Undiscovered, Undervalued Smallcaps: The Game is Just Beginning

 |  Includes: ANSW, ITGL, ORSX
by: Dave Gentry

The game is not over, not even close. At least not for small-caps. RedChip's family of stocks remained relatively unscathed on Tuesday's sell-off. China was due for a precipitous correction and all roads connect in the global economy. The US stock market is not an island unto itself; however, the American economy remains strong. Interest rates are still at historical lows and consumer confidence remains high. In the short-term, certain sectors in the market will remain strong while others sectors such as the dotcoms will be hit hard in the coming weeks and months. The sell-off could be part of a longer-term correction or even the beginning of a bear market.

My suggestion is to buy the box stocks; look for undiscovered companies with growing sales, improving margins, profitability or near-term profitability that operate in the high growth sectors. Two I like: IT Group Holdings (OTC:ITGL) and Orsus Xelent Techs (ORXT.OB). And yes, I am paid to say I like these stocks. I’m also paid to find undervalued, undiscovered companies to represent. In fact, RedChip's affiliate, the Aurelius Consulting Group, could make close to $1 million with its ITGL stock options (see the disclosures). And that’s a big plus for investors looking to follow our lead. As for ORXT, we are not compensated in stock. Let me tell you why I like these two stocks.

Here's why I like ITGL:

1) Business Growth – Total asset growth of 86% between year-end 2005 and Q2, 2006.

2) Competitive Advantage - IT has an indefinite contract with British Telecom (NYSE:BT) that allows IT to sell line rental and airtime at highly competitive wholesale prices.

3) Undervalued in its Peer Group - ITGL should trade at 20 x forward 2007 with earnings of $0.06 which would price this stock at $1.20.

4) Revenue for Twelve Months 06 - will show approximately $21 million; RedChip is projecting $50+ million in revenues for 2007.

5) Exceptionally Strong Management Team – CEO, Charlie Yiasemis is a major player in the European telecom space. He has served as chief consultant for AT&T, Cable and Wireless and was Founder/CEO of one of the largest VoIP companies [IEC]. He has surrounded himself with industry experts who know how to avoid the big mistakes, grow revenues and.

Here’s why I like ORXT:

1) Profitable - The Company has experienced 200% earnings growth for the nine months ended September 30, 2006.

2) Explosive Revenue Growth - 457% Q1 Revenue growth; 776% Q2 Revenue growth; Q3 Revenue growth 55.92%; $45.9 million revenue for nine months ending 2006 which is an increase of 176% year-over-year.

3) Undervalued in its Peer Group - ORXT should trade at 16 x forward 2007 with earnings of $0.33 (this could be conservative) as they have a government contract potentially worth $120 million.

ORXT 1-yr chart

Short Pick

Answers Corporation (NASDAQ:ANSW) is losing $1.12 per share. They are trading at a price-to-sales ratio of 13.55. Though they have a sexy search engine with unique capabilities and they are aggregating customers, they have yet to prove that they know how to make money. The ANSW’s of the world will come back to earth this year. Their huge losses and sloppy balance sheets will come back to haunt their stocks. Profits do matter and always will matter. Until they have proven they can make money, this stock should trade in the $4.00-$5.00 range or about 5 x forward revenues. It’s a great short at these levels.

ANSW 1-yr chart

Disclosure: Author holds a position in ORXT.OB and ITGL.OB.