RST (Range)...

RST, makers of Rosetta Stone language teaching software, had some news today the market didn't like, and the market took it down 27%. Long story short, RST did two bad things today. One, they revised their 09Q3 guidance far lower, citing higher than expected operating costs for the quarter due to sales/marketing costs and product development costs. This comes immediately following a raise in guidance after their last earnings report a couple weeks ago. Two, they cancelled their upcoming equity offering.

Fundamentally, I'm torn on this company. On one hand, they have solid revenue growth and a solid balance sheet with a highly effective product, but on the other hand, they are a 'one-trick pony' of a company in that they really only have that one product and not much else. Frankly, I would not be surprised to see RST acquired by a larger publisher eventually, but it's not exactly cheap on many valuation measues such as price/book, sales, or earnings.

With today's massive breakdown, there's a lot of underwater shareholders who would likely take strength as a chance to get out and minimize their losses. On the other hand, we saw the lows of the day hold right at round number $20, indicating there are buyers willing to get into this name here around $20. My expectation is RST will trade in a range between today's highs and lows, roughly $20-$24, for several weeks. It doesn't report again until mid October, so we'll look to play this one by trading the range, buying/covering at $20 and selling/shorting at $24 until the range is resolved one way or the other. I like range-bound trades like this, and this is a big range to work in.

We'll revisit it once either $20 fails to act as support or $24 fails to act as resistance.



Position: none

DGW (Long)...

I'm liking DGW. They did their IPO a couple months ago and reported earnings a couple weeks ago. They reported earnings at $0.87 per share in their first quarter as a public company. DGW is a China-based company who manufacturers water treatment equipment. It's not sexy, but sexy is optional here. DGW has over 80 products across three main product lines, namely Circulating Water Treatment, Water Purification, and Wastewater Treatment. They also serve a broad array of customers. DGW, by all appearances, is a fully-integrated water company that is poised for tremendous growth in a market that surely needs to expand its infrastructure. We do need to tread carefully because this is a Chinese company and their accounting standards are much...shall I say...looser...than those we have in the USA.

The balance sheet looks very healthy to me, as they have nearly $11 in total assets for every $1 in total liabilities. Of their ~$188M in total assets, ~$137M of that is cash, so I like what I see there, too. They have ~$17M in total liabilities.

DGW is showing solid revenue growth, as well. 09Q2 was the largest quarter of revenue I have seen out of them, coming in over $31M. If DGW can keep up this kind of revenue growth, I see no reason they couldn't do $100M in revenue for 2009. They showed solid revenue growth across all three product lines

A yellow flag I saw this quarter was that the operating income was actually in the red by ~$300k. This is troubling considering the record revenues they hit, but it can apparently be attributed to a balloon in sales/general/administrative expenses. Their cost of revenue was more or less on par with their previous quarters, ~50% of the revenue generated, but the SGA expenses were way higher. SGA seems to typically run ~10%-20% of revenue, but in 09Q2 it ran at ~50% of revenue. This could be a one-time thing associated with their IPO, but it would take another quarterly release to tell us for sure.

DGW isn't due to report again for another couple months. Aside from that yellow flag in SGA, they had a stellar report.

Now let's go to the chart. As you can see, DGW debuted a couple months ago and has been off to the races ever since. The stock's doubled from its offer price already and has had a pretty decent pullback recently, but it appears to have held support at the middle BB. The increase in volume on Friday's pullback test of the middle BB is a bit disconcerting, another yellow flag, but the bulls were able to hold support and close of the lows of the day.

I am looking to buy a little of this one for a starter position, but will set my stop below Friday's lows. If that fails to hold, the next level of support is clear back at $26, which is the initial breakout level from the first few days of action, but also the lower BB.



Position: none

MJN (Long)...

I'm importing MJN from the stock blog over to here. The original post can be found here. Note the black arrow represents the previous entry, and the green arrow represents this update.

So what's change since then? Well, MJN proceeded to break out above the post-earnings highs, run about 10%, and has now pulled back to retest those levels. Volume is low on this pullback, and the stock is about to retest a confluence of support. We have the previous resistance level and the upcoming middle BB. I like MJN here on a pullback. We'll let it come to us.



Position: none

Intro...

This is the second blog I've started up. The first is Tim's Stock Blog. So, why make a second one? A couple reasons. One, blogging is kind of fun. Two, I wanted to make an even more focused blog on one specific aspect of the market that I don't see much coverage about. This hidden area is the IPO market. I would've launched this one sooner, but with the financial crisis we've endured the past couple years, the IPO market pretty much stopped dead. Seriously, there was literally one IPO of note in Q1 2009 (MJN). The floodgates have opened back up a bit during Q2 and here in Q3. We're also seeing a large amount of equity issuance in already-public companies, but that's outside the scope of this blog. We're only looking at IPOs here.

I would normally limit my scope here to stocks that have been public for a year or less, but given the aforementioned shortage of IPOs from late 2008 and early 2009, I'm giving it a bit longer. I've found IPO trading to be very successful in the past and I wanted to create a blog with a bit of a different focus than my other one, which is a more general stock blog.

This is a truly dynamic area of the market. It's risky, but potentially very rewarding. Since these are new stocks, there's no previous price history. You're getting in right at the beginning. So, right out of the gates, it's probably soon at new all-time highs or lows. The goal is to combine a little due diligence on the fundamentals with a little money management via technical analysis and try to make some money.