Companies That Work, Stocks That Don't: 3 Smallcaps in Question

Includes: ANSW, CNTY, WWMU
by: Dave Gentry

Working in the small-cap markets does not carry the glory and honor associated with Blue Chips, the major leagues of the capital markets. Small-caps are laden with the injured, the weak, and the dying remnants of companies that went public too early with the wrong management, the wrong financing, and the wrong business model. And just as the best and brightest “pros” at Smith Barney, Merrill Lynch, Bear Stearns and other White Shoe top-tier firms have been fooled and trapped by the pronouncements, the projections, the greed and mismanagement of Ivy League CEOs, we who live and breathe small-caps witness more than our fair share of plundered companies and plummeting stocks.

I strongly supported Universal Guardian [UGHO.OB] months ago, saying that the stock had bottomed out in the 50 cent range, but I was wrong. The Company’s U.S. operations had been hemorrhaging losses for years, yet management assured us that they were turning things around; they assured us that there were huge contracts in the making and, indeed, there were news announcements that gave us great hope. But the best laid plans of mice and men often go awry. A few short months after my blog on UGHO, the CEO resigned, the U.S. operations were closed down, and today we are left with a 5 cent stock...And, I had thought one day they might qualify for the RedChip Independent Research Index and be welcomed into the company of such RedChip stars as LKQ Corporation (LKQX), New Oriental and Chemical Corp. (OTCPK:NOEC), optionsXpress (NASDAQ:OXPS), Greenfield Online (SRVY), Pervasive Software (NASDAQ:PVSW) and Zhongpin (ZHNP), all of whom have performed up to and beyond our expectations in 2007.

Answers.Com (Nasdaq: ANSW)

In one of my earliest blogs this year, I set forth reasons that (Nasdaq: ANSW) was overvalued at $12.00 and said that it should be traded in the range of $5.00-$6.00. I also said that in a market correction, Internet companies losing money would be hit hardest. Today, ANSW is trading at $6.40 and has dropped as low as $5.50. They continue to hemorrhage losses.

Century Casinos (NasdaqCM: CNTY)

Meanwhile, Century Casinos, Inc. offers a compelling value play in the Gaming sector. Century functions in an expanding $100 billion industry; it owns and operates casinos, casino lodging and restaurant facilities in the U.S., Canada, South Africa, and Poland. They also provide casino management services and operate casino operations on international cruises. For the past five years, CNTY has recorded average top-line growth of 13.8% and average bottom-line growth of 14.1%. The company also has an attractive long-term debt to equity ratio of 0.49 compared to the industry average of 2.40, which could make it a takeover target for private equity investors looking to expand into new markets. Trading at a P/E multiple of 19.6x in an industry that trades at 32.6x, CNTY is clearly undervalued. We have a 12-month price target of $9.00 based on 28.1x FY 2008 EPS of $0.32. (View report excerpt here.)

Worldwide Manufacturing USA, Inc. (OTC:WWMU)

WWMU, a China-based manufacturer of electronic components for the aerospace and automotive industry received its initiation into the RedChip 80% Appreciation Club, closing at $8.60 on December 26th. RedChip signed WWMU as an Investor Relations and Sponsored Research client four months ago when the stock was trading at $4.50. The stock hit a 52-week high under RedChip. The company experienced 25% plus earnings and revenue growth in 2007. With only 300,000 shares in the float the stock does not have the liquidity needed for large position builders, but that should change in the first quarter of 2008. We expect continued annual revenue and earnings growth in excess of 25%.