In 2008, I became a Seeking Alpha contributor to introduce stocks with a low-risk / high reward profile. In late-2010, I shifted that focus to present stocks that have the potential to triple. Both strategies have proven very successful.
While searching for winning picks, a lot goes on behind the scenes. This is part of a regular series, chronicling selected events the Pipeline Data team encounters while analyzing companies and seeking triples.
In Part I, we discussed how to optimize profits on our highlighted names. In this installment, we will update our year-to-date performance and discuss a few stocks we have investigated over the past month.
First, let's quickly review the year-to-date performance of our highlighted names. As you can see from the chart below, the stop-loss strategy we discussed in Part I would have yielded strong gains. We started the year with three names: Majesco Entertainment (COOL), Zhone Technologies (ZHNE), and Calix (CALX).
Year-to-date, they have delivered an average peak return of 73%, outpacing the NASDAQ by a healthy margin. However, all three names have since pulled back. With 20% stops in place, investors could have locked in on an average gain of 53%. Utilizing a fundamental risk to reward methodology would provide similar results.
All data as April 17, 2012
* Carried over from the 2011 portfolio. Initial prices as of December 31, 2011.
Our first new idea of the year was Attunity (ATTUF.OB). It has been hanging in there and we believe the stock will perform in due time. That time could come as early as Monday when the company reports its quarterly results. I have a one-on-one meeting with management after the call and will be sure to post a write-up on SeekingAlpha.
Our latest picks, Alvarion (ALVR) and Smith Micro (SMSI) were revealed in tandem this week. Both qualify under our "bottom-fishing" classification, though ALVR has some potential catalysts, as discussed in "3 Stocks To Triple On The Mobile Data Offloading Boom".
This section is meant to be a selective behind the scenes look at a few of the stocks we've examined over the past couple of months. Much of our research directed toward servicing our Pipeline Data clients, but some is focused on uncovering new "Stocks to Triple". To be clear, this section is not meant to highlight new Stocks to Triple. Rather, it is to illustrate the variety of stocks we examine and the thought process we undertake in that endeavor.
Due to this month's lengthiness, we'll only discuss three names today. However, each one represents a very different story, so they should prove educational. Let's dive right in.
Seagate Technology (STX): The one name missing from our performance chart above is Seagate Technology . We first highlighted STX in the aftermath of the tragic Thailand floods. At $20, it had already doubled from its 52-low and was unlikely to triple from there. However, but we made it an "honorary" Stock to Triple because we believed it could reach $30, triple $10 level.
Our reasoning was that it was "among the most likely tech names to continue meeting (or beating) expectations". So far, so good -- the company reported blowout Q1 results on Tuesday. This sent the shares to within a couple coins of $30.
Conclusions: We believe Seagate will continue to deliver outstanding results, but our risk-to-reward roots tell us to avoid gluttony and ring the register. 50% is a nice enough reward for a 10-week investment.
Alanco Technologies (ALAN.OB): Alanco's value is highlighted by its near-2M share holding in ORBCOMM (ORBC). ORBC shares have appreciated sharply in recent months, increasing ALAN's net liquid value to a level that is 75% above its current market cap.
Apparently recognizing this stock market inefficiency, CEO Robert Kauffman purchased 190,000 shares in recent months. Our team believes that ALAN will most likely pursue a reverse merger. The company nearly succeeded in a reverse merger transaction last year. On the initial announcement of that deal, shares of ALAN nearly tripled in a day.
Conclusions: ALAN is tiny and speculative, but its assets can protect investors' downside for several quarters. Meanwhile, its potential for a reverse merger transaction holds the promise of significant upside. The CEO is on board, providing investors with good reason to feel confident.
magicJack (CALL): Speaking of reverse mergers, we've tracked the progress of CALL since its predecessor (VocalTec) went public in 1996. In 2010, VocalTec merged with privately-held magicJack and its uber-popular voice over IP (VoIP) product. The combined entity has done well. Management recently previewed exceptional Q1 earnings and raised expectations for calendar 2013 to $2.00 - $2.50 of EPS.
Our internal demand-tracking measures confirm that customer interest surged in the fourth quarter after several quarters of uninspiring data. However, these measures started to wane again in Q1. We are also concerned that functional and pricing pressures are beginning to accelerate. In fact, we believe that both Skype and Vonage will both pose a stronger threat to magicJack than they did in 2011.
With expectations at elevated levels, this should be cause for pause among investors. CALL's short interest indicates that this is the case. 2.4 million shares are now short, a substantial increase from 379,000 in September and 1.5 million in December.
The company has countered with an aggressive buyback program and public statements that management will seek to increase the size of the repurchase program. Interestingly, this comes in the wake of increased insider selling and a filing to sell 5 million shares on behalf of stockholders.
Conclusions: It's hard to trump a determined and well-funded management team. The company exudes confidence and three key insiders have actually purchased shares of late. However, a capital gains tax hike is looming for 2013. Thus, we suspect that insider sales will persist - original magicJack shareholders have only had a short amount of time to diversify their holdings since merging into VocalTec. If industry price-pressure heats up this summer, things could get messy in a hurry.
Additional disclosure: I am also short the CALL June 30 calls.