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"High Risk, High Reward, Gambling Money"

 

1/12/05  Here are some interesting Atlantic City Ideas from a reader:

Hi Joe,

Let me know what you think about these three Atlantic City stocks: Sonus Networks (SONS);  Sontra Medical (SONT); and eResearch Technology (ERES).

First, SONS...its a clear VoIP equipment play that seems to be uniquely positioned for the transition to VoIP.  Given its accounting issues from a year ago (of which Revenue was UNDER-stated) I think its going to pop here shortly due to increasing broadband penetration numbers and its unique market position.  Also, recent articles point out that it is right behind NT in circuits shipped. 

Sontra Med is purely speculative but what I like about it is that it has a FDA approved product in SonoPrep, announced 2 distributors for its product, a glucose monitoring product in development and a relationship with a major player Bayer.  On top of this, it is wound pretty tight with only a 30M Market Cap.

ERES also seems to be strategically positioned and is inking deals left and right.

I am extremely interested in hearing your thoughts (if any) regarding these stocks.  Cheers, Jeremy
 

Hi Jeremy,

 
I believe there's a place in almost all portfolios for some sort of an Atlantic City type investment. I like your ideas. Here are mine:
 
-Sonus Network (Sons - $5.53) - The VOIP market is very exciting and is the next technology wave. Over the years I have been into so many of these small technology companies and you never know which ones will succeed. Two things: First, its net income as of 6/30/04 is a little misleading, SONS had Net Income of $7.9m while its cash flow from operating activities came it at only $1.1m. Ultimately if their products sell cash will flow in, but that has not occurred yet.  Second, the company raised $1b and spent $800m with little profits to show. Spending money is easy, making it is more difficult. My concern is that with its $1.3b market capitalization are you making a good investment or bailing out the original investors. I don't know, but that's why I call it an Atlantic City play.
 
-Sontra Medical (SONT - $1.98) - SONT has an interesting skin cleaner. Its 9/30/04 quarterly revenue of $12.2k is very low for a company with a $42m market capitalization. If the cleaner sells it may make a excellent fit for a company like BD. The price seems on the high side. I don't know how big their market is. I would wait to see if sales trends materialize.
 
-eResearch Technology (ERES - $13.58) - It costs about $800m to develop a new drug. ERES's technology seems to streamline the process in getting FDA approval. That is worth money!  ERES has a history of making money and "money makes money". For the nine months ending 9/30/04 ERES generated $47m cash flow from operating activates. That's excellent for a relatively new company with a $698 market capitalization.
 
Jeremy, I believe eReasearch is no longer a Atlantic City play. It's a real investment and the one that I like the best out of your three choices. I would follow the cash and the cash is being made at ERES.

Good Luck - I enjoyed your question and you may have found a very good stock for yourself and my readers. - Joe

 
 

 

11/29/04 Pacific Internet Ltd. (PCNTF - $7.83) Pac Net, a small cap. company, and a leading independent internet service provider located in Singapore, seems to be an appealing investment. For FYE 6/04 Yahoo reported Pacific Internet's revenues at $98m and net income at $2.8m. PCNTF's balance sheet also seems in order. The company has a tangible net worth of $28m, of which $24m is in cash, and practically no LT Debt. The company's cash flow from operations is approximately $9.8m. The price is also reasonable. Pac Net has a market capitalization of $102m and an estimated EPS range between .22 to.41 cents. Given a low and declining dollar, Pac Net is interesting.

P.S. (I would have liked to review their SEC filings, but I was unable to access them from my computer - Please review their SEC filings before investing.)


Name: XO Communications ("XOCM.OB")
Price: $3.55
Date: May 14, 2004


Name: Global Crossing ("GLBC")
Price: $12.41
Date: May 14, 2004

XO Communications and Global Crossing are assets plays. These companies spent billions of dollars building fiber optic net works; in which their usage projections failed to materialize. They both emerged from bankruptcy with a fraction of their pre-bankruptcy debt. XO Communications is a domestic company, while Global Crossing is known for its international infrastructure. XO spent approximately $10b plus building their infrastructure, while Global spent approximately $23b plus building their platform. These assets are now selling for pennies on the dollar.

The strategy is similar to Global Marine in the 1980’s. One is betting that in 10 to 20 years the voice and data demand for fiber optic cable would catch-up to capacity, thus these companies will once again be viable.

My concern is that both of these companies, which are still operating at losses, and have substantial debt, may not have the wherewithal to survive a few decades. XO communications has approximately $500m of long-term debt, while Global Crossing has approximately $400m. It’s possible that these companies can go into bankruptcy again if demand never increases.

If one is going to participate in this game, watch debt, cash and cash-flow; discount everything else until demand and earnings pick up. A lot of investors lost money on these companies, so buy low, and be careful.
 

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