For 2010, selecting the Top Picks is more difficult than for 2009 because there is no fracture in the market. In fact, many believe the total market to be at or near full value. As a result, returns are likely to be more modest for the full year than the 189% return reported so far for 2009. I have attempted to find stocks that could produce performance momentum during 2010 that may be ahead of the total market. As a result, there are a few more riskier picks this year than last year.
The general themes remain the same for 2010 as for 2009. There is an emphasis among the picks on mobility - both infrastructure and applications - and on transactional systems with recurring revenue models. All of the companies on the list (so far) now have solid, or at least de-risked, balance sheets and strong probabilities of generating growth in operating earnings during 2010.
Here is the list:
Carry Overs from 2009:
DSG - Descartes Systems performance should benefit from the significant acquisition of Porthus with most of the upside appearing during H2 2010. Organically, the company may see more upside in the deployment of 10+2 reporting services. Even with the all-cash acquisition totaling $44 million, DSG should have a solid foundation with more than $50 million in the bank post-transaction. Porthus makes DSG more of a world player, and also helps to expand its transactional offering to current clients. There are integration risks, although management has proven that it can acquire and integrate effectively.
BWC - Even with its run-up in share price during 2009, there is room for more share price growth during 2010 for Bridgewater Systems. It has a strong backlog, and its client base has pressing needs to address traffic volumes caused by an increase in applications used by smartphone subscribers. 2010 should represent accelerated growth in smartphone subscribers, which adds more subscriber complexity when coupled with more application usage. The conditions remain very positive for BWC to continue to build on 2009 growth with more major long-term contract announcements during 2010.
CX - Cyberplex has had a monumental year in terms of growth in revenue, earnings and cash flow. It is highly unlikely that the Company will maintain its growth trajectories for 2010. However, it should produce solid earnings growth. Right now the stock is trading at a PE ratio of 8, which is not reflective of forward earnings potential. This is an undervalued stock based on its profile.
GXI - Guestlogix now has a balance sheet that allows it to more aggressively build its unique transactional business for airlines and rail carriers. The company spent 2009 consolidating its dominant position in the US and continues to deploy with significant carriers in Europe and the Middle East. Onboard retailing is catching on, with passengers pulling for more destination services. The company is likely to sign a slew of Pan Pacific airlines this year, and many of its merchandising live trials are scheduled to go into production during H1 2010.
New Picks for 2010:
PN - PNI Digital (previously Photochannel)has finally hit an earnings inflection point and continues to report record revenue and earnings. It has been cash flow positive for three quarters and its impressive client base continues to tap them for new programs in order to monetize digital images. Online photo management is a mundane but necessary activity, and PNI Digital is turning it into a solid, cash flowing business supported by long-term contracts. For 2010, investors should see solid revenue growth and strong cash flow. If you have developed a photo at Costco or Walmart recently, you've probably used PNI Digital and not known it.
MMC - Multiplied Media has yet to show significant revenue, but that is about to change. Its multiple award-winning Poynt local search application is a top 5 Blackberry application in all of the markets into which it is deployed. Unlike most mobile downloads, users actually use the application often. Multiplied Media enters 2010 with about 2 million users generating over 400,000 queries per day. With launches into France, Spain, and Italy this month, an iPhone launch in January, and an Android launch later in Q1 the user base and transactions should build quickly. Once the Unomobi acquisition closes during Q1, the company will be in possession of some pretty significant intellectual property that could make it a major player in mobile advertising. This is a momentum opportunity, and scaling friction is minimal.
IEE - Iseemedia has developed a solution that allows subscribers with feature phones to access email via the SMS channel. Considering that a vast majority of subscribers in emerging economies have feature phones, this is a highly desirable product in those markets. Potential was theoretical until the company announced a deal with Tata Docomo and Tata Indicom to deploy the solution to a 40 million subscriber base in India. Combined with recent announcements in Syria and China, the conditions are in place for revenue to scale dramatically during 2010. In addition, the company recently raised $2.7 million in an oversubscribed best-efforts financing to shore up its balance sheet. Currently, this is a microcap penny stock and this is a momentum opportunity which is dependent on execution by Tata.
Ultimately, this list should have ten stocks on it. Three spaces are reserved for stocks that will be added in January. Stay tuned...there may be a surprise on the list.
Disclosure: I own BWC, CX, MMC
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