 30 Sep 08 06:20:01 -0400

The recent sharp turbulence in the stock market, due to the mortgage crisis, has unfairly punished many non-financial microcaps. Tech play Tucows Inc. (AMEX:TCX) is one such example.

Headquartered in Toronto, Tucows is primarily in the unglamorous, but profitable business of providing domain name registration and related Internet services to Web hosting companies and Internet service providers. Except for a one quarter hiccup in 2006, Tucows has posted 27 quarters in a row of positive cash flow from operations. In addition to managing over 8 million domain names and millions of email boxes for 9,000 service providers, Tucows owns a portfolio of 150,000 “high value” domain names. Tucows acquired the core of this domain name portfolio through its 2006 acquisition of NetIdentity for $18 million in cash and securities.

As part of this deal, NetIdentity shareholders, which included billionaire Mark Cuban, ended up with a minority ownership stake in Tucows. In mid-August, investment firm Lacuna, LLC bought out Cuban’s 6.9 million share position in Tucows for $0.50 a share. Cuban had been a Tucows shareholder even before the NetIdentity deal. Interestingly, two of Lacuna’s principals were previously NetIdentity executives. While the recent exit of Cuban from Tucows has weighed on the stock, Lacuna’s deep knowledge of the domain name and Web services sector shouldn’t be ignored. After a series of follow-on open market buys by Lacuna, the investment shop now holds a nearly 15% ownership stake in $28 million market capitalization Tucows.

For the second quarter ended June 30, Tucows reported revenue of $20.5 million, down slightly from $20.8 million a year ago. Tucows noted that last year’s second quarter results included an “atypically large” sale of a block of domain names for $3 million. With this in mind, net income declined to $2.2 million, or $0.03 a share, from $3.2 million, or $0.04 a share, a year ago. Deferred revenue increased 11% . . .

Fallen Angel: Sparton Corp.

Tue, 16 Sep 08 06:20:35 -0400

Recent pressure from an experienced activist investor may kick shares of underperforming Sparton Corp. (NYSE:SPA) into gear.

Jackson, Mich.-based Sparton Corp., a niche electronic design and manufacturing services provider, has lately been feeling the heat. Last month, Lawndale Capital Management, Sparton’s largest independent shareholder, publicly disclosed that it had sent a series of recommendations to the company’s board of directors. These requests included that Sparton appoint four new independent directors, hire a turnaround management team and engage an advisor to explore a potential sale. Lawndale also provided notice of intent to directly nominate these new directors via a proxy contest if its requests were not met. Lawndale has subsequently disclosed that it is having constructive discussions with Sparton’s board over reaching an amicable settlement.

The last few years have not been pretty for Sparton shareholders and clearly the company is in need of changes at the board and management levels. At Monday’s closing price of $3.69 a share, Sparton shares are near their 52-week low of $3.50, set in June, and well off the 52-week high of $6.05 from last October. Going back two years, the stock has declined approximately 50%, during which Sparton has racked up an unenviable track record of eight quarters in a row of operating losses.

Historically, Sparton’s main business was designing and manufacturing sonobuoys, an anti-submarine warfare device, for the U.S. military. While perhaps best known for sonobuoys, Sparton manufacturers a host of niche electronics products for corporate and government markets. In 2005, Sparton opened a manufacturing facility in Vietnam, while in 2006 it further diversified by acquiring Astro Instrumentation, . . .

Fallen Angel: Travelzoo Inc.

Wed, 03 Sep 08 06:20:03 -0400

Ralph Bartel, the founder and CEO of Travelzoo Inc. (Nasdaq:TZOO), has been buying up shares of the small-cap online travel publisher hand-over-fist. Time to take a closer look.

Since February, Bartel has scooped up several million dollars worth of Travelzoo stock. Bartel’s buying binge has come during a disappointing series of earnings reports for New York, N.Y.-based Travelzoo, a one-time high flier. At a recent price of $7.99 a share, Travelzoo trades near its 52-week low of $6.45, set in July, and well off its 52-week of $24.97, hit last September.

While it remains to be seen if Bartel is a savvy buyer of Travelzoo shares, he has previously shown a very good knack for knowing when to sell the stock. Bartel was wisely a big seller of Travelzoo shares around the $30 level back in 2006. Even after Bartel’s massive selling of Travelzoo stock two years ago, he still owns an over 60% stake in the now struggling small cap.

Travelzoo’s financial performance has been dragged down by a costly international expansion effort that has yet to pay off. At the same time, Travelzoo’s core domestic business has turned stagnant. Unlike travel companies such as Expedia, Inc. (Nasdaq:EXPE) and Orbitz Worldwide, Inc. (Nasdaq:OWW), Travelzoo doesn’t handle bookings, but rather serves as an aggregator of travel offers from around the Web. In fact, Expedia was one of Travelzoo’s largest advertisers last year. Through a series of websites, e-mail newsletters and alerts, Travelzoo provides information on offers from hundreds of travel companies to more than 12 million users.

For the second quarter ended June 30, Travelzoo reported revenue of $21.8 million, an 8% annual increase. As a result of Travelzoo’s aggressive expansion into Asia Pacific and Europe, this modest growth wasn’t able to overcome its enlarged cost structure. Travelzoo reported a second-quarter loss of $1.2 million, or $0.08 a share, . . .

Harris Interactive a reliable cash flow generator

Tue, 19 Aug 08 06:20:16 -0400

Billionaire investor Vincent Bollore’s continued interest in microcap play Harris Interactive Inc. (Nasdaq:HPOL) deserves a closer look.

Ranked as one of the world’s richest people by Forbes magazine, Bollore has focused his attention in recent years on making media-related investments. The French billionaire is a major shareholder and chairman of Havas SA, the world’s sixth-largest advertising agency holding company. Havas is the owner of the Euro RSCG Worldwide agency. Bollore is also a major shareholder in British media services holding company Aegis Group. Bollore has spent the past two years trying to gain control of Aegis.

Last year, published reports indicated that Bollore was interested in increasing his investments in the market research sector. In April of 2007, Bollore popped up as a 6% shareholder in Harris Interactive. The custom market research shop’s roots trace back to the founding of Louis Harris & Associates over 50 years ago. Rochester, N.Y.-based Harris is best known for The Harris Poll, one of the longest-running independent opinion polls in the United States. Over the past 52-weeks, Bollore has purchased over $2.6 million worth of Harris shares on the open market.

So far, Bollore’s investment in $78 million market capitalization Harris has been a loser. Since opening 2008 around the $4 level, Harris shares have steadily declined, as demonstrated by the recent stock price of $1.45. Harris shares have been punished the past two quarters particularly for company management falling short of meeting projections and poorly managing expectations.

For the fiscal third quarter ended March 31, Harris reported revenue of $57.3 million, an 11% annual increase. However, this gain was largely acquisition-driven. Organic revenue actually declined 4% year over year. The loss for the quarter was $2.1 million, or $0.04 a diluted share, compared with net income of $1.2 million, or $0.02 a diluted share, for the year-ago period. Earnings before adjusted EBITDA for the quarter declined 58% to $1.6 million from $3.9 million. Harris blamed the decline primarily on revenue shortfalls in its U.S. health-care business, which has been . . .

Cash-rich Westell Technologies worth a look

Tue, 05 Aug 08 06:20:30 -0400

With its stock price trading for approximately its cash value and a new CEO at the helm, it may be worth taking a flier on shares of telecommunications equipment company Westell Technologies Inc. (Nasdaq:WSTL).

Following several quarters in a row of disappointing financial results and missed guidance, on July 8 Westell announced the resignation of CEO Thomas Mader. New interim Westell CEO Bernard Sergesketter, a former Westell director, has his work cut out for him. At a recent price of just $0.80 a share, Westell’s shares are down over 40% since the start of the year and 60% since mid-February. At current stock price levels, and with over $0.80 a share in net cash on hand, investors are clearly indicating that they have meager confidence in Westell’s future.

Founded nearly three decades ago, Aurora, Ill.-based Westell operates in three segments: customer networking equipment, outside plant systems, and conferencing services. The customer networking equipment segment provides broadband digital subscriber line (DSL), fiber-to-the-home (FTTH), voice-over-Internet protocol (VoIP) and Internet protocol television (IPTV) products for telecom carriers and cable companies. Last year, Westell outsourced its networking equipment manufacturing to China. Operating under the name OSPlant Systems, the outside plant systems segment provides outdoor cabinets, enclosures, remote monitoring and related network protection solutions.The conferencing services segment, called ConferencePlus, manages and hosts voice, video, IP applications and back-office services for corporate clients...

Value Find: Crown Crafts Inc.

Tue, 22 Jul 08 06:22:06 -0400

With a push from its largest shareholder, little-followed microcap play Crown Crafts Inc. (Nasdaq:CRWS) could be poised to finally unlock shareholder value in the coming quarters.

On July 3, Gonzalez, La.-based Crown Crafts announced a settlement agreement with Wynnefield Capital, its largest shareholder. The agreement averts a proxy contest showdown between the long-time shareholder and the designer of infant and toddler bedding, blankets and accessories. As part of the settlement, Crown agreed to add a Wynnefield nominee to the company’s board of directors. Crown also agreed to form a strategic review committee to explore strategic alternatives. Wynnefield is permitted under the agreement to increase its ownership stake in Crown up to 20%. The investment firm currently holds around a 15% stake.

Following a successful restructuring in 2001, Crown has maintained profitability since 2002 through a combination of organic and acquisition-driven revenue growth and sensible moves to clean up its capital structure. The $32 million market capitalization company is the largest producer of infant bedding, bibs and bath items in the United States. Crown’s products are marketed under a variety of company-owned trademarks, such as NoJo and Hamco, as well as licensed trademarks. The sale of products under licenses from Walt Disney Co. (NYSE:DIS) accounted for 30% of total revenue in fiscal 2008. Crown’s top customer is Wal-Mart Stores Inc. (NYSE:WMT), followed by privately held Toys “R” Us, Inc., and Target Corp. (NYSE:TGT).

For fiscal 2008 ended March 30, Crown reported revenue of $74.9 million and net income of $4.4 million, or $0.43 a diluted share, compared with year-ago revenue of $69.2 million and net income of $3.9 million, or $0.39 a diluted share. This reported net income total for fiscal 2007 excluded a gain on refinancing, net of taxes, . . .

Value Find: Patrick Industries

Tue, 08 Jul 08 06:20:08 -0400

Sizeable insider buying by a smart money hedge fund and a beaten-down stock price make Patrick Industries, Inc. (Nasdaq:PATK) a small-cap play worth putting on the radar.

Billionaire investor Jeffrey Gendell has made his fortune patiently making big bets in sectors when they are out of favor. As part of this strategy, his Tontine Capital hedge fund selectively invests in the private placements of small-cap companies. Tontine-led private placement homeruns in recent years have included Broadwind Energy, Inc. (OTCBB:BWEN), MISCOR Group Ltd. (OTCBB:MIGL), Exide Technologies (Nasdaq:XIDE) and Matrix Service Co. (Nasdaq:MTRX). Given this record, Tontine’s recent increased bet on Patrick Industries, a manufacturer of component products and a distributor of building products serving the recreational vehicle (RV), manufactured housing and industrial markets, caught my eye.

Near the end of June, Patrick completed a previously announced Tontine-led rights offering and standby purchase agreement at a price of $7 a share. In total, the rights offering and standby purchase agreement raised gross proceeds of nearly $13 million. Since the start of 2008, Tontine has now pumped nearly $20 million in cash into Patrick, boosting its stake in the $67 million market capitalization company to 57%. This continued vote of confidence by Tontine in Patrick comes in the face of the company’s stock having been walloped over the past year. At Monday’s closing price of $7.30, Patrick shares have tumbled over 50% from the $17 they fetched last July.

In May 2007, Elkhart, Ind.-based Patrick acquired rival Adorn, a manufacturer and supplier of interior components to the RV and manufactured housing industries, for nearly $79 million in cash. This acquisition virtually doubled Patrick’s manufacturing sales volume and significantly increased its market share. Since closing the Adorn deal, Patrick has focused on consolidating overlapping facilities to boost capacity utilization and improve operating efficiencies. This integration activity has come at a dicey time for Patrick with the housing industry in a downturn and RV sales suffering . . .

Value Find: Meade Instruments Corp.

Tue, 24 Jun 08 06:20:53 -0400

For investors with an iron stomach and a penchant for dumpster-diving, microcap play Meade Instruments Corp. (Nasdaq:MEAD) may be worth a closer look.

The recent announcement by the Irvine, Calif.-based company that it expects to undergo another year of restructuring has resulted in investors dumping the stock in droves. Since trading as high as $1.69 a share back in February, shares of the long-time designer and manufacturer of telescopes and binoculars have plummeted nearly 60%. At Monday's close, Meade fetched just $0.66 a share, which works out to a market capitalization of about $15 million.

This is a far cry from several years ago when Meade shares crossed the $3 level on excitement that two activist investors had joined the struggling company’s board of directors and a new CEO had been installed to lead Meade’s turnaround. Since then, Meade has managed to cut costs, reduce inventory and shed non-core assets, but this has been a slow process beset by manufacturing problems and related supply chain issues. To compound matters, Meade has had to try and engineer this turnaround during a weak retail environment. In April, Meade sold its Weaver and Redfield sports optic brands for $8 million in cash, followed by the sale earlier this month of its Simmons brand for $7 million in cash. With these sales, Meade will focus on its core business of Meade-branded astronomical telescopes . . .

Value Find: SourceForge, Inc.

Tue, 10 Jun 08 06:20:05 -0400

After a recent high-profile buyout announcement in the same sector, it may be time to kick the tires of long-time underperformer, but cash rich small cap SourceForge, Inc. (Nasdaq:LNUX).

In mid-May, online tech news and information provider CNET Networks Inc. (Nasdaq:CNET) agreed to be acquired by CBS Corp. (NYSE:CBS) for $1.8 billion. The price paid for CNET represented a hefty 45% premium over its stock price the day before the deal was announced. The CBS take-out of CNET followed months of pressure by a group of CNET shareholders to sell the large, but struggling, company. The CNET announcement could place pressure on the remaining, small publicly held Internet media companies to find merger partners.

One such name is $92 million SourceForge. Formerly known as VA Software Corporation, SourceForge changed to its new corporate name last year after the sale of its software business to CollabNet. The Mountain View, Calif.-based company’s remaining operations include its namesake SourceForge.net website, which hosts more than 170,000 open source software projects. SourceForge also runs IT community and news-focused websites Slashdot.org, Linux.com, FreshMeat.net, ITManagersJournal.com and NewsForge.com. SourceForge also operates a niche e-commerce operation called ThinkGeek.com. All told, SourceForge claims that its network of websites reaches 32 million unique visitors each month.

While SourceForge has a strong position in a valuable segment of the online media space, serving technology professionals and enthusiasts, it has been unable to translate this position into sustained profits. SourceForge management has attracted a reputation in recent years for unfulfilled promises and missed guidance. After SourceForge reported another quarter of disappointing results at the end of May, Trivium Capital, the company’s second-largest shareholder, called on SourceForge to either seek strategic alternatives or announce a significant stock buyback. Trivium pointed out that SourceForge, as of the most recent quarter, was sitting on a cash position of $0.82 a share with “possibly” another $0.10 a share in value from its stake in CollabNet. On Monday, SourceForge established a new 52-week low . . .

Value Find: Peerless Systems Corp.

Wed, 28 May 08 02:25:53 -0400

A balance sheet stuffed with cash and a left-for-dead stock price make Peerless Systems Corp. (Nasdaq:PRLS) a microcap tech play worth investigating.

The past two years have not been kind to shareholders of the El Segundo, Calif.-based company. At a recent price of $1.93 a share, and a market cap under $34 million, Peerless has seen its stock price shrivel by nearly 75% since 2006. Founded over 25 years ago, Peerless enjoyed a solid niche for many years providing software-based imaging and networking technologies for providers of printers, copiers and multifunction products. However, in recent years, Peerless’ customers, such as Konica Minolta Holdings, Inc., Kyocera-Mita Corporation and Ricoh Company, Ltd., have increasingly developed more technology in-house, putting pressure on Peerless’ margins. Understandably, investors dumped the stock as Peerless’ prospects dimmed.

Last year, activist investor Timothy Brog tried to shake things up at Peerless. His proxy contest resulted in a settlement last June in which Peerless agreed to add Brog to the board, as well as name two new independent directors. With the resignation last week of the lone remaining long-time director on the Peerless board, all of its directors have joined the board in only the past year or so. Peerless CEO Richard Roll took the top spot in December 2006. In January of this year, Roll announced an agreement to sell substantially all of Peerless’ intellectual property and other assets to major customer Kyocera-Mita for $37 million in cash. As part of the deal, Kyocera-Mita issued to Peerless a non-exclusive, worldwide, perpetual and royalty-free license on the transferred technologies. At the start of this month, the transaction officially closed...