When Wall Street and Main Street Disagree

by: Shlomo Greenberg

On September 20, in an article entitled ‘Nasdaq Rebound Candidates,’ “Forbes” Magazine named a group of 10 stocks that had produced disappointing results in the year ending June 30, 2006, and about which analysts were in agreement over their prospects of turning from frogs to princes during the course of the coming year. The sole Israeli company to be included in this list was Ceragon Networks Ltd. (Nasdaq: CRNT), which develops, manufactures and markets broadband communications solutions for wireless networks.

The criteria used in the selection of these 10 stocks were based on expected growth in sales and earnings per share in the next two years. According to the article, Ceragon lost 8% over the last 52 weeks, despite an improvement in its business results. The company overlaps with Alvarion (Nasdaq: ALVR) in certain fields, despite the substantial differences between the two companies in strategy and products.

Either way, the stocks of both Ceragon and Alvarion have been moving in a fairly similar manner, and the reason for this is that they both operate in the same field of communications. If you examine the movements of both stocks, and perhaps add alongside them ECI Telecom (Nasdaq: ECIL), which also engages partially in broadband wireless communications, you will find that all three have followed a very similar direction over the last one, three or five years.

The differences in stock movement are related to events in the three companies’ respective fields. This is obvious in the case of Alvarion, which is associated with WiMAX to the point of exaggeration. This is neither good nor bad, although every time the issue is in the news Alvarion gets jumpy, regardless of whether or not the story has anything to do with the company. Ceragon and ECI, on the other hand, are not automatically associated with any specific sector, so they are governed by the same rule as every other wireless communications company.

What John Ray, the author of the “Forbes” article is saying is that there are companies like Ceragon whose stock prices tumble despite the continuing improvement in their business results. This, of course, is nothing new to me, since there is a long list of Israeli companies, such as Top Image Systems (TiS) (Nasdaq: TISA), whose improvement on Main Street is clear for all to see, yet whose stocks act as if they are unaware of this.

Top Image is a small company that has been making progress, with wonderful consistency, from one quarter to the next. I feel that companies such as Top Image, BOS Better Online Solutions Ltd. (Nasdaq: BOSC), Eltek (Nasdaq: ELTK), Tower Semiconductor (Nasdaq: TSEM), Mind CTI (Nasdaq: MNDO), and a few others, are trading at market values that quite definitely justify buying their shares. And this is not a recommendation to buy, but to take a closer look.

If we take Silicom Ltd. (Nasdaq:SILC), for example, which currently has a market cap of $33 million, we will see that this is half the value it had six months ago, but 50% higher than its value a year ago, and 21 times its value almost four years ago at the beginning of 2003. If we take all the companies mentioned so far as the “Main Street Curve” for the last four years since the slump in September-October 2002, and compare them to the Wall Street curve for the same period, we’ll notice something very interesting. The Main Street curve has risen consistently from one quarter to the next, while the Wall Street curve has zigzagged. The question that must be asked is what, essentially, causes this difference between Main Street and Wall Street?

Top Image, for example, rose from a loss of $600,000 on $8.3 million sales in 2003, to a profit upwards of $600,000 on $18.3 million sales in 2006. The same trend can be seen in all of the companies mentioned earlier. All that the Wall Street curves show us is a kind of mirage, a blend of expectations, instant psychology with a few facts thrown in. After all, what else could have brought Silicom to $12 six months ago, and $6 today, given that it is in a far better state today than it was six months ago? Only a mix of expectations and instant psychology. Even the facts are missing here.

Yet despite this, Wall Street is not detached entirely; it is trying to tell us something by its behavior. Look at the graphs of these companies. Take Top Image’s graph since its slump in 2002, when the stock price dropped to $0.45. What, in essence, is Wall Street telling us? It is saying that there has quite definitely been a tremendous improvement at this company, and therefore it rose from a market cap of $4 million to $38 million, regardless of what happened on the way.

The shock waves on stock graphs represent “moments of reconsideration” regarding value and such shock waves will continue indefinitely. There is not much difference in this regard between Top Image and Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA). Wall Street gives values based on the average assessment of millions of investors. That is why volatility occurs.

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

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