Zoran Corp. (Nasdaq: ZRAN) has led the analysts astray yet again, and this is now something of a tradition, having created an entire community of Zoran watchers who short sell the stock every time it rises to a certain level and enter a long position every it falls to a certain level. “It’s true,” an associate of mine named Mike tells me, “This happens to a lot of companies about which the analysts have made their minds up on the basis of figures that only they have access to, but we have never come across an instance where the analysts were so way off the mark. I constantly play on Zoran’s volatility.”
Let’s go back a bit. Zoran soared following the publication of its report for the first quarter of 2006, in response to the phenomenal surprise that the company provided when it resoundingly beat the analysts estimates. The surprise was indeed profound since at that time the analysts believed that the camera and video sectors, for which the company designs chips and which are its key lines of business, had quietened down and that demand in these fields was falling. OK, so they were ultimately proved wrong and Zoran climbed 50% in April 2006.
Zoran then beat the analysts again in July with its report for the second quarter of the year, but its guidance was somewhat disappointing and the stock fell 33% to $14 from $21. It rose again ahead of the unveiling by the company’s third quarter results, but then the options backdating problem surfaced, sending the stock back down to $13.45 in November. Why did it fall to a full-year low in November? Because between October to November, four leading investment banks, among them JP Morgan, downgraded their ratings for Zoran. Last week the stock rose sharply once again, after it unveiled excellent results for the fourth quarter of 2006. These, of course, are not final, since the options issue poses a real problem for the company’s auditors; it’s difficult to reach a settlement because of the new regulations, so Zoran could well be the next company to make the trip into the pink twilight zone (i.e. the Pink Sheets).
But, what has happened in Zoran’s stock highlights a phenomenon that I have been aware of for some time - the analysts prefer to keep a safe distance. “Just look at this,” says Mike. “Zoran’s price has ranged from $14-25, and that amounts to a difference of 44% upward or 78% downward. That’s what happens on the market. But if you look at the numbers that the company has published, there’s absolutely no reason why the stock should be knocked around like this.”
How does he assess when to enter or exit the stock? “It’s quite simple,” explains Mike. “The stock is covered by $6 in cash. For me, the stock of a company such as Zoran, which is growing and recording profit, cannot be less than twice the value of cash covering it. So if the stock falls below $14 I buy, because I don’t believe that it will drop below $12.” Great, and when’s the right time to sell? “By instinct. Usually, at three times and higher than the company’s cash price. And you’ve got to be consistent.” Fine, anybody who wants to try is welcome to do so.
John Vinh, the analyst at CE Unterberg Towbin, who in October downgraded Zoran to “Hold” from “Market Perform” has just reiterated his “Market Perform” rating. He warns investors, quite rightly, to take into account the continuing saga over the company’s options backdating. If Zoran is relegated to the Pink Sheets, the stock will fall again. But Vinh has an interesting dilemma business wise, since he talks, on the one hand, of the competition that Zoran faces, and the fear of a slowdown in the relevant markets on the other. I prefer Mike’s approach, based as it is on instinct.
The RIT Riddle
Richard Church, also an analyst with CE Unterberg Towbin, has just rated RIT Technologies (Nasdaq: RITT) “Hold.” After tumbling 65% since the beginning of 2005, RIT’s stock has recently begun to show signs of a revival. The question is whether the revival in the stock will be accompanied by revival at the company itself, or whether this is an upward correction in response to the previous falls.
RIT is one of the oldest of those companies that focus on telecommunications networks performance monitoring, and network management solutions. A study of the figures that the company has published over the last four years reveals that the company has performed a lot better than its stock has, yet still, since 2006 was not as good as 2005, the stock’s response was disproportionately sharp. As for the figures themselves, the company’s sales rose from $15.2 million in 2003, to $27.5 million in 2005, but these are believed to have fallen in 2006 to $25.5 million. In the bottom line, the company moved from a loss of almost $7 million in 2003 to a profit of $1.4 million in 2005, and Rich expects that it will post a loss of $1.4 million, or $0.10 per share for 2006.
What is interesting here is that the stock’s downward spiral began before the company unveiled its excellent results for 2005. This would mean that by the time the company reported its 2005 results towards the end of the first quarter of 2006, the stock was clearly on a downward track. I have no idea as what led the stock down throughout 2005. Did anyone know that 2006 would not be as good? I don’t think so, and my conclusion is that it fell simply because of “boredom” that is to say lack of public interest. The falls in 2006 are understandable given RIT’s weakness on Main Street, which projected onto Wall Street. Church expects that the company will have a fairly stagnant year in 2007, but that it will begin to growth in sales and profit in 2008.
Speaking frankly, I find it easy to understand the difficulties that a company like RIT faces, from the stiff competition to its meager financial resources. It has no unique product with which to make the breakthrough. With proper sales management, a company like RIT could see revenue of around $20 million, and perhaps more. The question, however, that every investor will have to consider is whether his or her dream is to be in a company like this. This is something that I can’t answer.
Published by Globes [online], Israel business news - www.globes.co.il - on February 7, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007