WEBMETHODS AGAIN

WEBM

Picked up some WEBM at 4.90 today. This pick is somewhat against my principle as I believe it will likely need some catalysts to move up, even though it is really really cheap. I believe there is a good chance that it will beat its Q2/05 guidance. In any event, the stock is traded close to its cash value and it is cash flow positive. Down side risk is limited. Risk/reward ratio appears in favor. Target 6.5 in 12 months.

UNDER-INVESTED

LGI

One of my standing orders got filled today ($9.80). A very small company with market cap less than $100 million, but IMHO, a very good company (table below).

GROWTH 02/03 03/04 04/05E
Revenues 127% 27% 20%
EBITDA 151% 39% 30%
NI 177% 54% 50%
EPS 94% 29% 40%

PROFITABILITY
EBITDA 32% 35% 40%
O.P 18% 17% 23%
NI 9% 11% 15%
ROE 14% 17% 20%

The stock has gone up quite a bit, but I still believe it is reasonably valued. I expect EPS05 and 06 at 0.68 and 0.85, and at currently level, it is traded at 14.4X and 11.5X of 05/06 EPS. It is cheap for a company that has been growing its EPS at 40%. I also like the sector as most of its customers are major hospitals in Canada, which not only defensive, is a growing industry in Canada as spending on healthy care is clearly on the rise and will likely continue. Unfortunately, the company has less than 8.0 million shares outstanding and it is sparely traded. It is hard to buy, and it will be hard to sell as well. It will surely test my patient.

Am I too anxious because I am under-invested? I have been putting quite a few bids today, probably not a good sign. I got only one filled, it probably a good thing!

WEBMETHODS

WEBM

I am looking at WEBM with some interests. This is not one of my typical picks because (1) it is only nominally making money; (2) It has basically disappointed in the past few quarters; (3) Outlook is not exactly inspirational; (4) NASDAQ has gone up quite a bit from its early April low; (5) Software sector in general is not in favor presently. On the other hand, it is dirt cheap, trading at only 1.7X05Sales, 1.6XCASH. I am generally against buying cheap for the sick of cheap. But the company has some potential for an upside surprise in the next few quarters. Its clean balance sheet and solid cash position will provide some down side protection. Most importantly, its current cash position is approximately $3.0 per share and it has been cash flow positive for the past three quarters. It is ignored by analysts, if not detested. It might worth to take a small position. (Low-balling some, not filled).

TAKEING OFF THE TABLE

It seems to make sense to take some profit off the table here. The market has been going up non-stop for about 10 sessions, most of tech names I added late April has risen to more than 10%. It is the right and disciplined thing to do. On the other hand, the trend remains positive, economies grow with a decent pace, inflation, while that’s another story, valuation, even with this run-up, remains reasonable if not under-valued. Moreover, I already have about 25% in cash, and I am having a hard time to find names to add.

Second part of this question is which name to take it out. My inclination is to trim some STX, which has gone up by about 17% since I picked it up on April 20. One reason is that it is about 7.5% of the total portfolio. I probably would be more comfortable with half of that. Having said that, the valuation remains very reasonable, strong Q1/05, positive outlook, it is hard to part. Do I love this stock too much? The stock also behaves weak on a very strong market. Sold STX @21 (17.5%).

I am having a hard time to re-deploy the cash. I am about 30% in cash now which is not good. The problem with investing in Canada is that excluding financials (40%) and resources (40%), there is not much to pick. There are a couple of good earnings this morning, TD/NA all right, but I have enough financials already and I am not too keen of adding more, in view of the raising interest rate environment.

RET.NV.A

I did add some RET @16. I can hard find any weakness in this morning’s Q1/06 report. Sales, EBITDA, operating profits, earnings, all up significantly. The company has been growing consisitently in the past five years, and it reflects in its stock prices. Its ROE is at about 20%, and at currently level it has a yield of 2.25%. Balance sheet is clean with $80 million cash and minimum debt. I estimate it should be able to generate about 1.2-1.35 for fiscal year 2006. Targe at $20 by the end of calender year 2005.