Small cap power: CIMT

[David Randolph]

As realcoolhead once said, small cap momentum + value stocks are the bread and butter of the Main's Portfolio performance, the way to really outperform the general market.

Yesterday CIMT came up as an interesting situation and turnaround story:

• Cimatron Reports Operating and Net Income in the Fourth Quarter and Full Year 2006
PR Newswire (Mon 5:05am)

I find the company appealing, not just because of the financial turnaround, but because it is a small software company with great potential:

«Cimatron, Ltd. engages in the design, development, manufacture, marketing, and support of a family of computer-aided design/computer aided manufacturing (CAD/CAM) software products. Its products primarily include Cimatron E, which provides tools, applications, and process-automation solutions for the tooling industry; Cimatron IT, a family of integrated software tools for mechanical engineering and manufacturing automation; and QuickConcept, a preliminary design and review package that allows tool designers and their suppliers to hold virtual review meetings over the Internet. The Cimatron E product family includes various modules, including Designer Solution that provides users with 3D design and modeling capabilities, and associative 2D drawing and sketching functions; NC Solution, which offers milling, drilling, simulation, and verification capabilities up to 2.5 axes + 2X Positioning; Master Solution that includes various features of the Designer Solution and the NC Solution integrated into an end-to-end system; Electrode Solution, which includes various tools necessary to create and design electrodes out of a given part model; Electrode Pro Solution, which includes the tools necessary to create, design, and manufacture electrodes; Cimatron Student Package, a limited Cimatron package for students� home use; and View Only System that provides tools to view and check CAD/CAM projects. The company sells its products to various industries, including automotive, aviation and aerospace, household goods, mold and die making, machinery and tools, and telecommunications. It distributes products directly in Israel, and through a network of independent providers and distributors, as well as through subsidiaries in the United States, the United Kingdom, Canada, Germany, China, France, and India. Cimatron was founded in 1982 and is headquartered in Givat Shmuel, Israel.»

The company recently released a new version of its flagship software product that apparently has many new useful functionalities:

• Cimatron's New Version 8 Receives High Praises From Customers and Analysts
PR Newswire (Mon, Mar 5)

Here's the complete video analysis I made for CIMT:

The trading plan for CIMT is:

Buy 6.66% of capital between $2.90 and $3.20. Don't put orders over the pre-market, just when the market opens.

(The stock will also be bought for the 3 Stocks on Fire Portfolio, 33% of capital there)

[gix330]

Hi David,
CIMT was trading at low volume before yesterday, and do you think it would break 3.00 again soon?

[David Randolph]

Hi David,
CIMT was trading at low volume before yesterday, and do you think it would break 3.00 again soon?

Hi gix330, I don't care about the short term. I need you to focus on the long term and fundamental analysis. If the company just maintains what it did in the 4th quarter (but I expect growth, look how its operations in China grew 80% from a year ago levels) I think at least a double to $6 is a sure thing throughout 2007.

Volume doesn't matter, only value matters.

Stick with it, I'll update this analysis everyday with new information. Thanks

[gix330]

Hi David,
Thank you for your advice. I'll continue to hold it on long term.

[Se7en]

Hi David,
CIMT was trading at low volume before yesterday, and do you think it would break 3.00 again soon?

Hi gix330, I don't care about the short term. I need you to focus on the long term and fundamental analysis. If the company just maintains what it did in the 4th quarter (but I expect growth, look how its operations in China grew 80% from a year ago levels) I think at least a double to $6 is a sure thing throughout 2007.

Volume doesn't matter, only value matters.

Stick with it, I'll update this analysis everyday with new information. Thanks

David, CIMT is a very very low volume stock looking at the past months, won't this give trouble when trying to get out some day? There were days volume was 0!!! 
Often I heard you say you didn't like a pick because of the very low volume, what's the difference with this one,  do you think average volume will increase dramatically from now on?

[David Randolph]

David, CIMT is a very very low volume stock looking at the past months, won't this give trouble when trying to get out some day? There were days volume was 0!!!   
Often I heard you say you didn't like a pick because of the very low volume, what's the difference with this one,  do you think average volume will increase dramatically from now on?

Volume is low because the company didn't increase its share count for the past 10 years (which is a very positive development) and insiders hold 65% of the shares, which is another positive.

If you feel you don't have patience, please get out of the stock, as there will be days where there won't be any volume. Anyway, that doesn't change my long term view of this being a $320 M market cap, which is 14 times more than now.

I don't consider volume all that important anymore, not for long term investments.

[mbaugh]

Although CIMT had virtually no volume in the past, yesterday's volume changed that going forward.  The stock basically had zero interest since it was not an impressive company financially, but since management has been restructuring and cutting costs as well as launching new products the future looks bright and with over a million shares yesterday, that's an impressive change of course in regards to volume.  The same thing happened with OFI, virtually no volume and now it has decent trading volume.  I believe the big funds will start adding CIMT and this will lead to higher volume days.  I see at least $5 with a month since it is a low market cap company and with large funds buying into a small market cap company; this itself will propel the share price to new highs. 

[eggman11]

David, CIMT is a very very low volume stock looking at the past months, won't this give trouble when trying to get out some day? There were days volume was 0!!!  
Often I heard you say you didn't like a pick because of the very low volume, what's the difference with this one,  do you think average volume will increase dramatically from now on?

Volume is low because the company didn't increase its share count for the past 10 years (which is a very positive development) and insiders hold 65% of the shares, which is another positive.

If you feel you don't have patience, please get out of the stock, as there will be days where there won't be any volume. Anyway, that doesn't change my long term view of this being a $320 M market cap, which is 14 times more than now.

I don't consider volume all that important anymore, not for long term investments.

David,

What is your methodology in coming up with a long term view of $320M Market cap?

Thanks

[David Randolph]

David,

What is your methodology in coming up with a long term view of $320M Market cap?

Thanks

Did you see the video analysis?

[eggman11]

David,

What is your methodology in coming up with a long term view of $320M Market cap?

Thanks

Did you see the video analysis?

I just watched the video. I noticed over the past 4 quarters. It has been up and down 1Q was positive 2Q and 3Q were at a loss and 4Q was positive. Do you think their earnings will be more stable going forward. Over the past few years their revenues have gone up and down slightly, but have been flat. What makes you believe that this company can consistantly grow earnings 20% a year going forward?

Are the software products they sell a one time fee? or are the licensed from the company on a yearly basis?

Thanks

[David Randolph]

Thanks for the great questions eggman11

Do you think their earnings will be more stable going forward?

Yes, because, look here:

«Revenues for the fourth quarter of 2006 were $6.0 million, representing 11% growth compared to $5.4 million recorded in the fourth quarter of 2005. Software product revenues in the fourth quarter of 2006 increased 23% compared to the same quarter in 2005.»

If they just maintain the $6 M a quarter revenue, they will achieve $24 M in 2007, which is 12% more than the full year 2006 number. But I expect strong quarterly revenue growth, mainly due to this:

«Cimatron's subsidiary in China achieved 80% revenue growth in 2006.»

They're making a strong bet in China, look at their worker distribution:

«As of May 31, 2006, we employed 203 full-time personnel, of whom 59 (most of whom hold advanced technical degrees) were employed in research and development, 125 were employed in marketing, sales and customer support and 19 were employed in various administrative, information systems and management positions. Of these employees, 100 were employed in Israel operations, 21 were employed by our North American subsidiary, 33 were employed by our German subsidiary, 3 were employed by our French subsidiary, 1 was employed by our Japanese subsidiary, 3 were employed by our British subsidiary, 39 were employed by our Chinese subsidiaries, and 3 were employed by our Indian subsidiary.»

What makes you believe that this company can consistantly grow earnings 20% a year going forward?

I said 20% average annual revenue growth and 15% net profit margin over the long term, since this is a software company. Net profit margin was already 10% in Q4 2006 and I expect this number to rise as revenues grow.

Are the software products they sell a one time fee? or are the licensed from the company on a yearly basis?

There's recurring revenue, look here:

«We derive revenues mainly from (a) sale of our products, including software and hardware components, and (b) services which include primarily maintenance fees and the provision of technical support for our software products and, to a lesser extent, fees from the provision of engineering, training, consulting and implementation services. Revenues from sales of our products are generated by a relatively large number of sales and no one customer accounts for a material portion of our revenues. We provide maintenance services pursuant to maintenance contracts, which either provide for annual maintenance fees or for the payment of maintenance fees upon the provision of upgrades to our products. Generally, maintenance contracts are for a one year term. It has been our experience that most of our customers who purchase maintenance contracts elect to receive maintenance services from us on a continuing basis. While customers in most markets do purchase maintenance services from us, our customers in the Far East (other than in Japan) generally do not purchase maintenance but instead purchase product upgrades on a case-by-case basis.»

CIMT is just a $23.3 M market cap company, without any dilution over its 11 year history as a public company. I believe risk is low and the upside potential is very high.

I'll continue studying and holding CIMT, I hope eggman11 or others have more questions

[realcoolhead]

David, is there a reason that you didn't buy OFI back? It seems holding very well.

Also, would you like to take a look at NVTL? As I look for exceptionally strong stocks on the pullback, this one kept poping up on my screen.

By the way, I am very pleased with the new direction 3SOF is going. 

[David Randolph]

David, is there a reason that you didn't buy OFI back? It seems holding very well.

Well, I love the stock, but I'm expecting people to sell it because of losses elsewhere. I have this hope that I'll be able to recommend it at the 50 days SMA support, currently at $4.78.

Also, would you like to take a look at NVTL? As I look for exceptionally strong stocks on the pullback, this one kept poping up on my screen.

Great eye realcool, at first sight NVTL looks very attractive, I'll make a more in depth study on it today.

By the way, I am very pleased with the new direction 3SOF is going.   

When one has a realcoolhead to point the way, it's easy to go the right way

Just one thing, if your system is to follow the Main's strategy, you shouldn't have closed those individual stock's short positions, being "nervous" isn't a sound motive to exit a position. But, well, you also ain't no super man and everybody makes his own type of mistakes (and the jury is still out on the outcome of those trades).

Thanks

[realcoolhead]

Cool. I guess that's how you decided to buy SILC back since it sits right on the 50-SMA.

I am no superman.  I am even far from having a real cool head...  That remains my goal and I will try to be as cool as possible though.   

Regarding my decision to close those individual short positions: I figured one has to invest/trade within his own emotion tolerance, otherwise life will be less pleasant... right now I conclude that individual shorts are just not cup of my tea. Nevertheless I trust your directional call on the market, so I not only doubled down on SDS that day, I even bought a double sized QID the next day. I reasoned that if the market goes down further, I will make less money than 3SOF, but I will still be happy; If the market goes up, the loss on SDS/QID most likely won't be as much as those individual positions.   

I guess if we really have a full-blown bear market, I will be more comfortable to get into the individual short positions.

Well, I love the stock, but I'm expecting people to sell it because of losses elsewhere. I have this hope that I'll be able to recommend it at the 50 days SMA support, currently at $4.78.

Just one thing, if your system is to follow the Main's strategy, you shouldn't have closed those individual stock's short positions, being "nervous" isn't a sound motive to exit a position. But, well, you also ain't no super man and everybody makes his own type of mistakes (and the jury is still out on the outcome of those trades).

Thanks

[David Randolph]

Regarding my decision to close those individual short positions: I figured one has to invest/trade within his own emotion tolerance, otherwise life will be less pleasant... right now I conclude that individual shorts are just not cup of my tea. Nevertheless I trust your directional call on the market, so I not only doubled down on SDS that day, I even bought a double sized QID the next day. I reasoned that if the market goes down further, I will make less money than 3SOF, but I will still be happy; If the market goes up, the loss on SDS/QID most likely won't be as much as those individual positions.

I agree. But maybe you have just a bit of something in you against wishing things to go down ... you rather buy something that goes up, even if it is a bearish directional trade.

I guess if we really have a full-blown bear market, I will be more comfortable to get into the individual short positions.

Yep, good idea. Against that you just have the 1929 crash when the Dow went down 48% in a couple of months and the 1987 crash when it went down 34% in just two weeks.

The study of these two crashes was what made me go from long to short so rapidly, when the market fell so much with that kind of volume on February 27, 2007, I was afraid the market could just crash right there.