Novice Investing - Finding Undervalued Investments

Date: Tuesday 16th 2010f March 2010 04:40:13 PM

Finding Undervalued Investments - 11/06/2006

By: Novice Investing Staff

We have sold Fresh Del Monte Produce (FDP). We have sold Merck (MRK) as well as Leap Frog Enterprises (LF). That leaves our portfolio with plenty of cash and we need to find other undervalued investments. Scouring the 52 week low might be a good starting point for us. We often times use businessweek screener which we have told you in the past. Also, we will be using sources from our past articles to get 'inspired' on our next investment for our portfolio. While we have not done a very thorough research on the companies, the list will serve as a starting point for further investigation. Thus far, here is the candidates that might be our next portfolio picks.

Dell Inc. (DELL). The name sounds familiar. After all the stumbles this year, Dell is still the most efficient PC manufacturers today. With inventory worth 'only' 3 days, Dell has significant moat over others. As PC prices has fallen, Dell's advantage has diminished due to diminished profit margin. Some say, competitors has moved to higher end PC products while Dell is stuck manufacturing low margin PC. Dell brand also is associated with Wal-Mart in retails. You would not want to buy your $ 1000 suit at Wal-Mart even if it in fact sell identical suit for much less. That same paradigm befalls Dell, unfortunately. Furthermore, customer service blunder has hurt its brand significantly. As a result, you see Dell trading close to its 5 year low this past year. It has rebounded to $ 24 and change, which is a little bit more expensive that we would like. However, with $ 11 Billion ($ 4.84 per share) in positive net cash, Dell is not in any danger of going bankrupt. Trailing EPS and forward 2007 EPS is $ 1.23 and $ 1.07 per share respectively. Current share price has already priced in some rebound and earning growth on Dell's business. Therefore, while Dell stock has fallen considerably this year, it would still not a good entry point to buy. Better Entry point: $ 15 per share (considering no change in EPS expectation).

Novell Inc. (NOVL). Novell is one of the distributor of Linux open source software. With positive net cash of $ 1 Billion ($ 2.95 per share) and market capitalization of $ 2.25 Billion, you have a stock with 44% of market capitalization in cash. Not bad. The biggest problem is that, Novell had been struggling to earn profit, consistently. For the year ending on October

2006, Novell is expected to earn just $ 0.16 per share. Current stock price is at around $ 6.65, which gives it a ridiculously high P/E of 41. So, what would cause us to think that Novell's fortune is about to turnaround soon? Last week announcement with Microsoft that it has supported Novell's Suse Linux is one. Further, both companies has agreed to combine forces in marketing. This is a big endorsement for open source and a big help for Novell's effort in marketing its Suse Linux. We expect Novell to start delivering EPS growth starting next fiscal year. EPS estimation is rather hard to predict at this time but share price has zoomed up 17.5% in the wake of Microsoft endorsement. 30 cents of EPS might be in the offering next year and then 50 cents EPS the year after. That would give it a sure double at this price. However, we have not done any deep research on it, so please hold your breath for now. Better Entry Point: $ 6.00 or less when the company delivers disappointing earning report on December 5th 2006.

Earthlink Inc. (ELNK). The stock trades close to its 52 week low now at around $ 6.75 per share. After disappointing earning report, the street does not Earthlink to make any profit on next fiscal year (2007). It is expected to lose 22 cents per share next year. However, with $ 380 Million ($ 3.06 per share) of positive net cash, it has a long way to go before it goes bankrupt. Even with a $ 1 per share loss every year, Earthlink will have a 3-4 years window to survive and find other revenue generators. What is the problem with Earthlink? It suffered the same fate as fellow Internet Service Provider America Online, a division of Time Warner Inc. Dial-up subscriber is an attractive asset. The trick here is for Earthlink to convert as much of its dial-up subscriber into broadband users. The latest earning setback shows that Earthlink is eroding more dial-up subscribers than it is adding new broadband subscribers. What appeals Earthlink as a potential investment is its foray into Wi-Fi network providers. Earthlink has obtained concessions to build Wi-Fi networks in select US cities such as San Francisco and Philadelphia. We have talked of the advantage of building a Wi Fi network over say, existing cable networks. Furthermore, we have covered Earthlink's annual report a while back and it gives excellent outline of Earthlink's revenue source. (60% revenue derived from dial-up). The biggest problem with Earthlink is this; We do not know when their EPS will turn up. Thus far, we know what the catalyst will be but the end of the tunnel is not anywhere in sight. Better Entry Point: $ 5 or when earning report shows progress on its Wi-Fi initiative.

We have several more suggestions for our next portfolio pick but even just these three ideas has consumed a lot of words. It is time for you to get a coffee break and we'll continue with our other ideas some other time.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Earthlink Inc. (ELNK) or any other securities.

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