MicroCap Gems Newsletter – 1/5/11
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MICROCAP GEMS January 5, 2011 Volume 3, Issue 79 SAPIENS INTERNATIONAL CORP. N.V.
(NASDAQ and TASE: SPNS) $2.26 OUTLOOK Sapiens International Corp. headquartered out of Rehovot, Israel, is a provider of information technology (IT) solutions for the insurance industry.
We find the Company attractive due to its recent turn around and growth in its earnings, its improving balance sheet, its increasing margins, its decreasing operating expenses and its 16 consecutive quarters of operational profit as well as its consecutive quarters of net income since the third quarter 2008.
Furthermore, from a technical analysis view point, we believe the stock currently may be attempting to build support around the $2.00 area. Therefore, should we be correct in our analysis and should this possible support area continue to hold, levels near this possible support area may offer long term investors an attractive entry opportunity.
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The Company primarily offers its Sapiens INSIGHT, a suite of modular business software solutions for the insurance industry.
Sapiens` INIGHT solutions are built on the Company`s core technology Sapiens eMerge.
eMerge is a rules-based application model-driven middleware that utilizes standard modeling, enabling the creation of mission critical core enterprise applications with little or no coding, using agile methodologies.
eMerge is based on a multi-level architecture and operates in multi-platform environments, encompassing many hardware vendors, operating system environments and databases.
The Company markets its solutions globally through its direct sales force and through marketing alliances with global IT providers, such as IBM Corporation, Microsoft, RedHat and Electronic Data Systems Corporation.
It should be noted that Sapiens is a member of IBM`s Insurance Application Architecture (IAA) group and the ISV Advantage Program for the Small and Medium Business insurance market segment. Additionally, the Company recently qualified as a Microsoft certified partner for the eMerge platform.
Furthermore, the Company sells its products through distributors in the United States, the United Kingdom, Japan, and Israel.
In addition to it`s family of software solutions, the Company offers outsourcing services as well as IT services.
The Company`s IT services include project management, application development and enhancements, application platform porting, and general technical assistance.
It should be noted that Sapiens primarily offers its products and services in North America, Europe, Israel, and Japan and has extended its sales and marketing teams in North America and Europe in the recent past For the fiscal year ended December 31, 2009, Sapiens reported revenues of $45.695 million, up from the $43.534 million reported for fiscal 2008. Net income for fiscal 2009 increased to $4.201 million from a net loss of $344,000 for 2008.
The increase from a net loss to net income was primarily due to a combination of increased revenues as well as higher margins.
It should be noted that the Company`s gross margins increased from 39.2% in 2008 to 41.9% for fiscal 2009.
Furthermore, Sapiens` total operating expenses have decreased each year over year period from $21.791 million in 2004 to $13.783 million in 2009.
More recently, the Company reported third quarter revenues of $13.148 million compared to revenues of $12.951 million for the prior year`s third quarter. Net income was $1.505 million for the third quarter ended September 30, 2010, an increase of over 45% compared to net income of $1.035 million for the comparable quarter of the previous year.
The increased earnings were primarily due to slightly higher revenues and higher operating margins during the latest quarter.
It should be noted that for the three month period ending September 30, 2010, operating income increased to 12.1% from 11.5% for the comparable quarter of 2009.
Additionally, the Company reported cash and equivalents of $12.328 million and working capital of $2.710 million for the third quarter ended September 30, 2010 .
While we would normally be cautious of any company with very low working capital, we are overlooking this due to the improvement in this company`s balance sheet over the past few years.
For example, the Company`s working capital has improved from a deficit of $12.616 million on December 31, 2006 to its current working capital surplus of $2.710 on September 30, 2010.
Furthermore ,the Company has made huge strides in reducing its long term debt and liabilities with them falling from $23.281 million on December 31, 2004 to $1.360 million on September 30, 2010.
Still, we believe the Company`s cash on hand and income from operations are sufficient to cover any funding needed for operations in the foreseeable future.
However, readers should be aware that the Company`s working capital may once again decrease and the Company may need to raise capital.
Readers should be warned that failure by the Company to successfully obtain additional future funding if and when needed, may jeopardize its ability to continue its business and operations.
It should also be noted that the Company depends on revenues from a small number of large customers. The loss of business from any one of its primary customers could have a material adverse effect on the Company.
In 2009, the Company`s two largest customers accounted for 23.5% and 9.7% of the Company`s consolidated revenue.
It should also be mentioned that the Company faces strong competition from U.S. and global companies with larger customer bases, greater name recognition, and significantly more financial resources and research and development facilities.
Additionally, the Company`s international operations involve inherent risks, such as foreign currency fluctuations and compliance with various regulatory and tax regimes.
Similarly, the Company`s corporate headquarters and research and development facilities are located in the State of Israel.
Sapiens could be adversely affected by any major hostilities involving Israel as well as the interruption or curtailment of trade between Israel and its trading partners.
Finally, readers should be cautioned of possible liquidity issues with the stock. There are 21.591 million shares outstanding and the float is approximately 6.04 million.
Additionally, volume averages only approximately 13,300 shares per day. Keeping this in mind, when trading such thinly traded stocks, we strongly recommend the use of limit orders and warn readers to expect added volatility.
Still, we find the Company`s decreasing expenses as well as its turn around in earnings growth very appealing.
Additionally, the Company`s improving balance sheet should be advantageous as the Company meets growth challenges and attempts to maintain and manage that growth.
We believe Sapiens International Corp. may offer high risk tolerant long term investors an attractive growth play in the micro-cap arena.
For more information on Sapiens International Corp., please visit the Company web site at http://links.mkt026.com/cttkn=4&m82544&r=MTMwNjI0MTI5OTIS1&b=2&j=MTAyOTk3ODQ0S0&mt=1&rt=0 Additionally, information can be obtained from the Company`s investor relations representative through the web site contact page at http://links.mkt026.com/cttkn&m82544&r=MTMwNjI0MTI5OTIS1&b=2&j=MTAyOTk3ODQ0S0&mt=1&rt=0 Summary Data 52 wk high $3.20 52 wk low $1.33 One year return 72% Average Daily Volume 13,300 Shares Outstanding (mil) 21.591 Market Capitalization ($mil) 54.8 Insider Ownership 1.8% Annual Cash Dividend 0.0 Dividend Yield (%) 0.0 Risk level High Industry Technical & System Software INCOME STATEMENT (Dollars In thousands, except per share amounts) Full Year Ended December 31 2009 2008 Revenues $45,695 $43,534 Total Cost of Revenues 26,571 26,457 Gross Profit 19,124 17,077 Total Operating Costs & Expenses 13,783 14,592 Operating Income 5,341 2,485 Total non-operating Expenses (Income) 1,140 2,788 Net Income (Loss) 4,201 (303) Attributable to non controlling interest – 41 Net Income (Loss) attributable to Sapiens 4,201 (344) Basic and Diluted Net Earnings (Loss) per Share $0.19 $(0.02) AVERAGE ANALYST ESTIMATE Full Year Ended December 31 2010 2011 Fiscal Yr NA NA ^Single analyst Estimate.
MICROCAP GEMS PORTFOLIO Computer Task Group, Inc.
CTGX Information Technology Services Added 6/25/2008 at $5.018 1/4/2011 Close $11.00 Return 119.2% GSI Technology Inc.
GSIT Semiconductor – Broad Line Added 10/29/08 at $3.30 1/4/2011 Close $8.20 Return 148.6% HealthStream, Inc.
HSTM Internet Information Providers Added 7/15/2009 at $2.71 1/4/2011 Close $8.07 Return 197.8% Jewett-Cameron Trading Company Ltd.
JCTCF Lumber, Wood Production Added 7/23/2008 at $6.75 1/4/2011 Close $9.10 Return 34.8% Key Tronic Corporation KTCC Computer and Peripherals Added 12/1/10 at $5.54 1/4/2011 Close $5.39 Return -2.7% NAPCO Security Technologies, Inc.
NSSC Security & Protection Services Added 12/3/2008 at $1.41 1/4/2011 Close $1.82 Return 29.1% Norsat International, Inc.
NSATF Communications Equipment Added 4/7/2010 at $0.77 1/4/2011 Close $0.55 Return -28.6% Sapiens International Corp. N.V.
SPNS Technical & System Software Added 11/11/2009 at $1.52 1/4/2011 Close $2.54 Return 63.9% Servotronics, Inc.
SVT Industrial Electrical Equipment Added 1/21/2010 at 9.41 1/4/2011 Close $8.39 Return -10.8%*
*Excludes Dividends.
Taylor Devices, Inc.
TAYD Diversified Machinery Added 6/30/2010 at $5.26 1/4/2011 Close $5.00 Return -4.9% To see some of MicroCap Gems` past and present winners please click here.
http://links.mkt026.com/cttkn&m82544&r=MTMwNjI0MTI5OTIS1&b=2&j=MTAyOTk3ODQ0S0&mt=1&rt=0 The Holding Period Return for the MicroCap Gems portfolio year to date (12/31/2009 – 12/31/2010) is 31.68%.***
The Holding Period Return for the MicroCap Gems portfolio since inception (5/5/2005 – 12/31/2010) is 22.31%.***
The Russell Microcap Growth Index year to date return (12/31/2009 – 12/31/2010) is 28.89%.
The Russell Microcap Growth Index cumulative return for the period 5/5/2005 – 12/31/2010 is 21.906%.
***The portfolio is assumed to be equal weighted and is re-balanced every time there is an addition or deletion. Any dividends paid are incorporated into the holding period return. Data presented reflects past performance, which is no guarantee of future results. Due to market volatility, current performance may be higher or lower than the performance shown. Investors may incur a loss despite previous gains.
Results will vary with economic and market conditions.
Additions/Deletions There are no additions or deletions to the MicroCap Gem portfolio.
UPDATED GEMS KEY TRONIC CORPORATION (NASDAQ: KTCC) $5.26 Currently, from a technical analysis view point, we believe the stock appears as if it may be attempting to build support just below the $5.00 area. Therefore, should we be correct in our analysis and should this possible support area continue to hold, levels near this possible support area may offer long term investors an attractive entry opportunity.
We continue to find the provider of electronic manufacturing services (EMS) to original equipment manufacturers (OEMs) attractive due to its recent strength in revenues and income, its newly increasing margins, its strong and growing backlog, its leveraging of lower cost manufacturing regions, its increasing book value and its expanding customer base and decreasing large customer concentration.
However, readers should be cautioned of possible liquidity issues with the stock. There are only 10.326 million shares outstanding and the float is approximately 9.92 million.
Additionally, volume averages only approximately 62,000 shares per day. Keeping this in mind, when trading such thinly traded stocks, we strongly recommend the use of limit orders and warn readers to expect added volatility.
It should also be noted that the Company depends on revenues from a small number of large customers. The loss of business from any one of its primary customers could have a material adverse effect on the Company.
For the year ended July 2, 2010, the Company`s largest customer accounted for 18% of the Company`s consolidated revenue and the Company`s five largest customers accounted for 52% of the Company`s total revenues.
Also readers should be aware that a significant portion of the Company`s operations are in foreign locations.
The Company is exposed to foreign economic and political risk as well as risks associated with currency fluctuations, regulation changes and compliance with foreign laws.
For corporate information on Key Tronic Corporation, please visit the company web site http://links.mkt026.com/cttkn&m82544&r=MTMwNjI0MTI5OTIS1&b=2&j=MTAyOTk3ODQ0S0&mt=1&rt=0 In addition, information can be obtained from the company investor relations representative at (206) 729-3625 or through email at ktcc@stct.com.
Norsat International Inc.
(OTCBB: NSATF and TSX: NII) $0.6185 The provider of broadband communication solutions announced that one of its Ka-Band BUC units was recently used in an antimatter study at the CERN Laboratory located near Geneva, Switzerland.
The unit provided for the experiment was a pre-production model and Norsat anticipates offering the BUC units commercially in early 2011.
Currently, from a technical analysis view point, we believe the stock may be attempting to build support around the $0.50 area. Therefore, should we be correct in our analysis and should this possible support area continue to hold, levels near this possible support area may offer long term investors an attractive entry opportunity.
We continue to find the Company attractive due to its strong and consistent income and revenue growth, its expansion into new vertical markets, its strong balance sheet and lack of debt as well as the growing demand for broadband connectivity.
Still, readers should be cautioned of possible liquidity issues with the stock. There are only 53.436 million shares outstanding. Additionally, volume averages only approximately 22,900 shares per day. Keeping this in mind, when trading such thinly traded stocks, we strongly recommend the use of limit orders and warn readers to expect added volatility.
Additionally, the reader should be aware that the Company is listed on the OTC Bulletin Board quotation system and not on any of the major exchanges. The OTC BB system and the applicability of Penny Stock Rules could affect liquidity and/or market price.
It should also be noted that Norsat depends on revenues from a small number of large customers. The loss of business from any one of its primary customers could have a material adverse effect on the Company.
For more information on Norsat International Inc., please visit the Company web site at http://links.mkt026.com/cttkn&m82544&r=MTMwNjI0MTI5OTIS1&b=2&j=MTAyOTk3ODQ0S0&mt=1&rt=0 Additionally, information can be obtained from the Company`s investor relations representative at (212) 370-4500 ext. 25 or through email at adam@wolfeaxelrod.com.
MICRO-CAP MARKET OVERVIEW On Friday, December 31, 2010, the Russell Microcap® Index closed at 1,155.24. The index ended the year with the best performance of the four indexes for all periods covered. The Russell Microcap Index was up 9.21% over the trailing 30 day period. The Index was up 28.89% year to date and for the trailing twelve month period.
The Russell Midcap® Index was up 6.92% over the trailing 30 day period. The Index was up 25.48% year to date and for the trailing twelve month period.
The S&P 500 was up 6.53% over the trailing 30 day period. The Index was up 12.78% year to date and for the trailing twelve month period.
The Dow Jones ended the year with the worst performance of the four indexes for each of the three periods. The Dow was up 5.19% over the trailing 30 day period. The Index was up 11.02% year to date and for the trailing twelve month period.
From a technical analysis point of view of the two major indexes, the S&P 500 may see some support just below the 1,200 area and some resistance around the 1,300 area. The Dow may see support coming in just below the 11,000 level while resistance may be expected around the 12,000 area.
MICRO CLASS NOTES In the Micro Class Notes section we share investing insight and strategies to keep you ahead of the market. Also in this section, we will alert you to scams and pump & dump operations, which will help you avoid land mines in the micro-cap world.
Investing 101 “What is the January Effect” The January effect is a historical trend where stocks will tend to dip towards the end of the year and rebound in January. The trend is one of the several calendar effects in which stocks are believed to perform differently at certain times of the year.
The January effect`s dip toward the end of the year is generally believed to be due to investors attempting to create losses by selling their losing stocks in order to write the losses off on their taxes. The following rally is believed to be from investors buying stocks which have dropped in price.
The January effect is believed to affect micro and small-cap stocks more than mid and large caps. This stems from the fact that a relatively small amount of tax-loss selling will have a more significant impact on small, thinly-traded companies.
It is important to note that trying to take advantage of the January effect is not a sure thing. Research has turned up mixed results with the trend observable in some years and not in others.
Furthermore, while the trend continues to be visible in some years, it has been less pronounced in recent years. This is believed to be due to markets adjusting for the effect and that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.
ABOUT US Mission We know that micro-cap stocks can be risky but we believe that large profit potential exists in some of those same micro-cap companies.
The MicroCap Gems Newsletter attempts to find tremendous growth opportunities in the micro-cap market. We look for companies showing unusual promise and what we perceive as a favorable risk to reward ratio by using meticulous analysis of the company and its competitors. We do this by reading and evaluating all of the research reports written about micro-cap stocks, contacting the companies, customers and competitors.
Most of the research written about micro-cap stocks is termed issuer paid research since the companies themselves pay the research firm to have the report written.
MicroCap Gems is not an issuer paid research provider and to preserve our objective evaluations MicroCap Gems and its employees do not accept money, stock, services, or in-kind advertising in exchange for coverage of particular companies, securities or markets nor do any MicroCap Gem employees trade in any of the companies covered.
We believe that issuer paid research holds much value as long as you can filter out those reports making noise from the companies with true promise.
When we find a real gem that merits your consideration we will profile the company in the MicroCap Gems newsletter. As many of these Gems are long-term investments, once we profile a company we will keep you abreast of on going developments as its investment story unfolds. As we do our due diligence we will also uncover and alert you to scams and pump/dump operations, which will help you avoid the land mines in the micro-cap world.
Editor Bio The editor, Steven J. Anderson, has over 17 years experience in the investment and trading arena. He graduated from West Virginia University in 1992 with a BSBA in Finance/Investments and Securities. While in college, his stock market passion had him actively analyzing and speculating in small and micro-cap stocks by the time he started his junior year.
After college, Steve began trading commodity options and Dow futures as a member of the Chicago Board of Trade. However, his infatuation with smaller stocks soon had him starting up his own small cap investment newsletter. In 1996 he began writing the Anderson Small Cap Report that was an equities newsletter to investors focusing on small and micro capitalized stocks. Commentary from that newsletter was featured on many web sites and investment publications.
In 2004 Steve gave up trading to take a job as an Equity Analyst and ended the Anderson Small Cap Report.
Once again he found himself longing for the opportunity and excitement only found in the micro-cap stock arena. So in 2005 the MicroCap Gems newsletter was born.
Steve still believes that one of the most enjoyable aspects of writing his newsletter is his being permitted to help others benefit through his knowledge and experience. His infatuation with the markets and his desire to help others learn drives him to speak annually at the West Virginia University MBA Executive Speaker Series. At these seminars Steve speaks to students and industry professionals about his insight and involvement within the intriguing world of trading and investing.
Disclaimer The MicroCap Gems newsletter is solely for information purposes only and the statements and opinions in this report should not be construed as an offer or solicitation to purchase or sell any security. The information is created without regard to any investor`s individual needs. If the reader should purchase or sell any security they do so at their own risk. MicroCap Gems LLC and its employees accept no liability for any losses or for consequential or incidental damages arising from any investor`s reliance on or use of this report, even if the information is untimely, incomplete or incorrect. The reader should be aware the information provided by the editor may not be accurate, timely or complete. The information expressed in this letter is based upon the interpretation of available data, which the editor considers reliable, but the editor does not represent that the data is accurate or complete. The majority of statements and expressions are the sole opinions of the editor and are subject to change without notice. The data and information presented is provided for informational purposes only, and is not offered as a basis for investing in securities. Users of this letter should conduct their own independent investigation before making any investment or business decisions with respect to securities covered by the editor. MicroCap Gems LLC and its employees do not accept money, stock, services, or in-kind advertising in exchange for coverage of particular companies, securities or markets nor do any MicroCap Gems LLC employees trade in any of the companies covered. Past returns are no guarantee of future performance. Any companies mentioned in this report may, or may not, be experiencing liquidity issues and may require additional capital to continue operations.
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