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Where's the Bottom? In Individual Stocks

Jonathan Moreland

It's getting more difficult to resist buying on these tremendous market dips. Although the major indices may not have hit bottom, some individual stocks we have been watching have shown obvious resistance levels during the selloff days and rebounded well during the stronger days.

The fear, of course, is that there is another downdraft to come in the market, and that the only bottoms we've seen so far this summer were viewed from behind our sunglasses on the beach, rather than from behind our terminals in our offices and homes. But we have to play the odds, and from where we're sitting, the odds that we are not far from a market bottom, and that many individual stocks may have already bottomed, have increased.

One stock we didn't wait to bite on was Microtek Medical. We mentioned last week that it would likely be the first stock we would add back to InsiderInsights' Recommended List, after its guidance of earning a penny less than expected for the year sent MTMD down to a ridiculous price. We recommended getting back in as it traded at $1.49. It has acted well since, and it is still a good bargain from where we sit.

We've noticed other potential bottoms as well. Cymer continues to hold its own around the $29 mark even after an analyst's downgrade, and any time Shaw Group has traded below $25, it has bounced back well. And surprisingly, even the horrible quarter Vitesse Semiconductor announced last week wasn't enough to drag its stock back down to the $2.29 low it hit at the beginning of July.

These are just a few of the stocks we have liked in the past that have come down with the market and now look interesting again. Most gave us (and the insiders whose purchases originally brought their stock to our attention) decent profits before crumbling. Only Vitesse insiders were just too wrong (or too early?) for us to make anything from them.

But there is a good chance that these and other stocks we have mentioned have bottomed and are arguably worth nibbling on soon, if not now. Remember to set a stop to protect your bets, though. The odds that many stocks have bottomed already may be higher now, but the odds are never 100%. For MTMD, for example, we have ratcheted up our recommended stop to $1.65 to make sure our quick gains don't become a nasty hit.

We added only one stock last week, but if today's current market action continues, we will likely start nibbling on a couple more stocks.

Scream and Shout

Network Equipment Technologies is a good example of the "evil sellers" going too far. The company just announced its first quarter (ended June 28), which supports our so far, unprofitable belief that NWK was and is oversold.

Network Equipment's top line of $27.2 million was an increase of 14.1% year over year and 1.9% sequentially. For a telecommunications equipment firm in this market, that statistic alone should tell you that this company is worth looking into further.

As expected, the company is still losing money from operations, but losses are narrowing steadily. Management still expects to be cash-flow positive from operations around Q4.

Thanks to some one-time earn-outs and insurance gains, the company also managed to end its last quarter with more cash on hand than it started with. Its $95.3 million balance now equals $4.27 per share. Even after trading up well in the wake of its results, NWK is still trading at just $4.

Going forward, management expects to become cash-flow positive with at least $80 million in the bank. Already-improving operating margins are expected to increase slightly more, and odds are that the company's new Scream and ShoutIP products (see this column for details) will continue to gain traction and enable revenues to continue inching up this year before hopefully taking off in earnest next year.

While there are no promises that Scream and ShoutIP will be widely accepted in their prospective markets, trial activity appears to have picked up, and the problems that these products address should make them winners. Even minor acceptance should help NWK holders make money.

The biggest problem we see with NWK now is volume. Although there were several money management firms on Network Equipment's conference call voicing niceties, NWK's jump on Friday was on a mere 38,000 shares. If that's not too little volume for you, NWK is worthwhile.