To OTC Journal Members: 
 

Let's Go Crazy

I have absolutely fantastic news for anyone who happens to read today's commentary. Here's the news flash- It's no longer October. Thank God, the sun came up again today, and I looked at my calendar. October 2008, the worst month I can remember - far worse than 1997, 2000, 2001, or any other individual month one can think of. October has been the month all the important market lows in the last 50 years have been made, and this will be no exception.

As investors, it's important to recognize there are "stupid" valuations out there right now. Why? Clearly a lot of it has to do with forced liquidations. Overleveraged funds are simply being blown out of stocks with no regard for value. Hence, some pretty good bargain basement steals. 

If you don't quite understand what's happening here, take a minute to read a news release that came across the tape on Friday. It relates to Penson Worldwide (NASDAQ: PNSN). This is a gigantic, Dallas based securities clearing firm sprung out of the old Southwest Securities. Their stock was down from $12 to $7 on Friday thanks to the following revelation. 

PNSN's Canadian subsidiary is now exposed to a potential $25 million loss. Apparently, hedge fund customer Evergreen Capital Partners has a maximum of $25 million in margin debt. Evergreen can't make the margin call, and has ceased operations. PNSN may or may not be in possession of whatever stocks they were holding. One thing is certain- whatever stocks they were holding are now for sale immediately at the market price. Click Here for the news. That's what's going on in the world.

I'd love to have a list of the stocks that are going to be liquidated to raise cash at any cost by PNSN. What a shopping list. I bring PNSN to your attention to let you know this is not an isolated incident. It's going on everywhere world wide. It's why the valuations on the two ideas listed below are so absurd. Here's two ideas for bargain basement shoppers shared with me by a contact who is an expert in the wireless telecom arena.
 

Novatel Wireless (NASDAQ: NVTL): Buy the Business For Next To Nothing

Let's assume the insanity in the markets is going to abate somewhat over the coming weeks and months. Let's take it a step further and assume some of the absurdly under priced stocks out there represent a value. Here's a couple to look at right now.

Novatel Wireless is a major player in wireless internet access technologies. The image you see here is one of their cards plugged into the side of a notebook computer. Their technology could be imbedded in the wireless connection in your notebook computer as well. 

Numerous carriers now offer their hardware- Bell, Panasonic, Sony, and Toshiba are all notebook manufacturers with their technology embedded. Sprint, Verizon, and Vodafone are carriers offering their hardware. 

Here's the big challenge with this idea- the company decided to review its accounting procedures, and has not filed its 10Q for either the March of June quarters. It was granted and extension to November 17th by NASDAQ.

From 2005 to 2007, Novatel delivered $161 million ('05), to $217 milllion ('06), to $429 million ('07) in revenues. Profits were $11.16 million ('05), $443k ('06), and $38.7 million ('07) over the same time frame. In short huge growth and great profits.

All the hoopla is apparently over booking $3 million in revenues in the proper quarter, and since the stock of course cratered, the lawyers are champing at the bit and filing all kinds of class action law suits, which further depressed the stock price. You'll see a lot of the ambulance chasers in the news releases.

In the interim, the last 10k audited financial statement shows cash of $153 million as of the end of 2007, and no long term debt. At last report, there were 33 million shares I&O. Therefore, the company had about $4.63 per share in cash.

This past week the stock finally showed some signs of life for the first time in months. There are, of course, plenty of unknowns- they had $4.61 in cash at the end of 2007- we don't know where they stand right now. You can't tell if they've been losing money. Of course, it's a certainty revenues have come down in 2008- notebook computer sales are not robust in this environment.

Another negative- hand held devices are becoming more and more like notebook computers everyday. It won't be long until we can't tell the difference. This does not bode well for Novatel's long term prospects unless they evolve their technology to be useful for OEM hand set manufacturers.

Here's the way I see it- the company has been profitable for 3 years. The first half of 2008 was probably reasonable for NVTL, so one might assume their cash levels haven't dropped dramatically, or perhaps even increased.

Friday's closing price was $5.20. Therefore, you are paying $.57 (or $19 million) for a company that generated $38.7 million in profits in '07- not bad. Then, you get about $4.70 in cash. 

I picked up a small position on Friday. I'm pretty sure the drop below $5 blew everyone out who was holding the stock leveraged. Below $5, it becomes unmarginable in most accounts. 

I doubt this stock is going back to $30 anytime soon. However, it certainly could be good for a rebound into the $8 to $10 range. When the delinquent numbers come out, if they are not too bad, I would expect a huge gap up in the stock. If there's a big downside surprise, there won't be any way to hide. It will open far lower than where it closed.

I believe a nearly worst case scenario is already priced in. A bargain basement steal thanks to circumstances.
 

Sierra Wireless (NASDAQ: SWIR): Boatloads of Cash

Similar business, similar story without the drama of late filings or law suits.

Would you believe this little USB plug in is a full blown wireless modem? I know- small and elegant. I'll have to get one and see how well it works. This little guy helped Sierra Wireless deliver $116 million in revs and $11 million in profits in the June quarter.

These guys are all about speed and the next generation 3G wireless products. This is a Canadian company- Vancouver based, so you really have to dig in to get to their SEC filings.

In the September quarter, SWIR delivered $136 million in sales and $7.3 million in profits- they had previously forecasted $141 million and $8.5 million in profits. The shortfall was attributed to the delay in a major product roll out by a major, and unnamed manufacturer.

Friday's closing price you ask? $8.75. Cash per share you ask? At the end of Q3 they had about $200 million in cash and cash equivalents- Zero long term debt. With 31 million I&O- you figured it out- $6.45 in cash. This one is probably good for a $4 rebound to $12 or $13.

So, let's break this one down. You are paying $2.30 for the company, because the other $6.45 is cash. That's a value of $71.3 million for the company. Last quarter $136 million in sales and over $7 million in profits. Amazing value. 

Here's the chart. Another $30 to $7 story. Just saw a sign of the first rebound this past week. Still growing, not burning cash, no debt. This company does a lot of business with AT&T (NYSE: T), which opens the door to Apple (NASDAQ: AAPL).

Looking at these new ideas in the wireless internet access- there's a common theme. The first is the downside. Admittedly, not knowing the exact financial condition of NVTL makes it a little dicier- but in both cases a couple of reasonable assumptions can be made. Both these companies have more than 70% of their share price in cash- and there's no long term debt. Secondly, both of these companies have at least 3 years histories of growth and profitability.

Is there going to be a downturn in both of their fortunes in 2009? Highly likely? Is the end of their business model already priced into their stocks? Highly likely. 

Looking for a couple of bargain basement steals with minimal downside and great value? Consider SWIR and NVTL- in that order. If you like these ideas, go in for 1/3 of what you might want to own. That way, you'll be ready to add to your position in some sort of crazy market pullback.

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