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Teresa Dawn
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I have been investing in the market for more than 30 years in small and midcap stocks. I have worked in the industry for almost 20 years in everything from IT to accounting, but am glad to say that I am now retired. This means I have time to share my knowledge with others!
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  • Two Underperforming Small Caps That Might Be Worth A Look

    When you think of a small cap stock you automatically associate risk with the investment. One of the first lessons we are taught when we begin investing is that more risk is associated with smaller companies and less risk is attached to a larger company. But what happens when a small cap stock is fundamentally larger than its market capitalization, and is valued incorrectly? Sometimes this occurs, and then the market struggles to appropriately value the company. The two companies I am looking at fall in this category and compare favorably to both of its larger counterparts. Each has traded with large gains in 2012 but is now presenting additional upside due to a large value advantage. (NASDAQ:OSTK)

    After a five year 65% loss, has gone on to trade with gains of 135% in the last year. The company reported earnings on January 24 and rose another 7.50% with revenue growth of 9% and a 170 basis point rise in gross margin, to 17.9%. This is a company that is seeing vast improvements, which is leading investors to buy its stock as quickly as possible. Investors had sold the stock over the previous five years due to Amazon's (NASDAQ:AMZN) rise, but it appears the market is large enough for more than just Amazon and eBay in the online retail space.

    At this point with a market capitalization of $386 million, is a better value play than Amazon. Yes, the company is growing slower, but is trading at a price/sales of only 0.36 compared to Amazon's 2.16. Therefore, the stock is much cheaper compared to sales alone and has seen an impressive trend at improving its margins. Investors should explore the data on a blog, showing the difference in direction between's operating margins and that of Amazon's operating margins.In comparison, Amazon has achieved operating margins of 0.93% over the last 12 months while has recorded margins of 1.11%.

    When you look at the margins of both companies you find that both are similar, but as shown in the blog, it's the trend that is concerning. Since Q1 2006 Amazon's operating margins have fallen from 6% while's have risen from (2.50%). This shows that is becoming more efficient while Amazon is losing its profit with growth. However, we must acknowledge that Amazon has made large investments and is sacrificing profits now to produce larger profits in later years. Yet I still consider this to be an issue, as many have suggested that as Amazon grows its fees for shipping, taxes, etc. will create larger costs. Furthermore, Amazon's return on assets of 1.58% compared to's 4.23% shows a clear difference in efficiency on behalf of management. Because of these factors, I believe that might be the better investment.

    While I do believe that is the better investment, we must also explore the risks. Yes, the company is improving its margins and is becoming more efficient, but is growing by less than 10% year-over-year. In the internet company space this is very conservative growth. Investors must be careful and pay close attention to changes in interest among the general public. This is probably the most important thing for internet based companies, having to remain "cool" or interesting to drawl in the consumer/user. At this point, is growing, but slower than I'd like to see, and an investment would be based on value and efficiency compared to the industry, and not necessarily rapid growth.

    Both Amazon and have similar business models, therefore it's hard to deny that is fundamentally cheaper. The company has better margins, better returns on assets, and is valued cheaper compared to its fundamentals. With all things considered, I don't think Amazon is a bad company, and it's growing significantly faster than But with now showing growth, improved margins, and efficiency, it's likely that the market will begin to value it correctly after years of it being pushed down in favor of Amazon. To put this in perspective, if's industry-low price/sales ratio was to reflect that of Amazon's then Overstock would be worth $2.2 billion, or $93 per share. It won't happen overnight, but is possible nonetheless.

    Big 5 Sporting Goods Corporation (NASDAQ:BGFV)

    With a P/E ratio of 27.80 there are many who are starting to believe that Big 5 Sporting Goods is getting expensive. The stock has increased over 75% during the last year as a result of margin improvements. This is a company with sales of almost $1 billion and growth in the mid-single digits. However, the company has had problems in the past maintaining its margins, currently with operating margins of just 2.21% in the last 12 months.

    Big 5 is valued at $300 million, more than 4.5 times less than Hibbett Sports (NASDAQ:HIBB). The problem is that Big 5 is the larger company, by almost $200 million in annual revenue. However, Hibbett Sports has managed to maintain operating margins over 10%, currently 13.91%, therefore is awarded the higher valuation. The reason I believe that Big 5 is presenting further upside in this current year is because it's growing at the same rate as Hibbett and is now finally showing progress at improving its margins.

    If in fact, Hibbett Sports has been awarded the higher valuation because of margin improvements then if Big 5 continues to grow its margins then it would make sense that we'd see continued returns in its stock. In 2012 Big 5 saw a five year worse in profit margins, with 1.3%, but saw a boost in November due to a sudden rise in long-term margin guidance. For the recent quarter, it improved its profit margin to 3.24%, which is a reflection of other fundamental improvements that we've seen during the recent year.

    While Big 5 is just now showing progress at improving its profit margin, the company has made other strides in 2012. In the first nine months of 2012 the company reported operating cash flow of $28.5 million compared to just $2.22 million in the year prior. In previous years, the company had earned positive cash flow from other financing and investing activities; however operating margin is the true measure of efficiency.

    If the company can continue to improve in margins, cash-flow, and become more efficient then it could easily grow in market capitalization, by a significant degree. Compared to Hibbett Sports, Big 5 still has a lot of work ahead of it. Hibbett Sports has profit margins of 8.72%, return on assets of 20.68%, and operating cash flow of more than $80 million. Overall, Hibbett is a great company that is efficiently managed, yet is valued according to fundamentals.

    For those interested in investing in Big 5 I think the risks are obvious based on this article. The company has seen an increase in value due to margin strength, therefore it must maintain these higher margins. Furthermore, the company must continue to improve its cash flow, or correct the issues with cash from financing and investments. If the company can maintain or continue to grow margins from the last quarter, and operate efficiently in all phases of cash flow, then it will have no problem trading higher. However, these potential catalysts are also potential risks that must be monitored.

    Big 5's profit margin of just over 1% and its return on assets of 3.17% doesn't even come close to that of Hibbett. However, Big 5 has reported almost exactly half as much operating cash flow, and if it can improve on its other areas of cash flow then it could become highly profitable. Right now, we are already seeing mass improvements in the business of Big 5, while margins and returns on assets and equity appear tapped for Hibbett Sports. Hence, with similar revenue growth, Big 5 showing the operational improvements, and being the cheaper stock, I believe it's the stock to own and presents the best upside potential.


    Compared to the rest of the market these two companies appear greatly undervalued. Now granted there has been numerous reasons for why each is undervalued, whether it be years of underperformance or being mismanaged. Regardless of the reason, this fact is now creating gains for investors, as each company makes progress in its operational approach. And because these companies were so undervalued, each could now continue to grow if in fact the improvements continue. After looking at each company, and being familiar with each stock, I expect 2013 to be a great year for investors of these two companies.

    Disclosure: I am long CBK, OSTK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: All fundamental data such as operating margins, returns on assets, etc. was obtained from Yahoo! Finance

    Jan 29 3:31 PM | Link | Comment!
  • Life Technologies At $65-$75 Is A Good Deal For Roche

    An interesting development in the healthcare sector led to double digit returns for Life Technologies Corp (NASDAQ:LIFE). Life Technologies Corp is one of the true breakthrough technology companies of our time. The company develops gene sequencing products, including products, devices, and tools that can be found at just about every large pharmaceutical company throughout the country, and beyond. The company is a leading expert in cell imaging and analysis, DNA and RNA, and research for the newest theories in medicine. And now, the company might be preparing for a major shift in ownership.

    Life Technologies Corp is a stock that I have owned for many years, and a company that I have always found interesting. It is not a high-growth company, rather a consistent performer that could see organic growth of 10% depending on the segments in which it operates. On Friday the stock traded to new highs with a 10% gain in the early session, after reporting that it has hired Deutsche Bank and Moelis to assist in its annual strategic review. For the last few months there have been rumors of a potential move on behalf of the company; this adds further fuel to the fire.

    At this time it is unclear as to what type of "strategic" move the company may be looking to make. We don't know if it's looking at a private equity buyout, a leveraged buyout, or perhaps another global industry player will look to swoop in and make an offer. The only thing we know is that there is now some substance to the rumors of a strategic move; the company is attracting some interest and believes a deal could be made.

    The most important questions for investors such as myself is will the deal occur, who will buy the company, and what is a fair price? First, of course the private equity conversation comes into play, but considering the fact that a company will want to scale up Life's business it might be a hard accomplishment for a company without a sizable pharmaceutical segment. Therefore, it's more likely that a pharma company will purchase Life, and all indications suggest it will be Roche.

    Roche is attractive as a potential suitor for three reasons: It is the world's largest maker of cancer drugs; it failed to acquire a similar company in Illumina (NASDAQ:ILMN), and Life's technology could be crucial to the future development of therapeutics due to its ability to develop a blueprint of a person's DNA. Furthermore, there have been rumors of the two companies speaking ever since the talks between Illumina and Roche fell apart. In fact, according to some reports, Life Technologies and Roche were speaking even before the Illumina deal fell apart, back in February 2012 when the two companies signed PCR licenses.

    According to recent reports, Life Technologies is looking for $65-$75 per share. Jefferies analyst Jon Wood said that the $50 to $60 range is more realistic in present market conditions. However, Wood must remember how close Roche came to acquiring Illumina last year, and the fact that Life Technologies is more valuable with patents and products that could be quite useful in the development of new age therapeutics.

    At $65-$75 per share Roche would be acquiring Life for $11-$13 billion, roughly twice as much as the $6.7 billion bid that Roche made for Illumina last year. Last year, Roche pulled out of the Illumina deal due to concerns of flawed data. However, Roche then tried to pursue Illumina on several occasions for a lower price, indicating that it desperately wanted to have the DNA technology that such a company had to offer. Life Technologies is a larger and more diversified business, with more to offer in terms of patents, revenue, and products.

    In some ways the deal would be similar in terms of value/fundamentals; as Life has 3.5 times more in sales, 4 times the EBITDA, and 2.5 times as much operating cash flow. However, Life also has 3 times as much debt. Overall, I think that with Life's much larger business, that stretches across 160 countries with over 4,000 patents, it's worth at least 70% more than the premium that Roche offered for Illumina. In short, Life Technologies is worth twice as much as Illumina because it's a much larger business that is more complete.

    At this point, I am unable to find many reasons that this deal will not get done. Roche has proven with its relentless pursuit in the DNA space that it wants to complete a deal. In my opinion, the only risk is that talks will force Illumina to lower its asking price, or that Roche will determine that the price for Life Technologies is too high. Personally, I don't think the price is too high because of what Life Technologies brings to the table in terms of innovation, support, and development. However, I am not the one who is writing a $12 billion check.

    The fact that other private equity firms may show interest should be enough to keep Roche bidding in the $11-$13 billion range. After all, Roche is a company with about $16 billion in net income over the last year, a company that could easily afford this acquisition. Not to mention, all the signs are present, and it's obvious that Roche wants to acquire a company of this caliber, in this industry. And for those analysts and investors who believe the price is too high, just remember that it's cheap if it leads to the development of the next Herceptin. This may ultimately mean that the benefits of Life Technologies span well beyond its $3.8 billion business. This is why Roche and Life are a good fit and is why Roche will continue to pursue the company in its quest to remain the largest company in cancer therapeutics.

    Disclosure: I am long LIFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: ILMN, TMO, long-ideas
    Jan 18 2:29 PM | Link | Comment!
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