Highlighted Companies EOY Update

2009 has been a really good year, but I believe 2010 will be even better. The overall markets may be a bit top heavy but I believe the Russell (micro/small caps) will outperform the major averges. I am going to start off 2010 the way I finished 2009..WORKING. I’m traveling the first week of January visiting GAXC and GLTC, and then off to visit some others later in the month. I try to keep everyone informed via my website on my thoughts on each company I’m invested in. I continue to be an advisor to ZAGG and now GLTC as I’ve always make it a point to disclose this. If anyone would like me to write on topics I have not to date, let me know. I will never charge for people to access my website since this is not my bent. I’m amazed that my website gets about 10,000 visitors a month, so please continue to comment/ask any questions. The power is in the collective.

2009 Performance

Gold Resource Corporation (GORO.OB): Two words tell the tale for GORO shareholders, “GORO TORO!”.  GORO will emerge into the elite class of low cost gold producers most likely (hopefully) within days of my posting this update.  If the metrics work out as they should, if gold stays at $1,000 oz, three years from now GORO will be producing roughly $2.25 in after tax net income, paying over $1 per share in annual dividends, and the stock will probably be $50+.  It could go down as the one of the greatest stories ever told or invested in.  I’ve been in it since $1 and it’s been a joyous ride.  The only mistake I made was not holding on to most of my shares.  But it is what it is.  GORO TORO!

ZAGG Inc (ZAGG): ZAGG went from 65c to $7 in seven months during 2009 and is now around $4.  The company will likely earn 0.20 in 2009 (give or take a penny or two), and gave guidance of 0.40 EPS for FY 2010.  With increased distribution for invisibleShield and new product introductions throughout Q4 2009 – Q1 2010 (ZAGGsparq, ZAGGskins, ZAGGfoam, ZAGGbox) continued growth looks to be all but guaranteed.  Even if the company would earn 0.30 in 2010, this growth would warrant at least a 20 PE by EPS growth standards, so I believe the stock should do well from these levels.    The company will be making a big splash at the Consumer Electronics Show in January, and it is probably when the stock will revive itself as well.

Electronic Game Card, Inc (EGMI): It’s still my largest position and my most annoying position at the same time.  During Q3/Q4 2009 Administrative blunders screwed up this perfect growth story with a fort knox balance sheet.  I’ve written over 30 blog entries on EGMI so if anyone wants a nice chronological story, it is there for the record.  Q4 WILL most likely be a record revenue and earnings quarter for the company.  With over $12 million in cash on the balance sheet, and $8 million of investments that will be monetized in 2010, the financial underpinnings of the company are very sound.  I believe the stock will make a comeback in Q1 2010.  I’m looking for a new CFO first half of January, followed by new directors, proxy vote, and more deals.  The management team will be traveling to China in January to get a better feel for the China Lottery roll out, and will likely give investors more transparency into its potential during Q1 2010.  Investors want some transparency in the New Year and I believe they will get it which will allow for some multiple expansion.

Global Axcess Corp (GAXC): GAXC manages a network of over 4500 ATMs and plans on growing this number in 2010 while also rolling out a DVD kiosk offering (similar to Coinstar’s Redbox brand).  I believe GAXC will be successful in leveraging its network of ATM’s by up selling them on DVD kiosks and other offerings in the future.  If the company were to capture a large DVD win (taking business away from Coinstar’s Redbox), not only would the fundamentals of the company change drastically, but the PR generated would be enormous.  GAXC ATM business has best in class customer service, up time rates, and payouts, so I believe the core business will continue to capture additional market share.  The company recently refinanced $1.2 million in short term debt (pushing it to long term debt) while dropping the interest rate paid on it by 400 basis points.  I find this to be an incredible achievement given the tight credit markets (especially for a micro cap). The stock is currently trading around 10x 2009 EPS, and 6x my 2010 EPS estimate.  Initial Report

GelTech Solutions (GLTC): GelTech is my newest position and a new advisory client.  They have everything I look for: 1. Good management 2. Great Share Structure 3. High Margin Buzzy Product.  Read my initial write-up to get a feel for the product(s).  It’s one of those stocks that can probably trade at $3 without profitability, but I believe they have a good chance to be profitable by Q2 2010.  The company breaks even at a $5 million annual revenue rate, and after that I expect a good chunk of incremental revenue to fall to the bottom line.   I’m looking for increased distribution throughout 2010 for FireIce and RootGel.  GLTC is going to be a fun one to watch/own in 2010.  Initial Report

Timberline Resources (TLR): Timberline Resources Butte Highlands Gold Project should be in production in a year (late 2010/early 2011).  At $1,000 Gold, TLR’s 50% ownership of the project will produce roughly $0.33/share in Net Income.  Most gold producers trade at 15 PE, so I believe this will end up being a $4-5 dollar stock in 18-24 months.  The caveat is if the management team is able to acquire another late stage property on favorable terms.  I know the management team well, and they are looking.  In the event that they add another property, thus adding another layer of revenue and net income, the potential valuation could be considerably higher.  Additionally, TLR operates two drilling subsidiaries (US and Mexico) that are currently profitable and providing cash flow to the company.  Bottom Line:  At $1 it’s a layup unless gold goes back to $700.

China Gerui Advanced Materials (CHOP): CHOP recently came public in November 2009.  CHOP is the largest high-precision, cold rolled narrow strip steel producer in China with 12.5% market share in 2008.  The company is increasing capacity starting Q3 2010 with the goal of doubling its current capacity by the end of 2011.  The capacity they are adding is for higher margin (45% GM vs 30%) coated product lines which will increase overall gross margin.  CHOP is expected to earn $0.79 in 2009, $0.84 in 2010, $1.22 in 2011, on a fully diluted, fully taxed basis.   The reason 2010 EPS growth isn’t higher is because of the expected exercise of 16 million warrants at $5; therefore, on a nominal basis net income will be increasing greatly but it will also be divided into more shares outstanding (58m FD).  CHOP is currently trading at 6.5x 2010 EPS est, so it is a very compelling buy at these levels.

Avantair (AAIR): Avantair continues to take market share and is on the cusp of positive net income.  It would take $200 million and 5-7 years to duplicate what this $60 million market cap company has done.  I believe the stock will continue to move higher as new investors/institutions stumble on this diamond in the rough of aviation.

Acorn Energy (ACFN): I’ve talked to the CEO on several occasions over the last couple years.  Acorn Energy is a private company incubator that focuses on investing in energy and infrastructure companies.  Coalogix continues to be its shining star in the portfolio and shareholders await the day that ACFN spins out this gem as a separate public company.  The CEO continues to buy stock in the open market.   When ACFN was under $3 I felt it was undervalued but didn’t pull the trigger and buy any.  Now it’s $7.  Oh well.

Disclosure:  LONG GORO TLR ZAGG EGMI GAXC GLTC CHOP.  I’m an Advisor to ZAGG and GLTC.