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Stock Picks Bob's Advice
Sunday, 27 February 2005
A Reader Writes "Do you have any tips?"

Hello friends! Thanks again for stopping by and visiting my blog, Stock Picks Bob's Advice. I had another letter today (!) again asking about stock advice.

As I point out many times all over this website, I am an amateur investor and am not prepared to give individual stock market advice to individuals. However, there are many stock market ideas all through the blog that you can review with your investment advisors....and I am sure some will turn out to be great stocks over time.

However, more important than any picks, I want my readers to appreciate my techniques for picking stocks, and hopefully, they too will be able to pick stocks just as easily.

Xanthe wrote:
Hi Bob,

I have never purchased stock before but am very eager to do so in the near future. I admit that I am a little nervous in doing so because as you probably know stocks can be very unpredictable. Do you have any tips for me and can you reccomend any certain stocks to buy?


Thanks very much,
Xanthe


Well Xanthe, I hope that answers your question. My tips for you are to think well before buying any stocks, you can adopt my methodology....you can read my prior post...or take a look at the dozens of stocks listed here! Good luck and let me know what you decided to do!

Bob


Posted by bobsadviceforstocks at 10:03 PM CST | Post Comment | Permalink
A Reader Writes "I would appreciate any kind of guidance."
Hello Friends! That beautiful picture is a shot of Boston College from the BC Homepage. What a beautiful school and a wonderful city as well. Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any decisions based on information on this website.

Checking my mail today, I saw that I received a nice letter from Chris who wrote:
Hi Bob,

My name is Chris and I stumbled upon your website today in search of
stock pick blog rings. I am a senior at Boston College and am taking
a financial services class. One of our projects is to split up in
groups and to pick stocks to create a portfolio. We are given a
million dollars and are asked to choose stock and justify the
choices. One thing my professor is keen on is the use of blogs
whether to take them for their face value or to understand their
misdirection.

Your page seems primarily focused on your past picks and monitoring
them, however, I was wondering if you might have an recent stock
picks that might seem good. I was also wondering how you initially
go about picking some stocks whether it be analyzing PE ratios or
betas or any other type of regression analysis. I am really open to
learning anything here and would appreciate any type of guidance.

Regards,

Chris



Chris, I hope that I may be of help to you! I hope that as a blogger I can provide you with more direction rather than misdirection.

I would like you to pick the stocks for your portfolio. You are welcome to any of mine :). But it is important that you understand why you might pick a stock...and see if your philosophy of investing is similar to mine (and your group's).

The first thing I like to do is to peruse the list of top percentage gainers. I have found over the years that within those lists are stocks that are worth considering for investment. You will have to see if that approach works for you!

Next step is to go to the latest quarterly results. You can find these over at Yahoo finance. Let me know if you have a problem, just scan through the headlines and see if you can find the latest quarter's results. Basically, what I am looking for in the latest quarter are two basic things: growth in revenue AND growth in earnings. In addition, if the company provides some positive guidance, like raising guidance for future results, well that is "gravy".

(You may start seeing that there isn't much 'magic' about my approach...just a bit of homework!)

Generally, at that point, I will go to Morningstar.com and check the "5-Yr Restated" financials. What am I looking for? Basically, growth in revenue...as steady as possible, same for the earnings. In addition, Morningstar gives information regarding free cash flow, and I insist on this being positive, and if there is a positive trend as well, then that is noted! Finally, on the lower part of the page is a balance sheet. Not being an accounting wiz, I simply look to make sure that the cash and current assets are greater than the current liabilities and that the long-term liabilities aren't too burdensome.

Next step, I like to touch on "valuation"....you can see this isn't my number one screen. For this, I generally click back on Yahoo Finance to "Key Statistics" for the stock I am researching. What do I look for there? I like to at least look at the market cap of the stock, the P/E, the PEG, and a number on the Price/Sales. I report on the number of shares, and see if there are a lot of sales out short....if there ARE a lot of short sellers, well, on an up move there might be a bit of a squeeze...as these shorts try to cover.

Finally, I go over to Stockcharts.com and look at a "point & figure" chart....I have found that these are helpful in getting a good feel for long-term trends as the columns of climbing 'x's' battle with the declining 'o's'.

PHEW...by the way, that's a photo of Faneuil Hall, one of my favorite tourist traps in the Boston area.

Anyhow, that's how I pick my stocks! But equally important is a little strategy on portfolio management. In the past, I didn't have any idea at all about moving into equities and moving back into cash depending on the overall market tone. In fact, I still don't have a great way of doing this. What I have settled on is an internal mechanism of using the activity of my own stocks to determine my trading direction....

What do I mean? Well, first of all, let's set a fixed maximum of stocks you are going to hold in this "phantom" portfolio. If you do it like I do it, you might consider 25 issues.

First, start at 50% invested. That is, start with 12 or 13 issues and 50% of your cash utilized. Pick stocks that fit the criteria I have suggested...you can pick recent stocks that I have written about, or find new ones tomorrow off the top % gainers list....just follow my screening techniques...they really are just common sense.

Next, sell any stock that drops 8%. Don't replace that stock with another issue unless you have a "buy signal" from the rest of your holdings. What I like to use is a sale at a gain. Now, when do you sell at a gain? Well, for me, I am trying to sell my losers quickly and sell my winners slowly.

What do I mean about that? What I mean, is that I sell 1/4 of my holdings when the stock hits a 30% gain, another 1/4 at 60%, 1/4 at 90%, 1/4 at 120%...and then sell 1/4 at 180%, 240%....until 360%...then I plan to continue selling 1/4 positions at 90% gains....

I hope you follow. I actually do this in practice.

Next on the downside, if I have sold a stock once (30% gain), then on the way back down, I sell at break-even instead of waiting for an 8% loss. On stocks that I have sold at higher levels of gains, I let the stock retrace 50% of the highest gain before unloading the shares. I will sell if clearly there is bad news....but generally, I like to try to avoid my own judgments, and let the price of the stock determine my action.

There are LOTS of stock blogs out there hyping all sorts of stuff. My methodology is very unsexy in my humble opinion, but I believe it is pretty common sensical....(is THAT a word?)....anyhow, I hope my discussion is helpful. Please write back and let me know what you decided and how things work out.

Bob


Posted by bobsadviceforstocks at 6:43 PM CST | Post Comment | Permalink
Updated: Sunday, 27 February 2005 9:42 PM CST
Saturday, 26 February 2005
A Reader Writes "Will PMTI split?"

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to acting on any information on this website.

I always enjoy getting letters and comments from readers! Checking my mailbox, I found this:
hi bob

just wanted to email you to say i have some stock in pmti aswell, and just curious to know if you think the stock will split and if so what should i be looking for?

rick

Well Rick, first of all, I am glad that you own some PMTI, which is Palomar Medical Technolgies.

On February 10, 2005, PMTI reported 4th quarter 2004 results. Fourth quarter revenues jumped 63% to $16.4 million from $10.1 million the prior year. Net income came in at $5.4 million or $.29/diluted share, up from $1.0 million or $.06/diluted share the prior year. These were great results and the stock has been strong since then.

Looking at a recent "Point & Figure" chart from Stockcharts.com:


You can see how strong this stock has been performing! Looks like it broke down a little back in June 2004, when it dropped from $21 to $11.50. However, the stock has been strong since that time, staying above its support line.

When do I think it will split? I really don't know. It doesn't really affect my actions on a stock. I just wait until it hits percentage gain points and sell portions of my holdings.....so I don't really know WHEN it will split, or if it will.

What should you be looking for? That is certainly up to you. As for me, I sell portions at gains and then raise the downside stop each time...that is raise the level at which I would sell the remaining position on a retrenchment of the stock.

I frankly don't think I have answered your question, so if you have additional comments, please post them here or email me at bobsadviceforstocks@lycos.com.

Bob


Posted by bobsadviceforstocks at 10:38 PM CST | Post Comment | Permalink
"Looking Back One Year" A review of stock picks from the week of January 5, 2004






Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! I have enclosed an image from the New York Burns Film Center on one of my old favorite cartoon figures: Mighty Mouse!

As always, please remember that I am an amateur investor so please consult with your professional investment advisors prior to making any decisions based on information on this website.

It is the weekend and I like to review past selections when I get a chance (!), and see how they would be doing if we had purchased all of them and held on to them...without selling either at a loss of 8% or at gains; a process that I like to do with my real trading portfolio. In any case, it still gives us an idea about the potential and the pitfalls of this and any trading strategy! This week I am up to the week of January 5, 2004. I made six selections that week.

On January 5, 2004, I posted Applied Films (AFCO) on Stock Picks at $37.46. AFCO closed at $22.30 on 2/25/05 for a loss of $(15.16) or (40.5)%.

On January 20, 2005, AFCO reported 2nd quarter 2005 earnings results. Net revenues were down (17.9)% to $46.9 million compared to $57.1 million the prior year. Pro forma income from continuing operations was down to $1.8 million or $.12/diluted share from $4.1 million or $.28/diluted share the prior year.

On January 6, 2004, I posted Dollar Tree (DLTR) on Stock Picks at a price of $31.85. DLTR closed at $26.85 on 2/25/05 for a loss of $(5.00) or (15.7)%.

On February 23, 2005, DLTR reported 4th quarter 2004 results. Sales for the quarter came in at $987.5 million, a 10.6% increase over the $893.1 million the prior year. Earnings came in at $.79/share up from $.69/share in the same quarter last year. For the year, same-store sales growth was an anemic 0.5%.





On January 7, 2004, I posted Kenneth Cole Productions (KCP) on Stock Picks at a price of $31.95. KCP closed at $29.09 on 2/25/05 for a loss of $(2.86) or (9.0)%.

On February 24, 2005, KCP reported 4th quarter 2004 results. Fourth quarter revenue, for the quarter ended December 31, 2004, increased 5.3% to $136.1 million. However, fourth quarter diluted EPS dropped to $.45/share from $.49/share the prior year.

On January 7, 2004, I posted Unifirst (UNF) on Stock Picks at a price of $27.11. UNF closed at $39.25 on 2/25/05 for a gain of $12.14 or 44.8%.

On January 5, 2005, UNF announced 1st quarter 2005 results. For the quarter ended November 27, 2004, revenues increased 4.2% to $188.4 million from $180.9 million the prior year. Net income came in at a record $13.4 million, or $.69/diluted share, a 40.2% increase from last year's first quarter net income of $9.5 million or $.49/diluted share.

On January 8, 2004, I posted Resources Connection (RECN) on Stock Picks at a price of $34.50. RECN closed at $49.89 on 2/25/05 for a gain of $15.39 or 44.6%.

On December 22, 2004, RECN reported 2nd quarter 2005 results. For the quarter ended November 30, 2004, revenue came in at $137.0 million, an 85% increase over the $74.0 million the prior year. (Sequentially revenue was up 19%!). Net income for the quarter was $15.6 million, or $.62/diluted share, up from $4.4 million or $.19/diluted share, an over 200% increase in earnings!

Finally, on January 9, 2004, I posted American Medical Systems (AMMD) on Stock Picks at a price of $25.96. AMMD closed at $39.70 on 2/25/05 for a gain of $13.74 or 52.9%.

On February 17, 2005, AMMD reported 4th quarter 2004 results. For the quarter ended January 1, 2005, sales were $60.0 million, a 27.3% increase over sales of $47.2 million the prior year. Net income was affected by write-offs, and came in at $6.7 million or $.19/share, down from $10.3 million or $.30/share the prior year. However, excluding the impact of an investment write-off and the effect of tax rate changes...net income for the quarter worked out to $10.8 million or $.30/share up from $8.4 million or $.24/share the prior year. You decide. However, the street appears to have like the results as the stock price held up nicely.

So how did we do that week a year ago??? I actually had three stocks that declined (AFCO, DLTR, and KCP); and three stocks that appreciated inprice (UNF, RECN, and AMMD). However, the stock appreciating were overall stronger than the losing stocks and I had an average increase of 12.9% for the six stocks!

Thanks again for stopping by! If you have any questions or comments, please feel free to email me at bobsadviceforstocks@lycos.com.

Bob











Posted by bobsadviceforstocks at 10:03 PM CST | Post Comment | Permalink
"Revisiting a Stock Pick" Synaptics (SYNA)

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any investment decisions based on information on this website.

Yesterday my stock in Cal Dive (CDIS) hit my first targeted price for a sale, which as you may know is a 30% gain after an initial purchase. Thus, I sold 1/4 of my position, 50 shares, and had a new signal to deal with. Since I am under my 25 position portfolio goal (now at 21 issues), I was thus "entitled" to purchase a new position. Scanning through the list of top % gainers on the NASDAQ, I came across Synaptics (SYNA), a stock that I had listed first on 4/23/04 at a price of $17.69 on Stock Picks and was having a great day, closing yesterday at $24.33, up $3.32 or 15.80% on the day. I purchased 300 shares of SYNA at $24.02 prior to the close for my trading account. I have had some Synaptics shares in a managed account this past year...and am actually not sure whether I still have shares there, but believe I do. (I don't monitor one of my managed retirement accounts very closely at all!).

According to the Yahoo "Profile", SYNA "...is a worldwide developer and supplier of custom-designed user interface solutions for notebook computers."

What drove the stock higher yesterday, was the release of news that the new iPods from Apple Computer wil utilize Synaptics' touchpad technology. The stock had been under pressure recently over the possibility that Apple would no longer be requiring Synaptics' products in their new line.

On January 20, 2005, Synaptics reported 2nd quarter 2005 results. Net revenue for the second quarter ended December 31, 2004, came in at $56.5 million, an approximately 65% increase over the $34.3 million of net revenue the prior year same quarter. Net income was $9.7 million or $.33/diluted share for the quarter, an approximately 178% increase (!) over the $3.5 million or $.13/diluted share the prior year. Although believing the current quarter to be flat sequentially, the company expressed optimism for the 2005 fiscal year stating:
"Fiscal 2005 is shaping up to be an outstanding year based on our record first half performance and current outlook for the second half of the year"
How about longer-term? Taking a look at the "5-Yr Restated" financials from Morningstar.com, we can see the steady 'ramping-up' of revenue from $43.4 million in 2000 to $141.8 million in the trailing twelve months (TTM).

Earnings have increased from $.31/share in 2003 to $.55/share in the TTM. (Note the $.33/share in the latest quarter alone!). Free cash flow has been steady if not growing with $12 million reported in 2002 and $12 million reported in the TTM.

The balance sheet as reported on Morningstar.com looks very strong. SYNA has $97.3 million in cash, enough to cover both the $25.5 million in current liabilities and the $2.4 million in long-term liabilities almost four times over. In addition, they have $40.5 million in other current assets!

How about "valuation"? As has been pointed out by readers, I really do a very brief look at valuation issues...for what it is worth, I like to at least take a look at "Key Statistics" from Yahoo on SYNA. Here we can see that this is a mid-cap stock with a market cap of $639.30 million. The trailing p/e is moderate at 32.27, and the forward p/e (fye 30-Jun-06) is nicer at 22.32. With the fast growth rate anticipated (as noted in the latest quarter), we have a PEG (5-yr expected) of 0.62. The Price/Sales is a bit richer at 3.36.

Yahoo reports 26.28 million shares outstanding with 25.00 million of them that float. Currently there are 2.12 million shares out short as of 1/10/05, representing 8.46% of the float but only 2.059 trading days. Using my arbitrary 3 days of trading volume cut-off, this short interest does not appear to be very significan (imho).

No cash dividend and no stock dividends are reported on Yahoo.

How about "technicals"? In other words, what about a chart on the price performance of this stock? Taking a look at a "Point & Figure" chart from Stockcharts.com:



We can see that this stock has been gradually increasing in price from late 2003 when it was trading around $11/share to a recent high of $41/share in February, 2005. The stock declined recently on speculation about a loss in the Apple contract, back to support levels at around $21. It rebounded yesterday, and in my humble opinion, doesn't appear over-valued, nor does it appear to have broken down in price performance.

So what do I think? Well, I liked this stock before in April, 2004, when it was trading around $17.69. The stock had a great earnings report a few weeks ago, has shown steady growth over the past five years in both revenue and earnings, is generating a steady free cash flow, has an outstanding balance sheet, has a valuation that has a reasonable PEG, and the chart looks nice too! I guess that is why I decided to buy some shares yesterday!

Thanks again for stopping by and visiting. If you have any comments or questions, please feel free to email me at bobsadviceforstocks@lycos.com.

Bob




Posted by bobsadviceforstocks at 6:36 PM CST | Post Comment | View Comments (2) | Permalink
Friday, 25 February 2005
"Trading Transparency" SYNA

Hello Friends! A few moments ago, I purchased 300 shares of Synaptics, Inc. (SYNA) at $24.02 for my trading account. This is a stock I have reviewed earlier which apparently was lower on thoughts it would lose an Apple contract, but which popped higher today on reaffirmation of that relationship!

Anyhow, looks nice to me!

I have posted on this one before, but shall try to give a little update later...if I get a chance :).

Bob


Posted by bobsadviceforstocks at 1:06 PM CST | Post Comment | Permalink
"Trading Transparency" CDIS
Hello Friends! I just wanted to keep you up to date on my trading portfolio. Thanks again for visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your investment advisors prior to acting on any investment ideas on this website.

A few moments ago I made my first sale at a gain on Cal Dive Intl (CDIS). I sold 50 shares (of my original purchase of 200....a 25% position) at $50.03. I purchased these shares on 11/3/04 at a cost basis per share of $38.20. Thus, I had a gain of $11.83/share or 30.1%.

Thus, I am now able :) to purchase a new position, and I shall be visiting the top % gainers list in a few moments! I shall let you know if I find anything interesting! (My maximum # of positions, in my strategy, is 25 positions...and I thus have room for 5 additional positions....at that point, hopefully soon, I shall be sitting on my hands after a sale, and paying off, at long last, my margin! That would be a wonderful thing to happen!

Again thanks so much for stopping by! If you have any questions or comments, please feel free to email me at bobsadviceforstocks@lycos.com.

Bob


Posted by bobsadviceforstocks at 12:54 PM CST | Post Comment | Permalink
Updated: Friday, 25 February 2005 12:55 PM CST
Sunday, 20 February 2005
"Looking Back One Year" A review of stock picks from the week of December 29, 2003





Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor so please always consult with your professional investment advisors prior to making any investment decisions based on information on this website.

At the right is a beautiful picture of Yosemite.

My blog includes lots of ideas about stocks. I believe that among these, are potential outstanding performers. In my actual Trading Portfolio, I use pre-set sell-points to prevent the development of significant losses (by selling at an 8% loss), and to prevent failing to take gains (by selling portions at 30, 60, 90, 120, 180, 240% gains...). But for this weekend review, I just assume a "buy and hold" strategy, and see what would have happened if I had purchased equal dollar amounts of all of the stock picks that week and had simply 'held on'.

On December 29, 2003, I selected Matrixx (MTXX) for Stock Picks at a price of $18.28. MTXX closed at $12.39 on 2/18/05 for a loss of $(5.89) or (32.2)% since posting.

On February 9, 2005, MTXX announced 4th quarter 2004 results. For the quarter ended December 31, 2004, net sales came in at $27.0 million, a 48% increase above net sales of $18.2 million the prior year. Net income increased 62% to $1.7 million or $.17/share compared to net income of $1.0 million or $.11/share the prior year.

I selected American Vanguard (AVD) for Stock Picks on 12/29/03 at a price of $38.69. AVD split 3:2 on 4/19/04 for a resultant effective pick price of $25.79. AVD closed at $36.50 on 2/18/05 for a gain of $10.71 or 41.5%.

On November 3, 2004, AVD reported 3rd quarter results. For the quarter ended September 30, 2004, net sales rose 20% to $39.6 million, net income was up 42% to $4.0 million. On a diluted per share basis, this was a 40% increase to $.42/share. All of these numbers were strong!

On December 30, 2003, I posted Secure Computing (SCUR) on Stock Picks at a price of $16.78. SCUR closed at $9.25 on 2/18/05 for a loss of $(7.53) or (44.9)%.

On January 27, 2005, SCUR announced 4th quarter 2004 results. Sales were up 11% to $25.5 million from $22.9 million last year. Quarterly income grew to $4.5 million or $.12/share from $4.1 million or $.11/share last year. This was slightly above consensus.

On December 30, 2003, I posted SurModics (SRDX) on Stock Picks at a price of $24.38. SRDX closed at $31.51 on 2/18/05 for a gain of $7.13 or 29.2%.

On January 26, 2005, SRDX reported 1st quarter 2005 results. Revenues for the first quarter ended December 31, 2004, grew 16% to $14.1 million from $12.1 million in the prior year. Net income jumped 38% to $5.7 million from $4.1 million. On a diluted per share basis, this came out to $.32/share up from $.23/share in fiscal year 2004.

Finally, on January 1, 2004, I posted McKesson Corp (MCK) on Stock Picks at a price of $32.16. MCK closed at $36.77 on 2/18/05 for a gain of $4.61 or 14.3%.

On January 27, 2005, MCK reported 3rd quarter 2005 results. Revenue grew 14% to $20.8 billion. Net loss came in at $(665) million or $(2.26)/share including a charge of $810 million after-tax for securities litigation. Excluding that charge, earnings actually grew 20% to $.49 or $145 million. The street wasn't bothered much by that one time charge and the stock price has held up fine!

So how did we do? I had five picks that week a little over a year ago. Three gained and two lost ground for an average gain of 1.58%.

Thanks again for stopping by! I hope that my review of different stocks is helpful to you in understanding my thinking! If you have any questions, comments, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com or leave a message right here on my blog!

Bob






Posted by bobsadviceforstocks at 6:44 PM CST | Post Comment | Permalink
Updated: Sunday, 20 February 2005 10:36 PM CST
Accidental Posting :)



My daughter accidentally posted this photo on the stock blog! It is so cute I shall leave it there! Thanks!

Bob


Posted by bobsadviceforstocks at 1:24 PM CST | Post Comment | Permalink
Updated: Sunday, 20 February 2005 5:06 PM CST
Friday, 18 February 2005
February 18, 2005 Allscripts Healthcare Solutions (MDRX)
Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. For those of you who are new to this blog, please make yourself at home. I hope that what I write helps you think more clearly about investing. However, always remember that I am an amateur investor so please consult with your professional investment advisors prior to making any decisions based on information on this website!

After many years of searching for stocks that would just 'cooperate' and move higher, I have found that some of the most likely candidates for purchase may be found by perusing the list of top % gainers on the NASDAQ. I also like to review the same list for the NYSEand the AMEX.

Today, reviewing the NASDAQ list, I came across Allscripts Healthcare Solution (MDRX) which is actually the 4th best gainer on the NASDAQ (as I write). Currently, MDRX is trading at $13.16, up $2.13 or 19.31% on the day! According to the Yahoo "Profile" on MDRX, Allscripts "...is a provider of clinical software and information solutions for physicians." I do not own any shares nor do I have any options on this stock.

One of the most important factors, imho, that drives a stock higher is earnings. That is positive earnings growth and postive revenue growth in a consistent fashion is very attractive to the investing world. What drove the stock higher today, was the announcement of 4th quarter 2004 earnings results yesterday, just after the close of regular trading. For the three months ended December 31, 2004, total revenue was $26.3 million, up from $23.7 million in the prior year same quarter. Net income was $1.4 million or $.03/diluted share compared with $0.1 million or $.00/diluted share the prior year same period.

Please note again that important word "consistent" that I mentioned in the previous paragraph. While sometimes I am a very short-term investor, and may sell a stock a day after buying it on a loss, I really would love to own stocks that appreciate year after year! So, while a good quarter is nice, I am interested in stocks that repetitively deliver good results. That, imho, is what I call a "quality" investment. And that is what I believe is the key to investment success!

And how do I find consistent companies? Well, as you may know, I am fond of the Morningstar.com website. Fortunately, virtually all of the information that I use at this time is available as a free service!

For MDRX, I reviewed the Morningstar.com "5-Yr Restated" financials. Here we can see that first revenue growth has been very consistent, increasing from $28 million in 1999 to $98 million in the trailing twelve months (TTM).

Earnings have been erratic, dropping from a loss of $(.91)/share in 1999 to a low of a loss of $(11.07)(!)/share in 2001, then improving steadily since that point. It appears that MDRX just turned profitable this past year.

The next thing I like to check on the same Morningstar.com page is "Free Cash Flow". In my simplified understanding of this accounting term, free cash flow which is defined as the operating cash flow minus the capital expenditures, is the amount of real 'cash' that the company is either generating (positive) or consuming (negative). In the great dot.com era, the "burn rate" of these high tech firms was a constant factor in predicting how long a company would have before it ran out of money literally. I am looking for companies that are generating money and not consuming their assets!

For MDRX, we can find a steadily improving picture in the cash flow department, from a negative $(37) million in 2001, $(12) million in 2002, to $5 million in 2003 and $8 million in the trailing twelve months.

The next thing I like to review on Morningstar is a brief look at the assets and liabilities picture. Again, I am not an accountant, so my examination is fairly superficial...but still, it is helpful to have a handle on this. Basically, I am interested in companies that have lots of assets, and relatively little in the liabilities department. I am concerned that current assets, those, as I understand it, are either cash or easily turned into cash in the next 12 months, to be far greater than current liabilities, which are those liabilities, again as I understand it, that come due either immediately or in the next 12 months.

I would like to see very low levels of long-term debt, but as long as free cash flow is growing and positive, and current assets exceed current liabilities, I am not as concerned about this figure.

And what are the numbers for MDRX? Well, Morningstar shows that this company has $62.6 million in cash and $26.5 million in other current assets. This is plenty to cover the $30 million in current liabilities and still have additional funds to pay off a significant portion of the long-term liabilities. I am comfortable with this company's balance sheet.

How about "valuation"? Do we have to stick to one style of investing? Of course not. We can examine companies through a lot of different perspectives!

Again I turn to Yahoo and look at the Yahoo "Key Statistics" for MDRX. First off, how "big" a company is this?

Many investors confuse the size of a company with its stock price. A large cap stock has nothing to do with stock price nor does a small cap stock. Market capitalization is determined by multiplying the price of a stock by its # of shares.

There are actually many definitions out there on market cap and I have used the Ameritrade definition:
"Small-cap -- less than $500 million Mid-cap -- between $500 million and $3 billion Large-cap -- over $3 billion."

MDRX sneaks in below the mid cap level at $494.67 million, so we may call it a "small cap".

Since this company is just turning profitable, the p/e is HUGE at 299.77. However, going forward based on estimates (fye 31-Dec-05), we have a more reasonable 25.78 p/e. Thus, the PEG (p/e compared to growth rate), isn't bad at 1.70. Price/Sales is a bit rich at 4.31. I think that "cheap" has both of these ratios around 1.0.

On the same page, we can see that there are 38.38 million shares outstanding with 27.10 million of them that "float". Of these, 3.02 million shares are out short, representing 11.14% of the float (as of 1/10/05). To determine how long it would take to cover these shares which were borrowed and sold by investors speculating on a price decline, we have the "short ratio" which is the number of average trading days of volume required for the short-sellers to buy back their shorts. I personally have arbitrarily set 3 days as a cut-off of significance, that is, more than 3 days, imho, is significant. In this case, the short ratio (as of 1/10/05) is 9.063. Thus, with today's good news on earnings, there is the possibility that these short-sellers were scrambling to cover their "shorts" while the stock was rising.

Yahoo finishes this page off with the report that there is no annual dividend and no stock-split reported.

How about "technicals". As I pointed out earlier, I like to look at a stock from a variety of perspectives. The technician, or chartist, likes to look at the chart to determine future price action. Again, I am totally a novice at looking at charts, am not too sure how much I "believe" in them, but still would rather go long with a stock that has a chart that appears to be on the upswing then the other way around.

If you look at this blog much, you will realize that I like to use "Point & Figure" charts. As explained on Stockcharts.com:
Point & Figure charts consist of columns of X's and O's that represent filtered price movements over time. Their distinctive look may be alien at first to people who are more familiar with traditional price bar charts but once people learn the basics of P&F charts they usually become hooked.

There are several advantages to using P&F charts instead of the more traditional bar or candlestick charts. P&F charts automatically:

Eliminate the insignificant price movements that often make bar charts appear 'noisy.'
Remove the often misleading effects of time from the analysis process.
Make recognizing support/resistance levels much easier.
Make trendline recognition a 'no-brainer'.
Help you stay focused on the important long-term price developments."


Anyhow, here is the MDRX "Point & Figure Chart" from Stockcharts.com:

Here we can see that the stock price was actually declining from $11.00/share in February, 2001, to a low of $1.75/share in August, 2002, The stock broke through resistance in early 2003 at $3.00, and has traded higher above the support line since then. Overall, the graph looks strong!

So what do I think? How do I put all of this together? Well, in summary, the stock has moved nicely higher today, they just reported a very nice earnings report showing growth in both revenue and earnings. The company has been growing its revenue steadily for the past five years and has been improving its earnings picture for the last several of those years.

Free cash flow is excellent, the balance sheet is nice, and valuation is reasonable since the company is just turning positive. The chart looks nice...and there are a bunch of short-sellers out there who may well be providing some buying pressure.

And why don't I buy some shares? Well that is a whole different issue, certainly, my portfolio at 20 positions has 5 slots for new positions. However, I use my own portfolio as a barometer for adding new money or moving to cash. I am waiting for a sale of a portion of one of my holdings at a gain prior to buying a new stock! Otherwise, I would find this one to be attractive.

I hope that I wasn't too wordy today! Thanks again for bearing with me. If you have any comments, questions or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com!

Bob







Posted by bobsadviceforstocks at 1:45 PM CST | Post Comment | Permalink
Updated: Friday, 18 February 2005 5:33 PM CST

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