Comverse Technology - Takeover on the horizon? "The Greatest Stock Story Never Told"

In my early days as a stockbroker, I worked for a small investment banking firm who participated in underwriting small speculative growth companies that mainly traded as pink sheet stocks. Nine out of ten companies in this arena never make it, but i was fortunate enough to embrace one that was my greatest lesson in what can happen if you buy a stock for the long term.

I also learned what can happen if you don't stay with your beliefs and bail on a stock too early resulting in years of kicking myself and muttering of what I should have, could have, would have done.

The company I am referring to is my first stock pick from 1989, Comverse Technology (CMVT -OTC).

This company's storyline sounds like the trailer for the movie Gladiator where Commodus says to Maximus,

"The general who became a slave. The slave who became a gladiator. The gladiator who defied an emperor. Striking story!"

Comverse's storyline goes like this,
"The company who began as a penny stock. The penny stock that graduated to a Nasdaq listing. The Nasdaq stock who became an SP-500 component. The SP-500 component that fell from grace back to the pink sheets. Striking story!"

Unless you were a shareholder these last few years.

Even more intriguing was last year's worldwide manhunt for Kobi Alexander, Comverse's CEO for many years, who stepped down last year as a result of an improper options back dating probe that began and is still ongoing. Mr. Alexander made a lot of money for shareholders but apparently "greed" took over and he made a fortune by backdating options at low prices illegally. This was so unnecessary since he was doing what we as average investors expect a chief executive to do and that is increase shareholder value. For this he should be remembered as the model for success building a company from obscurity to an institutional darling, but for some reason he chose the path to riches by cheating rather than staying the course and continuing to build a telecom technology powerhouse.

I was buying this stock for clients at $.18c per share in the latter part of 1989. Yes, I was recommending a speculative penny stock in my early days while building a client base. Why? Because the company at the time represented what every investor looks for when they research a company before investing in it. The company was on the technological forefront developing telecommunication systems that provided messaging services and voicemail solutions. They were signing up customers left and right and these customers were major telephone giants throughout the world. Their telecom systems were purchased by governments. The company was building a foundation for remarkable growth. Growth that took this stock from $.18c a share to north of $100 per share over a 10 year time frame.

Unfortunately, I went from the penny stock firm to Lehman Brothers and began buying stocks that were more mainstream and were household names for the average investor. I stopped buying Comverse, and in fact sold what I had for clients in early 1991 and what a mistake that was. If I had held the shares for my first few clients in the early days, I would have been a multi millionaire by now with probably the greatest stock story anybody could tell. But I bailed early and watched the company woo Wall St. and begin it's meteoric ride to SP-500 status. What a lesson, the $100 million dollar lesson considering how much stock I had for clients ($10,000 turned into $8 million in about 10 years and I had about $100,000 worth of the stock total for clients). But a lesson I hope all my readers will learn about long term investing.

Today the stock trades on the pink sheets at around $16 per share and Wall St. is buzzing about a possible breakup of the company's divisions which analysts say is the best strategy that will represent good value to investors. There were even rumors of a takeover from Oracle that surfaced in September. Just in the last few months the company has announced several new telecom contracts and new product announcements that revived my memories of this active pace of new client deals 20 years ago. They still to this day provide major carriers like AT&T, Verizon and Sprint with their messaging technologies and continue to be a leader in this area supplying companies in as much as 130 different countries. Even the new Apple IPhone success has implications for Comverse.

This is not a typical Pink Sheet penny stock fundamentally with $1.43 Billion of cash on the balance sheet ($11.50 per share) and revenues north of $1 Billion. Institutions still own almost 20% and there are price targets by some analysts in the mid-twenties. So buying the stock at $16 seems like a good bargain just as it was 20 years ago at $18c.

Investors should be aware that the company still has delayed their audited financials which has been the main cause of the Nasdaq delisting, but I am anticipating they may be coming out of this two year scandal by early next year and new organizational changes will probably accelerate this process. Any potential takeover players may be waiting for these events to come to closure and the bad boys of the stock option scandal are now separated from the company. Earlier this year Comverse Technology also named a new chief executive. Former AT&T Wireless executive Andre Dahan who agreed to take the CEO job on April 30.

Whatever the end result will be, I am going to make a bold prediction that the company will be bought out next year and buying the stock at these levels could reward investors handsomely. I never made a buyout prediction before so it seems even more appropriate to make one on the greatest stock story in my investment history. I have high hopes that the company can put the past behind and move forward at doing what they do best, providing integrated software, systems, and related services for multimedia communication and information processing applications.

Could this be the beginning of a new era for Comverse? Time will tell, but considering my history with the company, I am going to give them the benefit of the doubt. Certainly, playing the stock on the market's recent weakness and a possible year end tech rally makes timing this stock now a prudent strategy.

I do not own the stock as of this post but will be adding it on the next down day for the stock market. I dont own a multi-million dollar voice messaging system.

What is in Santa Claus' stock portfolio this year? Nintendo and Apple probably

The Holiday season looks like it might be rough for retailers given that the average American family will probably be spending a week's paycheck for gas just to get to Wallmart. So what will Santa Claus be busy lugging on his carbon emission free sled? One of the CNET editor's top holiday gift picks, the Nintendo Wii.

The first thing that all investors should consider before buying stock in Nintendo (OTC:NTDOY), Japan's interactive game manufacturer, is that it trades as an ADR and is quoted as a pink sheet over the counter stock. Unlike other pink sheet stocks this stock is much more stable than the average penny stock. Another thing that investors should take notice of is that through all the market turmoil in the last year, this stock has more than doubled. Starting at about $32 per share at the beginning of 2007, it has risen to as high as $78 and has like many other stocks dropped almost 20 percent in the last couple of weeks with the market correction. Unlike some toy manufacturers whose stocks have suffered losses this year due to product recalls as a result of well publicized Chinese lead paint stories, Nintendo's got game, literally.

This meteoric performance for Nintendo stock began with the launch of their Wii product and sales have been booming as evidenced by retailer reports of shortages of the game console. Sound like an Apple story? Sure does, and speaking of Apple expect them to struggle keeping products on the shelf as gadget hungry consumers gobble of their technological marvels after the Thanksgiving weekend also.

These market corrections are a trader's paradise and an investor's opportunity. Just when it seems like there is nothing but bad news and extended bearishness, the market surprises and comes roaring back. I have seen this happen many times in the past and the end of year seasonal upside phenomenon will probably not disappoint again.

This market will probably stabilize over the course of the next couple of weeks paving the way for a Santa Claus rally at the end of the year. Of course if the average investor or the market gets naughty, then they both can expect to get Iceland's early versions of Santa Claus and a big fat potato to claim as your year end gift deduction or tax loss, whatever the case may be.

I have increased holdings over the last few days with the correction and have reduced my short positions. I currently have a position in Apple but not in Nintendo as of this post. If the market has more weakness over the next couple of days, I will be adding to my select retail positions as well as initiating a position in Nintendo.

I do not own the Nintendo Wii.

Is it time to make money at the expense of the "War Profiteers"?

As the calls for ending the war become louder, I can't help but think what the consequences could be for some of America's largest Defense contractors. As much as I don't want to see any potential cutbacks in Defense spending put our troops at a disadvantage, it seems abundantly clear some big cutbacks are on the horizon and the indexes that track this sector are sure to go lower.

I was disturbed reading today about hints of these cutbacks to come so I pulled up a couple ETFs that track the sector and couldn't help but notice performance that has outpaced the general market averages by almost two fold. The first was the PowerShares Aerospace & Defense (PPA -AMEX ) which tracks the index called the SPADE(TM) Defense index. This ETF is trading just north of $22 with a performance year to date of 27.93% and one year total of 39.41%.

The second is the iShares Dow Jones US Aerospace & Defense (ITA -NYSE) which tracks the Dow Jones U.S. Select Aerospace & Defense index. This fund's trading performance is a little better rising 30.62% year to date with a one year total return of 43.16%. This fund has a large weighting of almost 10% of one of my favorite stocks United Technologies (UTX-NYSE), but I believe this component's performance will not be enough to support this index's value.

Some components of this group have been characterized as evil "War Profiteers" and some have been exposed with amazing clarity how exactly they benefited from today's sabre rattling and war-time policies. There exists well documented scrutiny of the group as well as complete disclosure of key figures close to the Bush administration and their involvement in the War profiteering crew. Personally, I don't believe everything the Bush bashers have to say, but I am not naive either.

Whether you view these companies that make up the defense and related services as providing necessary evils, or if profiting from these entities is not appropriate for your own money because of the inherent evils that their products and services support, there can be just as much responsibility and satisfaction in profiting from a slowdown in their business which could mean a slowdown in those same evils. Either way, I can't make the case for the bullishness that existed here a couple of years ago considering today's popular anti-war climate.

From a technical perspective these two funds look overdue for a correction as evidenced by their short lived, long term charts in the last couple of years. The Ishares fund looks like a better short based on the recent market correction, but the Spade Index fund looks just as appealing and has a more concentrated focus of defense companies that are more likely to be impacted by defense cutbacks than aerospace companies that are more represented in the Ishares fund.

I would short both of them here for a longer term play to under perform the general markets in next year's pre-election anti-war rants.

I do not have a short position at the time of this post but will be looking to add positions on any near term rallies.

I do not own an airplane, missile or bomb.

Election year investing, What the next 365 days could mean to your portfolio

One year from now, I will be sipping on morning coffee while reading about who won the 2008 Presidential Elections. History has shown that the Stock Market does very well during election years, but this time around offers many more variables and an in depth study may help clear the fog.

As I witness today’s market risks and economic policy proposals as diverse as the candidates themselves, I can’t help wondering what impact these intentions will have on business, jobs, taxes, and credit.

I see an economic slowdown materializing day by day with geo-political risks continuing to rise, and an Asian bubble just waiting for a reason to burst. If Uncle Ben and his cohorts at the Fed could act with a greater sense of urgency then the recession might not come as fast and furious for the new candidates to point fingers at each other about next year. Either way our new President will have a lot on the plate to deal with and it is not looking rosy.

I decided to put together a small model portfolio of what I would like to call the Ultra Election Strategy.

Now I am not endorsing any particular candidate or party, nor am I able to predict with any certainty what new policies, foreign and domestic, will have on the performance of this portfolio. But I thought it a good time to take a look out one year from now with a few sector ETF long and short predictions. I am a big fan of the new Ultra ETFs that trade so I am tailoring the portfolio to include only theses funds.

My biggest prediction is that a democrat, probably Hillary Clinton, will win (She actually looked like a sure bet three years ago). However, contrary to the successful performance of the Stock Market under Democratic Presidents, the market under Bush has done very well and has outperformed the average year's performance while the Democrats held the big house. This could be a forewarning that times are changing and the scenario of the new President walking into a recession could make post election performance challenging for the markets. Time will tell.

I also remember with clarity the damage to big Drug stocks the first time Hillary took on healthcare, so if she moves up in the polls, I would stay clear of this group. No matter who wins, any radical new healthcare plans are sure to sharply affect these types of stocks. The following list represents the rest of the overall portfolio strategy and will be adjusted accordingly at the end of each quarter.

Prices are as of close Friday 11/2/07

$100,000 Portfolio

Cash - 20%

Bullish
Nasdaq 100 - Ultra QQQ Proshares (QLD - $120.06)
Technology - Ultra Semiconductor Proshares (USD-$82.21)
- Ultra Technology Proshares (ROM-$95.87)
Financials - Ultra Financials Proshares (UYG - $49.17)
Utilities - Ultra Utilities Proshares (UPW - $86.70)
Consumer Services - Ultra Consumer Services (UCC - $59.78)

Bearish -
Healthcare - Ultrashort Healthcare Proshares (RXD - $66.28)
Consumer Goods - Ultrashort Consumer Goods ( SZK - $64.00)
Real Estate - Ultrashort Real Estate Proshares (SRS - $98.95)


Neutral
Energy
Materials
Homebuilders

I do not own these ETFs as of this post, but I always wanted to put together an overall ETF market strategy using only the Ultra Proshares.