Harvest Trust Energy (HTE), a Canadian Oil and Natural Gas royalty trust formed in 2002, had its initial public offering [IPO] on December 5, 2002. It raised $34.5M at $8 per share then and a secondary offering in February 2003 raised another $15M at $10 per share. The trust also initiated its monthly dividend distribution immediately after the IPO. The distribution started at 20c per share and progressively went up to 38c per share and remained at that level for a couple of years before the recent slash to 30c per share.

The business plan at IPO was to acquire mature properties and eke out additional value by using production enhancement and optimization efforts. The initial acquisitions were mature oil producing properties in Eastern Alberta. Since then, the company diversified into natural gas properties although production is weighted 70% in favor to oil. In October 2006, they acquired North Atlantic refinery for C$1.6B.

iRobot (IRBT) initiated sign-up for ConnectR Pilot Program following the September 2007 press release at DigitalLife. The pilot program pricing for the product is expensive at $199, and only time will tell how keen consumers will be to actually purchase it. The starting price when the product is released is expected to be $500, a premium that will indeed make it tough for iRobot to penetrate the home market.

The press release had indicated that ConnectR would be made available to customers in the pilot program towards EOY 2007. By December, iRobot announced deferring the program to early 2008 largely due to the inspiring response from prospective customers. An excerpt from the email that went out last week is given below:

Microsoft (MSFT) has announced their decision to pay a hefty premium of $44B for Yahoo (YHOO). In perspective, that amounts to 60 times Yahoo’s projected 2009 earnings. The irony is that Microsoft had issued to its shareholders a special dividend not too long ago with the surplus cash that was available at that time. Had there been enough foresight Yahoo could have been purchased earlier for far less than the current premium without having to borrow money to fund the acquisition.

Microsoft and Google (GOOG) are valued at 14 and 25 times respectively of their forward earnings. Their size dictates that it will be tough for them to grow earnings at a healthy rate going forward resulting in mediocre returns for investors as explained in our article on Google valuation last year. Apart from the modest arbitration opportunity available to purchasers of Yahoo shares and short-term trading opportunities due to the volatility in Google shares, returns are limited for long-term growth investors in shares of either of these companies.

Cypress Semiconductor Corporation (CY) and EMC Corporation (EMC) have control over the majority of the outstanding shares of their spin offs as of EOY 2007. Cypress controls 51% of SunPower Corporation’s (SPWR) and EMC holds 86% of VMware,’s Inc. (VMW) outstanding shares. SunPower, which Cypress had purchased when it was a very small PV manufacturer, was spun out November 2005. VMware Inc., which EMC purchased for $625M in 2004, was spun out on April 2007.

The shares of SunPower have appreciated well over 150% since the spin-off in spite of the recent sell off. VMware shares more than doubled by the end of October and has since come down to the price at the time of the IPO. The current market capitalization of $6B and $22B for SunPower and VMware respectively exemplify how favorable these acquisitions have been for the parent companies.

iRobot Corp (IRBT), now a familiar name in the robotics arena, designs and develops residential, industrial, and defense (U.S. Government) robots. Its products are marketed both organically and along with their partners. Manufacturing is turnkey from China for residential robots and indigenous for defense products, as U.S. Defense contracts mandate it for their industrial and governmental robots.

The business plan for Advantage Energy Income Fund (AAV), an oil and gas [O&G] royalty trust based out of Calgary (Alberta, Canada) calls for acquiring and developing O&G reserves in Western Canada. The fund sports a monthly dividend policy, which is popular among Canadian Royalty trusts. For U.S. investors these distributions are:

• Qualified dividend income.
• Subjected to a non-resident withholding tax of 15%.

To be eligible for the withholding tax credit, the fund needs to be purchased for a taxable account. Tax deferred accounts like an IRA cannot claim the credit, which renders investments in such foreign royalties unattractive. Unlike their American counterparts, CanRoys are exempt from paying taxes on the distributions till 2011. Also, their operations and asset base seem perpetual, as they are allowed to expand by investing or acquiring other assets.

Energy meter reading hardware and software has been the lifeblood of Itron (ITRI) since its inception. The initial products included hand-held computers and the associated software that made paperless meter-reading operations a reality. In 1990, the company introduced Automated Meter Reading [AMR] technology based products that enabled utilities to collect data remotely through a wireless device. The earlier part of the 90’s saw a growth spurt as it focused on gas and electric meters. By 1995, they had expanded on to water meters as well. Its foray into software was initiated with the acquisition of MV-90 in 1996, an application for the collection and analysis of advanced meter data. The targeted audience primarily was commercial and industrial (C&I) customers and energy users. Soon focus shifted to the software application side of the business and gained acceleration in 2002 when they started an acquisition spree. Silicon Energy along with several other smaller companies was acquired and by 2004 they were the leader in the metering software market.

ClickSoftware’s (CKSW) revenue is diversified globally and across industries. This should allow the company to hold up well against regional and industry specific problems that may arise over time. However, the company is not immune to a global slowdown. Below are two tables that show how the business is spread out globally and by industry respectively:

Vertical integration in this context refers to integrating the different steps in the Polysilicon Based Solar Module production process. Module production involves four steps in chain event:

• Use the raw material sand (SiO2) to produce a very pure form of silicon called polysilicon.
• Use polysilicon to produce wafers and ingots.
• Use wafers and ingots to produce solar cells.
• Use solar cells to produce solar modules.

Manufacturers are yet to immerse in vertically integrating the whole process. There are a few getting their feet wet - Trina Solar (TSL), Yingli Green (YGE), Suntech Power (STP) and Canadian Solar (CSIQ).

Asure Software (ASUR) formerly Forgent Networks, in its early years, had dealt in the business of designing, manufacturing, and selling multimedia conference systems. The VTEL brand was well established and they had a rapport with resellers and a vested interest from Intel. This rosy outlook saw a volte-face from 1996 onwards as the business experienced low margins along with low growth. Initially price competition contributed to this woe but later Internet based technologies with enhanced flexibility proved overwhelming. The company’s financials prior to 2001 shows the unraveling of that business. The following summarizes the financials of the company after fiscal 2000:

ValueClick (VCLK) emerged from a split-up of the Internet advertising division of Web-Ignite in April 1998. This division pioneered performance based advertising on a cost-per-click [CPC] basis as a viable business model. Since then, the company has focused on creating an ecosystem around its performance based advertising model. ValueClick’s business caters to the long tail of the Internet. The CPC model was introduced at low rates to sell unsold inventory on publisher’s websites. This proved compelling for publishers as otherwise the inventory would remain unsold. Advertisers on their part appreciated the value in having to pay only if the user clicks (performance based model) as opposed to having to pay per the number of impressions served [CPM]. The company’s display ad network was born out of this harmonious concept.

A number of value-added initiatives were added to the company’s core expertise in display ad network over the years including Display Ad Media, Lead Generation (email & vertical sites), and Comparison Shopping sites. En masse they represent the ValueClick media business unit, which generates more than 70% of ValueClick’s revenue.

The first step to valuing Google (GOOG) using fundamental analysis requires coming up with a number for the Compounded Annual earnings Growth Rate [CAGR]. The table below looks at the growth rates priced in at different share prices, using the Discounted Cash Flow [DCF] calcuator at moneychimp.

Suntech Power (STP) is in the business of manufacturing solar modules and is the largest provider of such modules globally. The operating niche for STP is in the middle of the Photo-Voltaic [PV] supply chain. STP is dependent on suppliers to provide Ingots and Wafers, which are essential components in building its modules. The Ingot suppliers in turn depend on solar grade silicon suppliers. The modules produced at STP are then distributed to a variety of business partners including electric utilities, system integrators, installers, and distributors. These modules are primarily used in the On-grid and Off-grid applications of PV systems.

Business Issues

Central Europe & Russia Fund (CEE) is categorized as a non-diversified closed-end Exchange Traded Fund [ETF] and is managed by the Deutsche Bank Group. It is non-diversified as its investments are focused exclusively in Central Europe and Russia. As a Closed-end ETF [CEF], it has the characteristics of both stocks and mutual funds. It trades like a stock but like mutual funds the dividends and the realized capital gains are distributed to shareholders. The benchmark index of the fund comprises of Composite Eastern European Index [CECE] – 45%, Russian Traded Stock Index [RTX] – 45%, and the Istanbul Stock Exchange National – 30 (ISE-30).

Opportunities

The St. Joe Company (JOE) saw its stock price bottom at $30.5 three weeks ago, before rebounding to $36 as of yesterday. Even now the stock price is trailing by about 15% from its August 8th high of $41.21. This fluctuation, all within a timeframe spanning three weeks, piqued our interest since we had made a trade in the recent past. During this period, there were three different press releases, all on the company's land development operations. The combined outlook from all of them can be labeled as mildly positive.

In May this year, at the Ira Sohn Research Conference, David Einhorn, a hedge fund manager at Greenlight Capital pinned the value of JOE at $15 per share. Clyde Milton, a fellow blogger published a bullish report on JOE in August paving way for a debate with David Einhorn who defended his position. Seeking Alpha published both these articles and the unwelcome attention caused the company to come up with its own defense on September 13th. It was in the form of a very odd press release. The release structured as an FAQ portrays North West Florida as a growth area, defends the value of wetlands, and touts JOE's experience in getting land-use entitlements as a competitive advantage.

Financials

The following table summarizes the relevant financials of Patni Computer Systems Limited (PTI) along with a few others for the year-end 2006. The other companies are listed to allow comparison of relative valuations to a representative big-cap outsourcer (Infosys (INFY)), a big-cap US consultancy firm (Accenture (ACN)), and a similar sized company in the same industry with comparable business prospects (Covansys (CVNS)):

Local.com (LOCM) got Nasdaq listing on 10/2004 when it raised $22 million at $8/share. The listing enjoyed early success with the stock climbing steadily to $30/share in one month. This was a ride on the back of press releases such as the one about licensing “Local Direct search and advertising platform to Internet Yellow Pages [IYP] provider, MYePages LLC”.

By 5/2005, the stock was down at $5. By 6/2007, the stock was hovering around $4 and the average volume 100K down from 1 million in 2005. Then excitement began with 2 patent announcements.