Pointer Telocation's Ascent: Why... and Is Sapient Next?

Includes: PNTR, SPNS
by: Shlomo Greenberg

Let’s take some time out to have a look at the extremely strange phenomenon of stocks that rise and fall by tens of percentage points in one day. Note for example that Pointer Telocation Systems Ltd. (Nasdaq:PNTR), which soared 200% in three days of trading, began its last downslide at the beginning of 2004 at $20 at today’s values. It took the company almost three years to reach $5.30, and then a stampede by investors lifted it above $15 in two days.

PNTR 1-yr chart :

What caused this? The company’s business trend, which is changing for the better. The trend became clear back in August after Pointer published its second quarter financial report, but after that the stock continued to lose ground until the beginning of November on average volumes that were infinitesimal, 200 -1000 shares.

After the third quarter results were unveiled, the daily volume rose to 186,000 shares, and then 1.6 million shares on the following day. Did any of the buyers bother to find out exactly how many shares this company has? The number is 3.1 million, most of which are “closed” because of all the acquisition deals that the company made. Financial websites estimate the number of publicly-owned shares at less than 500,000. So is it any wonder that the stock rose so high?

But the crucial question that must be asked here is which kinds of investor charge into stocks like these? The answer is all of them, but primarily speculators, since a story like this, at present, will definitely be of no interest to hedge funds or conservative investors. It’s too small for the former, and too speculative for the latter.

By why would even speculators want to chase after a stock like this? Was the price of $5.30 a share on November 10 so low that it justified a jump to $15 by November 20? Of course not, but how would the stock market function were it not for lunatics such as these? The commentator-analyst has to view time as one of the leading variables in investors’ decisions. I said that the market needs lunatics like these, but the speculators will forgive me for using that word, because actually they are not crazy at all, and you will soon understand why.

I am not claiming that Pointer has not begun the growth that we have all been waiting for. What I am claiming is that it is difficult to explain gains such as these on the basis of known figures. It could well be that in a year’s time, a value of $15 for Pointer will be ridiculous compared with its real economic value. But what about now? The stock market creates from time to time - too many for my liking - situations in which a stock gets a value that it could deserve to get several years hence but not at present, yet many investors chase after such stocks. Sometimes, technology or biotechnology stocks get values that represent a situation that could happen in 10 or 20 years time.

If, for example, a company such as VocalTec Communications Ltd. (Nasdaq:VOCL), or Attunity (Nasdaq: ATTU), were beginning today to realize the dream that we paid for handsomely back in 2000, then we could say that those who invested in VocalTec and Attunity in 2000 were mad, but that the stocks would eventually reach and break through levels that look unbelievable today.

The fact is that M-Systems (now part of SanDisk Corporation (Nasdaq:SNDK), climbed from $4 in 1998 to $100 in 2000. It then plummeted again to $3 in 2002, by which time the 2000 price of $100 looked totally insane. But M-Systems climbed back up again and was sold earlier this year to SanDisk at an adjusted price higher than that of 2000. And what were the analysts’ verdicts on M-Systems founder and CEO Dov Moran? “He sold the company too cheaply."

Pointer, Sapiens International NV (Nasdaq: SPNS), VocalTec, and Attunity are all, more or less, at the stage where M-Systems was in 2000-2003 - the revival is clearly in the offing, but it’s still difficult to believe that these ships will make it home safely. What real prospects do the four companies I mentioned have of reaching an exit of the size of M-Systems? Judging by history, their chances are close to zero, since out of every 100 companies, perhaps one succeeds like M-Systems did. The odds are slightly higher when it comes to Israeli companies, but not by much. Those people who made a rush for Pointer, or could make a similar stampede for the other three companies mentioned here, would be well advised to weigh the chances against the risks.

Sapiens is one of the oldest software companies in Israel. It was founded in 1982, and has undergone countless upheavals, most of which I have followed in my reports on Wall Street. I’ll start at the end. Today, the company is focusing on its goal of becoming the leader in Insurance IT support. It has specialized in solutions for this field and the management decided that this would be the right niche to focus on. Sapiens believes that the insurance niche has reached the crossroads. The risks are now greater, competition is intensifying and becoming tougher, and regulation is becoming increasingly more complex.

Using the in-house knowledge that it has accrued and the business contacts that it has developed over the years, especially with IBM, Sapiens is now trying to take the lead in the insurance streamlining niche. This is a definitely a good idea, provided that the company knows how to put it into practice and take the lead.

The facts are that Sapiens has not managed to take a leading position to date, and judging by the stock, it has, actually, been quite a failure. The company has fallen from a price in excess of $100 at the beginning of 2000, to $1 recently. It is currently traded at $1.3 after posting a strong improvement in its business results. On one occasion in 2003, Sapiens’ stock dropped from $3 to $1 in one day, after The State of Wisconsin Investment Board, which manages the Wisconsin Retirement System, the 9th largest pension fund in the US, offloaded all its holdings in Sapiens in one day. Goodness knows how it came to hold such a large stake in a company like this.

A large portion of these shares were picked up at $1 a piece by one Israeli speculator, who promptly disposed of them next day at prices of $2.5 and upward. You can take my word for it that the speculator in question had never heard of Sapiens or its line of business. He took a gamble. In 2003, the Sapiens board decided to make changes aimed in effect at rescuing the company, and appointed Yitzhak Sharir, a professional manager and former general manager at Nilit Industries as CEO.

After taking up his post, Sharir waived his salary, preferring instead options for delivering results. This approach won over many investors, who believed that Sapien’s problems lay largely in its management, and the stock gained in response. But despite Sharir’s convincing and hope-inspiring entry, things didn’t work out. Sharir failed to extricate Sapiens from the quagmire it was in, and it looked like it was getting stuck even deeper. Not even the entry of Formula Systems (Nasdaq: FORTY) helped, and the stock continued its journey south.

The fact that the stock has begun to rally in the last two quarters, after the company signaled that it was changing direction, does not justify the rush en-masse for Sapiens’s stock whatever the reason, just as there was no justification for the stampede for Pointer. But the turnaround in company business does perhaps increase its chances, under the new management, of extricating itself from the quagmire and becoming really successful.

Remember though, that in the software or support platform sectors, the competition is intense, prices are falling, and the level of client-dependence is the highest in industry. Therefore, making the turnaround does not necessarily mean that success is around the corner.

SPNS 5-yr chart:


Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.