The Disciplined Investor: Black Friday Bargains

This first shopping day of the holiday season, customers are looking for bargains. As investors, we are looking for bargains as well, and one corner of the "store" that we call the stock market is full of them -- namely, smaller-cap names trading at or below cash value.

Last week, I posted a list of some ideas in this category of so-called "cigar butt" stocks. Whether the market has bottomed or is poised for more carnage, the best way to protect your capital (other than to sit in cash) is to find ideas that are so compelling you are willing to commit capital to them. Today we'll drill down on a few interesting ones.

---

CryptoLogic (CRYP - commentary - Cramer's Take) sells software that operates online casinos, such as this one for Party Gaming. (U.S. readers, you can look, but you can't touch. Internet gambling is illegal and you will get screened out.) The company made a promising but ultimately unsuccessful foray into online poker, the losses for which are masking the strength of the casino business. New management is shutting down the poker operation, which will save the company $2 million to $3 million a quarter. The company had an operating loss of $2.5 million last quarter, so just the poker savings alone can move it to profitability; additional easy cost savings initiatives should return the company to solid profitability within two quarters.

Click here for larger image.

Meanwhile, the stock is trading at $2.13, even though it has $3.09 of net cash. The stock is trading so low because the market clearly does not believe the losses are going to end. If they do, the stock will be a rocket. I estimate that CryptoLogic can earn 35 cents a share in 2009 and over 50 cents per share in 2010, using very conservative assumptions, such as almost no revenue growth.

I've written on CryptoLogic in the past, and I have been wrong on it in the sense that market sentiment has gotten far more bearish on it than I ever expected. Yet, so far the company is executing as expected on fixing the business.

---

At the time of publication, Dvorchak was long CryptoLogic and Cogo Group, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.