3SOF

Business Description: Optimal Group, Inc. (OPMR) operates as a payments and services company primarily in North America and the United Kingdom, as well as in Ireland. Through its wholly owned subsidiary, Optimal Payments, Inc., the company provides technology and services that businesses require to accept credit card, electronic check, and direct debit payments. The company processes credit card payments for card-not-present and card-present transactions, including Internet businesses, mail-order/telephone-order merchants, and retail point-of-sale merchants. Optimal Group also processes checks and direct debits online and by telephone. In addition, it processes online gaming transactions originating from the non-U.S. consumers. The company processes these online gaming transactions through the use of credit and debit cards, electronic debit, and an electronic wallet. Optimal Group markets its services directly, as well as through independent sales agents and strategic partnerships. Its customers primarily include small to medium-sized merchants, as well as consumers who utilize the company's electronic wallet offering. The company was founded in 1984 and is headquartered in Montreal, Canada.

Story: OPMR was a $20 stock in late 2005, early 2006, when it looked like a solid business. However, for no apparent reason at the time, it started sliding and in October 2, 2006, the reason came to surface: the Unlawful Internet Gambling Enforcement Act of 2006.



This new Law cut the company's revenues nearly in half. But costs were also greatly diminished, so the company didn't lose as much money as one would initially think, given a 50% haircut in revenue from one quarter to the next. The stock kept falling anyway, I believe because people just paid attention to the new Law and if internet gambling for North Americans would come back or not (I was one of this people). OPMR fell so much its valuation went below cash levels. On last Wednesday's close OPMR was worth $81 M, while its latest balance sheet says the company has $142 M in cash and cash equivalents. If we take out from the cash balance the company's total debt of $46 M, we're still left with a $96 M value, or $4.02 net cash per share. The stock closed at $3.59 on Friday.

Since OPMR was so obviously undervalued, twelve corporate insiders didn't have a problem in buying options to be converted to shares at $4.21 each.

Not satisfied with the options he bought at $4.21, and because the price in the open market was even lower, the CFO bought more shares in the open market.

Of course, the company has been lobbying for the return of internet gambling for US citizens, but it will probably take a very long time for the Law to change, if ever. So they went ahead and did something with their big cash pile, which was a relatively big acquisition of a private company:

«On November 7, 2007, we completed our previously announced acquisition of substantially all of the assets of WowWee Limited, a privately-held Hong Kong-based developer, marketer and supplier of technology-based, consumer robotic, toy and electronic products, as well as substantially all of the assets of WowWee Marketing, with offices in La Jolla, California, and WowWee Group, with offices in Montreal, Quebec. WowWee Marketing and WowWee Group were service providers to WowWee Limited in the operation of its business. This acquisition was completed at an approximate cost of US$67 million, US$55 million of which was incurred in satisfaction of the cash portion of the purchase price, US$10 million of which was incurred through the issuance of 2,169,197 of our common shares, at a price of US$4.61 per share, in satisfaction of the stock portion of the purchase price, and the balance of which was incurred upon the issuance of a warrant with an estimated fair value of approximately $2 million to purchase up to an additional 820,000 of our common shares at a price of US$5.56 per share.

We will account for this acquisition using the purchase method and the results of WowWee will be consolidated with those of the Company from the date of acquisition, November 7, 2007.

WowWee, with a team of design engineers based in Hong Kong and La Jolla, designs, develops, markets and distributes technology-based consumer products and toys. WowWee is best known for its line of Robo-branded consumer robotic products.

WowWee's products are sold through its direct sales channel as well as through international distributors. Approximately 65% of its products are sold in North America, with the balance being sold internationally.

In 2006 and 2005, WowWee's revenues were approximately US$117 million and US$131 million, respectively, and earnings before interest, taxes, depreciation and amortization were approximately US$5 million and US$27.5 million, respectively. The results of WowWee are subject to seasonal variability with a significant portion of revenues generated in the third and fourth quarter of each calendar year.»

I don't know how WowWee is doing now, but judging from the insiders confidence in buying shares above the current market price and the CFO buying in the open market, I believe this is a good hint that the company is doing well.

The company has also been buying back its own shares, benefiting from the price decline. The diluted share count was reduced from 25,558,243 in Q3 2006 to 23,866,604 in Q3 2007 and the company plans to buy back an additional 1.3 million shares:

• Optimal Group Publishes Notice of Intention in Respect of Normal Course Stock Buyback Program
Marketwire (Thu, Nov 15)

I'm not sure what the upside for the stock is, because I don't know how well WowWee has been doing or its prospects, but insiders activity tells me we're near the bottom for OPMR and the stock should rise from here. This information is enough for me to buy OPMR.

Trading Plan:

Buy OPMR, 6.66% of capital.

strange///with Etrade I get this message from my buy page, I'll have to call

Enter Order: Stocks

Orders for this security cannot be accepted online at this time. For assistance with placing this order, please call Customer Service at 1-800-ETRADE-1 (1-800-387-2331).

David, I am curious why you think it is the right moment to get in; do you believe the stock is unlikely to continue sliding. Sorry, if I missed this info in the text above. Thanks.

Quote from: berloga on December 03, 2007, 09:12:20 AM
David, I am curious why you think it is the right moment to get in; do you believe the stock is unlikely to continue sliding. Sorry, if I missed this info in the text above. Thanks.

Yes, since insiders are buying around current levels I don't think the stock will continue sliding.

But it's possible, everything is possible in the stock market. I'm talking about odds ... I mean, what's the possibility of OPMR going down further, given that it is valued below net cash levels (before the WowWee acquisition) and insiders are buying? And what is the possibility for it to go back up to $6-$7 over the medium term? I believe the latter is much more probable, but you be the judge. If you believe in technical analysis perhaps you should avoid this pick, since the trend is still bearish. Perhaps at $6 technical analysts will find it attractive, I hope so

I agree with David.
Technically speaking, technical analysis is also well known for its self-predicting prophecies.

Ok, essentially what I bought here is now a toy company:

http://www.wowwee.com/

I'm not sure what to think of these toys. I believe the Flytech Drangonfly technology has a lot of potential ... imagine if instead of an insect that was SpiderMan or SuperMan ... it would be really cool (an insect is also cool).

Time Magazine wrote it's one of the best inventions of 2007:

November 12, 2007
WowWee's Award-Winning FlyTech Dragonfly Named one of TIME Magazine's Best Inventions of 2007

hmm, if it was invented in 2007, it didn't exist in 2006 ... is this a hint that 2007 results are better than 2006? Retail price at $49.99 seems cheap, considering the technology.

We don't know much about WowWee's financial condition, so the investment is based on the strength of the balance sheet and insider's actions in the open market. 12 insiders paid $4.21 for their shares in November 12th, 2007 (the stock was around that price at the time) and the CFO recently bought 30,000 shares in the open market at $3.42 and $3.43.

We know the following about WowWee:

• Optimal Group to Acquire WowWee
Marketwire (Thu, Sep 27)

«In 2006 and 2005, WowWee's revenues were approximately US$117 million and US$131 million, respectively, and earnings before interest, taxes, depreciation and amortization were approximately US$5 million and US$27.5 million, respectively.»

Results seem to be trending down, but one can't make a trend using just two data inputs. OPMR's market cap is $86 M, so if 2007 resembles 2006, and just considering WowWee, it is trading at 17 times EBITDA. If 2007 resembles 2005, it is trading at 3.1 times EBITDA, a big difference.

We'll know about WowWee's current results in the 4th quarter earnings release, probably in February 2008. In the meantime I'll keep the faith based on insider's purchases.

Oh boy, I didn't put the right chart here ... only today Bourbon warned me through private message (thanks Bourbon ). Guys, whenever there's a mistake, please don't hesitate to point it out.

OPMR ... insiders bought above the current price, the CFO bought around yesterday's close. The company used to have $4 plus in net cash per share, but now it made an acquisition. Nobody (except the insiders) know how WowWee has been doing, and insiders have been buying. That means they see today's share price for OPMR as a bargain. And who knows better than them? They're the only ones in the know ... the only thing sellers know is the chart is bearish, but you know that can change pretty quickly.

Just give us a white marubozu and people will believe.

I'll keep holding OPMR for the long term.

The Robosapien toy has been around for a while and last year my 8 year old son HAD to have one. It was, like most toys, a fad, and after last year's holidays it was discounted everywhere. I didn't see anything that Wowwee makes that really juiced up my kids' enthusiasm this time around. My daughter loves Hannah Montana and so I'm sticking with JAKK and not getting into OPMR for the time being...

I would have to ask David what brought him to this stock in the first place, admittedly not knowing much about Wow wee. Is it solely because insiders bought some stock? Whats the WOW factor here? I certainly can't see it. Theres no convincing story on this one, why would anyone buy?

And what about "diworsification"?

Quote from: capricho on December 06, 2007, 12:11:00 AM
The Robosapien toy has been around for a while and last year my 8 year old son HAD to have one. It was, like most toys, a fad, and after last year's holidays it was discounted everywhere. I didn't see anything that Wowwee makes that really juiced up my kids' enthusiasm this time around. My daughter loves Hannah Montana and so I'm sticking with JAKK and not getting into OPMR for the time being...

Thanks for the information capricho. I also wasn't all that excited about WowWee's portfolio of toys. The market didn't like it either, as you can see on the chart below.

QuoteI would have to ask David what brought him to this stock in the first place, admittedly not knowing much about Wow wee. Is it solely because insiders bought some stock?

There's more to it. Before the acquisition the company had $4.03 net cash per share. Also, after the Law banning internet gambling for Americans, everybody thought OPMR would basically run out of business ... this is why it was trading near net cash levels. But guess what? Over the last couple of quarters OPMR was profitable (just $0.03 per share, but ...)

QuoteWhats the WOW factor here? I certainly can't see it. Theres no convincing story on this one, why would anyone buy?

You should ask that question to the 12 insiders and the CFO of the company. I buy because I see the stock is very cheap and they're buying. Also, the number of shares outstanding has been reduced, this company is buying back shares.

QuoteAnd what about "diworsification"?

I think this is different BigSully1, due to external factors, the company's core business was almost destroyed ... they had to do something with their big cash pile.

I'll keep holding OPMR.

OPMR has been responding negatively to the 50 days simple moving average, as you can see on the chart below. This SMA currently stands at $4.28.

If I were a technician I would probably take profits there, but as I look at other factors, like for example the price insiders paid to buy shares recently ($4.21), I don't feel like taking profits so low.

There's a good post on Yahoo Finance:

Why OPMR bot WOWWEE – top toys for 2007

It seems the Flytech Drangonfly, launched in March 2007, is getting traction. Maybe it will be enough to replace Robo Sapiens as the company's hot toy ... if Wow Wee manages to make anything near what it did in 2005 I would say OPMR bought it very cheap.

We'll find out when the company reports 4th quarter results. OPMR bought WowWee for a reason, and insiders also had their reasons to buy shares at $4.21.

I'll keep holding OPMR.

OPMR was the sole green light of the Main Portfolio yesterday. We have to give the stock some credit for that. But, until we crossover above the 50 days SMA we're not out of the woods in technical terms, as we've just seen with SIX.

If I were a technician I certainly wouldn't buy OPMR here. But I'm not, because technicians are always changing their opinions and can't invest for the long term, because stocks are too volatile and the charts give them many false signals.

Now pay attention to the fundamentals and read the 3rd quarter earnings press release:

• Optimal Group Announces Third Quarter 2007 Results
Marketwire (Tue, Nov 6)

"Adjusted earnings" were $0.13 for the quarter. GAAP net income was just ($0.02) per share, a  $413 K loss, not a big deal. Adjusted means "without the mess that will soon be over" to me. And that's $0.52 EPS for a full year, still without the Wow Wee acquisition, which I believe is a profitable company, or at least it has been profitable.

I'll keep holding OPMR, despite the chart.

OPMR couldn't cross above the 50 days SMA at its first attempt. The stock still has some work to do, but I'm confident that the low was made due to the various factors I've already explained.

Not much else to do but keep holding and waiting.

The 50 days SMA continues to reign in OPMR's land. If you believe in charts perhaps it is a good idea to wait for a bullish breakout above the 50 days SMA before buying this one. Currently that moving average stands at $4.16.

I got in at $3.59 and sure hope that you or anyone else waiting for a technical signal will end up paying more than I did for their shares.

Anyway, the problem I have with following the chart isn't the entry timing, but the trembling hands after I buy. You see, if I were to buy due to a bullish crossover between the price and the moving average, to be coherent, I would sell whenever there's a bearish crossover, that is, whenever the price falls below the 50 days SMA. Acting this way I could never hold a stock for the long term and would be doomed to be a short term trader, always getting in and out of stocks, because no stock ever goes straight up without periods of weakness.

Moving away from this philosophical discussion on technical analysis, I see that WowWee's products aren't distributed in Europe, currently the largest consumer market in the World. They're not for sale in China or Japan either.

It appears to me that OPMR's first objective when they announced the WowWee acquisition makes sense:

«- Expanding sales and distribution through a broadening of the sales channels, particularly outside North America and in emerging markets;»

Insiders believe in OPMR and bought many shares around current levels. I'm also a believer, I'll continue holding OPMR for the long term.

I'v noticed at my local ToysRUs and Target stores that the WowWee products are just sitting on the shelves and seem to get little interest from customers. Could just be a fluke. From personal experience my two kids are not interested in any of the 'Robo' toys.