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By ikedim
January 13, 2009

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

This is a specialized software company - as you probably guessed from the initials, this company makes Laboratory Information Management Systems (is it just me, or does it seem like laboratories discovered more stuff back in the days when they kept their information on hydrochloric acid-stained notebook pages?) Anyway, labs these days run some pretty complex processes and have significant regulatory standards to deal with, and that's where these guys come in. The numbers (all are approximate):

The current market cap is $38.6M.
Cash and marketable securities are $30.3M.
Receivables are $9.5M.
Other current assets are $2.5M.
Total liabilities are $5.1M.

I'll discount other current assets at 80% since from the annual report they seem pretty safe (mostly tax related and prepaid expenses). So, conservative liquidation value is (30.3 + 80%*(9.5+2.5) - 5.1) = $34.8M. Oops, this seems to have popped slightly above net-net territory while I was composing my SEC rant - sorry!

The company was incorporated in Israel in 1986, has been publicly traded there since 1993, and has operated under their current direct sales model since 1998 (before that they sold their software through Varian). They have been listed on the NASDAQ since 2007, and most of their revenue comes from North American sales. The company has been profitable at least since 2003 (that's as far back as I could find). The current downturn has affected their business but not to the point of bleeding cash - they broke even in the quarter ended Sept 30 and guided for a slightly profitable fourth quarter (this was in mid-Nov). They have been actively buying shares back and declared a special dividend of $0.35/share this year.

Also, this is the first foreign company I've mentioned, which leads me to mention my personal opinion on foreign net-nets: be careful out there. I'm not going to claim that regulatory standards are in general better or worse here in the U.S., but in the particular case of net-nets I've come across quite a few more fraudulent ones among foreign companies than domestic (i.e. where the balance sheet turned out to be a pure-and-simple lie and the cash wasn't there). As a recent example look no further than Satyam, which was supposed to have over $1.2B in cash backing up its $1.9B market cap. This isn't enough to completely put me off foreign net-nets, but I do think it's a good idea to require them to be actively returning cash to shareholders through buybacks and/or dividends - this is a no-brainer to do if the cash is really there, so if they're not doing it you have to start wondering.

The disclaimers:
These are not buy recommendations - Please do your own due diligence! I do not expect credit if you buy one that kazuples, nor blame if you buy one that goes to zero.

Some of these stocks will be very small and low-volume - this being a pretty sophisticated group, I'll assume that if you do decide to buy one you know how to do so without getting ripped off by the market makers (at a minimum use limit orders and patience). Also be aware they may be non-marginable, and can be difficult to exit quickly.

I may own some of these, and will feel free to buy and sell without updating my opinion in the future. In general I will start selling as my estimate of fair value is reached, or if some bad news comes that I think creates a substantial risk of permanent loss.

Isaac