10 Stocks Under $10 Newsletter

[Pages:4]10 Stocks Under $10 Newsletter

Brought to you by 24/7 Wall St., LLC

November 5, 2007

1. Security Capital Assurance (SCA). The big bond insurance companies including MBIA (MBI) and Ambac (ABK) have fallen out of favor, but nothing in the industry has been beaten down like SCA. Its shares have dropped to a 52-week high of $34.58 to just over $8.00. Last week the company reported that its net loss to common shareholders under generally accepted accounting principles for the third quarter of 2007 was $89.9 million or $1.40 per share compared to net income of $28.4 million or $0.49 per share for the third quarter of 2006.The net loss per share during the quarter was due to a $143.0 million pre-tax, unrealized mark-to-market loss on financial guarantee obligations executed in credit derivative form. It is stunning that that company still has a triple A rating. But, that could change, and very fast. The ratings agencies are under tremendous pressure to take a hard look at their ratings for the bond insurance companies because the losses in the industry are an embarrassment that calls into question their analytic judgment. In addition, the trouble in the mortgage-backed securities markets could get much worse. These shares could hit $5 before they hit $10.

2. Looksmart (LOOK). This is one of the internet bubble companies that barely made it out of the 90s alive. Back in the day (early 2000), these shares traded for over $360. Now they are lucky to change hands at $2.30. The company reports earnings on November 7. On October 12, Looksmart put "change of control" contracts in place with a number of its senior management. If the company is bought out, they get nifty severance packages of up to a year of salary. Maybe the new deals are not just a coincidence. The company is very near its 52-week low, and expectations for the recent quarter are modest. Sales are only expected to move up 10% from last year to $13.4 million. EPS is expected to improve to a loss of ($.11) from a loss of ($.17) a year ago. If the company only has a modest improvement over expectations, it may take a good run.

3. Autobytel (ABTL) The last research call on this stock was an "outperform" from Northland Securities in August. The stock trades at $2.25, near a 52-week low. The high was $4.64. The share price is low, and could go lower. The car companies have developed unusually sophisticated sites for bringing in buyers and passing them off to dealers. And, companies like CarMax (KMX) also have powerful online operations. Earnings are November 8, and expectations are modest. Very modest. Revenue is expected to fall 16% to $23.7 million. It does not get a lot worse than this.

4. Qwest (Q) Rough earnings knocked this stock down from $9.40 early in the month to $7.04 at the end of last week. The firm's closest comparables are AT&T (T) and Verizon (VZ). But, Qwest has almost only landline business, the part of telecom that is dying. VZ and T have cellular operations and are building fiber-to-the-home broadband systems to compete with cable. But, Qwest management indicated that it will be upgrading its infrastructure to compete with cable. Wall St. wants big cash flow from Qwest, so investing in new tech is not what investors want. But, the big spread in valuation between Qwest and other telecom companies may not last. At these prices, the company may be an attractive takeover target for a foreign buyer, perhaps Deutsche Telekom which owns T-Mobile, the No.4 cellular network in the US. The shares are cheap here.

5. Blockbuster (BBI) The stock may seem attractive at this level, but don't be fooled. Online movie company NetFlix (NFLX) had come out with huge earnings based on a surprising growth in its online DVD subscriber base. Then Blockbuster hit the market with a revenue drop of 6% to $1.24 billion. It announced it was going to cut spending for its own online DVD business. To make matters worse, it plans to cut more people. The business of renting movies through stores was getting old five years ago. Now it is dead.

6. RealNetworks (RNWK) The multimedia company had a good third quarter, but the shares still only trade at $6.99, down from a 52-week high of over $12. For the third quarter of 2007, revenue grew 55% to $145.1 million compared to $93.7 million for the third quarter of 2006. But, a very large part of that increase came from the acquisition of WiderThan. RNWK doesn't have much in the way of promising businesses anymore. Its RealPlayer is still used to deliver video and audio on the web, but Microsoft (MSFT) Windows Media and Adobe (ADBE) Flash have taken much of that franchise. The company's online music business, Rhapsody America, compete with Apple (AAPL) i Tunes. That is a losing bet. Don't look for RNWK to improve its position. It is too far behind rivals in it two main businesses.

7. Leapfrog (LF) If there is a list of "worst managed" companies somewhere, Leapfrog should be on it. For the third quarter of 2007, the company reported net sales of $144.0 million and a net loss of $2.8 million, or $0.04 per share. This compares to net sales of $184.7 million and a net loss of $49.7 million or $0.79 per share for the third quarter 2006. The company expects full-year revenue to be down as much as 15%. The company trades at $7.64, close to its 52-week low. LF has some fabulous products including a first computer for kids 3 to 6 years old and its Leapster educational video games. The products appear to be state of the art. That means that current management can't market the stuff. Nothing will change here while the current crowd runs the place.

8. Journal Register (JRC) Newspaper stocks may be down, but not like JRC. The shares in this dog are off over 70% over the last year. Gannett (GCI) a larger but similar company is down 30% over that period. The reason is debt, debt, debt. In the last quarter, revenue fell from $122 million last year to $113 million in the most recent quarter. Operating income was just over $17 million, but interest on debt was $10.7 million. That is cutting things way too close because revenue is still moving down. Long-term debt is about $650 million. This stock could go to "zero".

9. Alcatel-Lucent (ALU) This one could be a takeover target. After the merger of the two companies, almost everything has gone wrong. But, management has been able to take hundreds of millions of dollars in expenses out. Now the company says it will cut another 4,000 jobs to save an additional $580 million. But, the board does not know what to do about the CEO. The revenue line has not picked up. In the last quarter, revenue fell almost 8% to 4.35 billion euros. While there may have been consolidation in the telecom equipment business, there is still too much price cutting and too few clients. Each time a company like AT&T (T) buys BellSouth, a big customer goes away. Ericsson (ERIC), Nortel (NT), and Motorola (MOT) are all after a piece of the same pie. The company's two largest operations are wireless and wireless equipment. Each has revenue of about $1.5 billion a quarter. Are they worth more than the company's $20 billion market cap? They may well be if they get auctioned off to some of the current competition. And, that would allow ever more cost cutting in a consolidation.

10. 8X8 (EGHT). This is sort of the poor man's Vonage (VG). The broadband Voice over Internet Protocol (VoIP) and videophone communication services company revenues for the second quarter of fiscal 2008 increased to $14.8 million, compared to $13.2 million for the same period of fiscal 2007. The net loss for the quarter was $2.6 million or ($0.04) per share, compared to a net loss of $2.4 million or ($0.04) per share for the same period in fiscal 2007. EGHT's core business subscriber base grew by about 1,000 customers during the quarter to 9,000. The company picked up some new subscribers from defunct VoIP operator SunRocket. But, the company only has $5 million of cash on its balance sheet. The stock trades at about $1.25. It's a very risky bet. But, would it be an M&A target at $77 million in market cap against a revenue run rate of $60 million. Could be, if an investor can stomach the risk.

11/05/2007 Douglas A. McIntyre douglasamcintyre@

Company Contact: 24/7 Wall St., LLC 16 East 90th Street New York, NY 10128 Tel (212) 203-0673 Fax (888) 633-0673 WWW.

DISCLAIMER: Information has been taken from sources deemed reliable, but no assurances can be made as to the accuracy of any figures, claims, or opinions. This is intended for informational purposes only and is not to be interpreted as investment advice or as a recommendation to buy or sell securities. Neither the company nor its officers are licensed brokers or investment advisors. It is the sole responsibility of each individual to

do their own research and form their own opinions. Neither 24/7 Wall St nor its officers assume any responsibility or liability for gains or losses, and neither holds any material knowledge or inside information regarding the companies noted herein. Investing involves a high degree of risk and you should contact your own financial advisor before making any investment decisions.

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