Author: Yale Bock
Disclaimer: Yale Bock owns CASS, GIGM, DGI, KONA, MLAB and NDAQ in his Covestor GARP Model.
August 30, 2010: I believe September will prove to be much more representative of a “normal market” than June, July, or August, simply because the market will have all participants engaged. Summer is always a low volume situation, and as such, prices of stocks can get distorted with wide spreads on low volume. One caveat, I thought the same thing held true two years ago, and when the bottom fell out of Lehman, Fannie and Freddie, etc, I was surprised at the magnitude of the selling for the next 6 months. I do not see any events like that on the horizon, and I do not believe we will have a double dip recession. I also believe the bond market is in a huge bubble, and investors will feel the pain of it popping, especially with 2yr, 10 yr, and 30 yr Treasuries trading at all time low yields.
Covestor Model: The Reasons for Owning the Portfolio Holdings
1.Gigamedia (NASDAQ: GIGM): Any time a stock which is the largest position in my portfolio takes a large drop, I go back and look at the SEC filings to do some more research. Having done so, I want to explain why I continue to hold this position with it not having done well. I am more aware than anyone it has been the runt of the litter. First, the GIGM business has two components, one centered on internet poker and gambling, and the other around Asian gaming (not casino based). GIGM is transitioning from the main business being internet gaming in Europe to building a large platform for Asia based gaming.
As you know, GIGM received 100 million dollars for 60% of their internet gambling business. The other 40% will be sold in 3 years based on the status of the business at the time. The focus for GIGM is building the customer base in France, and with summer ending, the next 4-6 months will be used to spend money to attract players. In Asia, the business consists of a division focused on an online freestyle basketball game in China, run by the division T2CN. The second geographic area is the rest of Southeast Asia, where the concentration is offering casual, MMPORG, and card games like Pachinko. The division is run by Funtown. In the last quarter, the freestyle game showed good growth in China.
However, on the positive side, GIGM bought a company called IAHGames, which adds a huge distribution network. According to the IAH website, “IAH has tripled its online revenues for 2 consecutive years running from our current distribution of 3 online games- Granado Espada, FIFA Online 2 and Dragonica. IAH has also increased our gamer database from 500,000 registered users in the first year to over 35 million registered users today.” (From http:www.IAHGames.com) The GIGM plan is to take all of the promising games where the company has made investments in content creators and push them through IAH. The strategy is based on 8 minority investments in game creators all over Southeast Asia. It is similar to a venture capital strategy of investing in 10 companies, and if one has a home run it will more than make up for the other 9 possible failures. GIGM has scored a license to the Starcraft franchise, which had a big deput in July by selling over 1.5 million copies in two days. One last point, the US government may be on its way to allowing online gaming in the US. By owning GIGM, an investor has a free call option on any growth in online gaming in the US with a company which will be allowed to operate, provided Congress decides to pass the bill. Right now, GIGM has a112 million dollars of net cash on the balance sheet, which is greater than the stock value (25 million or so is reserved for buying IAH). The bottom line is time will reveal how GIGM performs in each part of its business as they are all in flux. The next 6-8 months will reveal how things fare in France with Mangas, in China with freestyle basketball, and in Asia with IAH and the new product pipeline. I hope this provides more clarification on the reasons for holding GIGM.
2.Digital Globe (NYSE: DGI): Same idea as each prior month, the reason for ownership of the company is the continued increasing demand by governments and private enterprise for digital photography from satellites, to help with defense, intelligence, and information collection. The big news last month was the signing of a 10 yr, 3 billion dollar contract with the federal government, and the stock jumped a bit.
3. NASDAQ: (NASDAQ: NDAQ) should benefit from the continued demand for data from companies, as well as for derivatives on equities, indexes, bonds, power, carbon, companies seeking to go public, and interest rate swaps. Volume over the summer has been light, but with the fall coming there should be a significant increase to bolster revenues in that area.
4. Cass Information Services: (NASDAQ: CASS) for 2Q2010, CASS reported earnings of .52 cents per share, which was better than the .39 cents per share during 2Q2009. Revenues came in at 23.8 million dollars for 2Q2010, 9% better than 2Q2009. When interest rates start to rise, Cass is in very good position to benefit from wider spreads.
5. Kona Grill: (NASDAQ: KONA) The key for Kona is continued operational improvement with concentrated efforts on social networking and targeted local marketing to drive traffic. Kona reported results on July 27, 2010.
6. Mesa Laboratories: (NASDAQ: MLAB) Mesa Laboratories develops, acquires, manufactures and markets electronic instruments and disposables for industrial, pharmaceutical and medical applications. 1Q2010 results were reported on August 16, 2010 and net income for the quarter increased twenty nine percent to $1,320,000 or $40 cents per diluted share compared to $1,026, 000 or $.31 per diluted share one year ago. Revenues increased 50% compared to the same quarter of last year (to 7,455,000 from 4,977,000), and operating income increased 29% to $2,214,000. Mesa acquired SGM Biotech in April 2010 and sales of those products were up 96% year over year. SGM makes biological indicator products. Another acquisition is Torqo, and they had a 53% increase in sales over the 4th quarter of last year, or $459,000. Mesa continues to plan for acquisitions in the future and will report earnings in both non-GAAP and GAAP measurements in the future to account for amortization and depreciation expense, as well as one time charges and stock option expensing.