5 Stocks I Am Watching

In December, I gave a brief synopsis on five stocks that I was watching for potential investment. I thought it would be worthwhile to revisit those names. Over the next week, I will be posting additional commentary for subscribers with some additional names that I am currently researching as well as giving an update on my planned conversation with Allied Defense Group. You will recall that the five stocks that I mentioned were as follows (prices are as of December 19):

1) Allied Defense Group (was $5.01, now $5.71) symbol: ADG: Allied Defense Group's primary business is in the sale of ammunition across the globe. The stock was added as a position in the portfolio and now represents a bit over 3% of total assets. The company is completing a major restructuring which has resulted in the sale of lower performing units and a recapitalization of the firm. The company has record backlog which should result in strong earnings and cash flows in 2008 (especially late in the year). I have a call scheduled with senior management late this month which could result in an additional increase in the position size.

2) L.S. Starrett (was $16.29, now $14.00 down $3+ today) symbol: SCX: The stock continues to trade at a very reasonable valuation and got a lot cheaper in yesterday's trading. I have not yet taken a position in the stock as I have not yet finished my qualitative analysis of the company (the firm sells over 5,000 products) but this continues to be a strong candidate for potential investment once my due diligence is complete especially considering the decline in share price today on no news.

3) First Marblehead (was $12.66, now $16.23) symbol: FMD: This is a high risk, high reward stock. It is unclear when the company will be able to complete its next securitization of student loans into asset backed securities but when it does so the future of the company will gain a significant amount of clarity. Goldman Sachs took a large stake in the company in late December and added capital into the company's coffers. The stock continues to be interesting at these levels and could be a very good buy if liquidity in the ABS market improves.

4) AEHR Test Systems (was $5.75, now $6.60) symbol: AEHR: The stock had an outstanding quarterly report on January 7 increasing sales by 55% over the prior year, doubling net income and continues to have a very strong balance sheet and cash flows. The company is at the start of its product upgrade cycle so it should be able to withstand at least a mild economic slowdown. In the past quarter, the company sold its first FOX-15 wafer burn-in system which will likely flow into revenues in subsequent quarters. I am gaining confidence that the company will be able to continue to report strong results in the near-term, however, the sector does still have cyclical components to it which may be a bit of a headwind for the stock going forward. The volume in the stock is a bit higher than what we had seen a couple of months ago but is still relatively light. The stock is very attractive on a valuation basis with a p/e of 7x my estimate for 2008 earnings, just under a dollar per share in cash, no debt and solid margins, although I am somewhat concerned by the recent increase in accounts receivable.

5) Ninetowns (was $3.42, now $2.92) symbol :NINE: I had mentioned in my prior post that this stock would begin to gain attractiveness if/when it approached the $3 level. The stock is now trading at a negative enterprise value (selling below cash) based on numbers from the quarter ended June 30, 2007 although I would like to see third quarter numbers or a slightly lower stock price to begin taking a stake in the company. The potential catalysts for an improved stock price for the company continue to be its B2B initiatives in China as well as the deal with the Chinese Government to begin servicing import/export e-filing software.

Overall, the stocks have had decent results especially considering the significant decline in the small cap indices over the past month.

Comments

[twinnkie]

adg has great possibilities. 25-30 dollars by end of 09.

[Dan Weiss]

Anything is possible Twinnkie but they will have to deliver nearly perfect to get the stock to that price (that is more than a triple from current prices).

[UYARE]

Dan Weiss' record of stock picking is one of the worst. Out of 5 he picked, 4 tanked! He should do other type of work!

[Dan Weiss]

Im not sure what you are referring to (lets take a look at each company):
1) ADG- $5.62 (was $5.01) -- this is a very high confidence name that I would point out is the only 1 of the 5 which was brought into the portfolio. The company has record backlog, strong orders and has undergone a restructuring plan which should allow some of that backlog to hit both the top and bottom line of the company.
2) L.S. Starrett- $22.62 (was $16.29) -- obviously, this stock has been a winner.
3) First Marblehead- $2.51 (was $12.66)- this stock has obviously been under distress. I never took a position in the company as I was waiting for improvements in the asset backed market and I wanted to see evidence of just 1 securitization which did not occur.
4) AEHR- $4.79 but reached $11.20 (was $5.75)-- This stock was a near double for those who would have bought the stock as clearly the same attractive valuation characteristics which were present at $5.75 were not as attractive at the high levels which it reached. I also pointed out in the article the risk of potential macro headwinds if economic activity were to deteriorate.
5) NINE- $2.10 (was 3.42)- This one has been disappointing as the company has an enterprise value of -$40 million. That being said I have no confidence in the management team of this company as the actions they have recently made (minimizing reporting) are not shareholder friendly.