Best bargain on the market today.  I traded this stock months ago and made money.  They met expectations and were hammered for the market.  Previously, they had a high P/E ratio because they were such a high growth company.  Simply meeting expectations didn't cut it for the market.  However, I think the market overreacted.  Read the google discussions post here for some decent analysis. If you don't feel like following the link, here is what one of the guys there has to say:

"I apologize for the typos in the previous post. I did it in an extreme
hurry yesterday.  I wish the posts here could be edited or deleted,
but obviously they cannot be.  The following is the corrected post.
This corrects typos and makes a few amendments on the description, and
is meant to completely replace the previous one.

The market is completely misunderstanding the data. The annualized
earnings rate based on the last quarter (ending December 2007) is
nearly $.60.  The forecast for annual revenue growth is 28%.  And also
importantly, the company forecasts a cost increase rate of 20%, below
the forecast revenue growth rate of 28%. It is mathematically
significant that the increasing rate of cost is lower than the revenue
growth rate, because this translates to an earnings growth rate
significantly higher than revenue growth rate. For any company, if the
cost increases at the same rate as the total revenue, the earnings
will also grow at the same rate. If the cost increases slower than the
revenue, earnings will grow faster than the revenue. This is pure
math.

In the case of Ceragon Networks, for example, the earnings will grow
at annual rate of 28% even if the cost grows at 28%, the same rate as
the revenue growth. If the increase of cost turns out to be close to
the lower 20% forecasted by the company, you will actually see the
earnings growing much faster than the revenue growth rate (forecast
28%). The math here is a bit more complicated, and the actual numbers
also depend on the current profit rate. The calculation would go like
this:

Earnings growth rate = (revenue growth rate x revenue - cost growth
rate x cost)/earnings

= revenue growth rate + (revenue growth rate - cost growth rate) x
cost/earnings

You can see there is an extra contribution to the earnings growth rate
on top of the revenue growth rate. The extra contribution is
proportional to the difference between revenue growth rate and cost
growth rate. Of course, this term would become a minus if the cost
growth rate is greater than the revenue growth rate.  So it works both
ways.

Also significant in the above formula is the factor "cost/earnings".
The formula shows that, a growth rate difference (revenue growth rate
- cost growth rate) translates to an extra earnings growth rate with a
multiplication factor of "cost/earnings".  The higher the current cost/
earnings ratio (a term inversely related to profit margin) is, the
greater the extra contribution to the earnings growth rate.  This may
strike you as counterintuitive, but it really should not.  It
basically means that it is easier for a company that has a low profit
margin to grow its earnings at a faster rate.

Now, let's plug in the current members of CRNT:

revenue growth rate = 1.28 (28% increase);
cost growth rate = 1.20 (20% increase);
(revenue growth rate - cost growth rate) = 1.28 -1.2 = 0.08; and
cost/earnings ratio = roughly 10 (equivalent to a present estimated
profit rate around 8%).

You would have a shocking 2.08 earnings multiple, which is a 108%
growth. Actually, this is very much what happened in 2007, in which
the revenue grew at 49%, but earnings grew well over 100%. Of course,
the above numbers for 2008 forecast can only be as true as the assumed
growth rates based on the company forecasts.

The bottom line is that, if the revenue growth rate is close to 28%,
and if the cost increases slower than 28%, the earnings will grow
faster than 28%. For each percentage point the cost growth rate is
below the revenue growth rate, the earnings growth rate will receive
an additional 10 (not 1) percentage points contribution. For example,
if revenue grows at 30%, and cost grows 5% slower than that (that is,
25%), the earnings will grow at 30% + 10x 5% = 80%.

Now back to the current price of the stock. With annualized earnings
based on the last quarter reaching $.60, we are looking at a PE ratio
of 14 at the present price. That's insane, unless you believe the
company's earning growth rate is going to be no higher than 10%
annually. The calculations above show that the company is actually
forecasting, implicitly, an earnings growth ratio of 100% annually.
But let's be conservative and cut that in half to 50%.  We would be
looking at a fair price of this stock at $18 if you believe a P/E of
30 is reasonable for a company whose earnings grows 50% annually; or
much higher than $18 if you use the conventional rule of thumb of
pegging P/E roughly at the credible annual growth rate.

The market is insane in terms of its emotion, and stupid in terms of
its intelligence. "  credit to whomever nobodes@gmail.com (some guy that I don't know).

Of course, I've followed this stock for months and months, so please don't think that I'm buying based off a random comment on the Google discussion board.  Generally, I agree with the above analysis, and although $8.42 may not be the bottom, I think CRNT is a buy at current prices. 

The stock is trending down because the market mis-interpreted the last earnings statement, which wasn't even "bad".  They met earnings, but they didn't blow out earnings, which is what the street wants.  Here are my guesses on why the stock is down: When the market is uncertain, people tend to sell off the stocks that they hold the least security, which is small cap stocks like CRNT.  As the stock was trending downward anyway, a bad day for the market only exaggerates the situation.  OR, you could be right and there may be bad news on the way.  But, my guess is that the market is just beating up the stock.  I thought it would bottom out in the 8's, but I may be wrong.  Another one of my small caps, TCHC, which had a stellar earnings season, is up 3% today.  Of course, TCHC deserves to trend up and the conference call was pretty clear about why it should trend up.  High growth companies like CRNT often trade at many times (30x, 40x) what they're worth and when an earnings season doesn't "blow away" the street, they sometimes get hammered back down to a much lower multiple. (Even Starbuck's coffee is suffering from this - their one year chart shows what I'm talking about.)   Anyway, CRNT is still a pick that I like, but I'm not sure when the downward trend will stop.  It's oversold, in my opinion, and I may have to wait a while to see higher prices, but I'm pretty confident in it.  TCHC shows some resistance at $13ish, but I'm in at $13.55, so I can either sell and try to buy back in at a lower price or ride it out until the market takes a greater notice of them, which could potentially be the next conference call in may.  However, it's likely (in my opinion) that an analsyst will notice TCHC eventually and make an upgrade and we might see a boost on that one.  Anyways, I'm rambling now, so sorry about that.  -- But look, the market is in bad shape right now.  That's why I'm not overly worried at being a little down on a few trades.  I'm getting in on these stocks at what I consider fairly low buy-in prices, and if/when the market recovers, I should be in decent shape.  At least that's my take on the situation. 

Anyways, their could be bad news, but I figure it's just the stock still trending downward on a good day.  Last year, I bought this stock for about $9 and sold at $12.  It eventually hit the $17-$18 range.  I figure those days are coming back later this year.  I can ride the wave and sell on a bounce, or I can wait for the long play. 

Ok.

Hope you don't mind, but I joined in on ya with this one. I may do this from time to time because I like your clear thinking on things. Eventually I'll become more original in my thinking but for now I like to see what others are buying and why, do independent research and try to see what they see, and go from there. 

An off topic question for you: You ever read morningstar.com? I'm a subscriber for the time being as I don't mind investing in education that will pay off in the future. Your style and theirs have their points of contention. They go long and you go short.  My question is if you've checked them out, what do you generally think about their analysis? (they do not cover this stock at this time)

As for this stock, I can go long or short. My tendancy is wanting to go short for the time being.

Later man.

ReformedPatriot,

Don't ever worry about joining me on a trade.  Just beware of trusting my decision making too much! :)  I try to lay out why I make my trades, but occasionally, I do get burned.  In the past, I've always been burned by selling too soon, rather than too late, so I always try to pick companies with good fundamentals (except for BRLC, which I sold) in case I have to hold for a while.  CRNT does backend services for cell phone companies, and they're been growing at a steady clip for the last few years.  I've been watching them for months, and without going into all the details, I've got confidence in them. However, I'm not sure where they are going in the next few weeks.  They're either going to bounce off this low, or break through resistance and set a new bottom, which would stink.  However, I don't think this is one that's going to stay beaten down for long, if it gets beaten down at all.  That's why I decided to buy at the month low.  In fact, if you look at the chart, we got in at near the three month low.  The stock has routinely traded between $8.75 and $9.25 over the last 3 months. Anyway, even if it bottoms out a little more (we'll find out tomorrow), I feel pretty happy with my buy in price.

So far as Morningstar goes, I don't pay for any subscriber services from any company.  The basic info found in most of that stuff is available for free (although not in as much detail) on the net.  Although I do think that having it all in one place is nice.  So far as subscription services go, I don't think they are a bad thing, so long as they aren't overly expensive.  Having access to some professional opinions is nice, and I've considered subscribing to a couple of them before, but I've always felt like I do ok without them, so I usually decide not to spend the money.  I tend to look for stocks that get noticed before the subscription sites notice them.  That way, when they do get noticed, I get a nice pop on the sudden buying interest.   Of course, I can never tell when/if they're going to get noticed, I just try my best to pick good companies and ride out my decisions.  One thing I do like about the subsciption sites is that they usually have good write ups about the overall market, larger events moving the market, and companies that I don't usually follow.  If I'm weak in those areas (and I often am), that info can be handy for education purposes.  Realistically though, I barely have time to read the msn "moneycentral" page in the mornings, much less get thorough use out of a subscription service, so I don't have one.  --Anyway, I think they're ok so long as they aren't too expensive and you have time to get your money's worth out of them.  There are a few different subscription services, and everyone has their favorite.  I'm not sure what the best service is, but if you make a blog post with the topic "What are the best subscription services?" I bet a few people would give you some good opinions.  (Heck, I'd even like to know what people think is the best...) 

Anyways, sorry to ramble, but there you go.

--danny

I happened to be reading through the comments when I came across this statement from ReformedPatriot

"I may do this from time to time because I like your clear thinking on things".

I have yet to piggy back off any of your trades,  but I agree you think very clearly.  This is reflected by the fact your blogs are very well written.  You make make excellent arguments for all of your trades (buys and sells) - at least in my opinon for whatever it's worth.

Glad to know I'm not alone.

Danny, did you set a stop-loss and is one that you're thinking you're going to have to go moderately long on? Also, what is your target price? I see often that you trade for small profits of $20-$50.

Here's a longwinded, rambling response:   

Thank ya'll for appreciating my blog posts and trade notes.  Generally, when I sell for less than $50 it's because I want to buy back in at a lower price.  For example, yesterday, I could have sold my shares of TCHC for $13.55, which is my breakeven price.  Then, the stock tanked with the bad market today at hit $12.81 (so I bought a few more shares).  If I think I can get a lower price, I'll often sell for a $20 profit and buy back in lower the next day.  I was going to that with TTWO.  I had been watching the stock drift between $15.80 and $16.30 for a few days.  I in the $16's for a $20 profit intending to buy back in at $15.80 on the next dip.  I didn't get $15.80 the next day.  The stock stayed in the $16's, but I felt sure, based on a couple of weeks of watching the stock, that it would drift down again eventually.  However, instead, over the weekend there was a buyout offer and I missed out on $1,000 in profit by selling one day early.  But anyway, that situation is one of the reasons that I sometimes sell for a small profit - so I can get back in at a lower price.  Of course, that takes watching the ups and downs of a stock for a few days and feeling confident in knowing the stock's pattern.  You can only guess at the future, but a good two week chart can usually give you a good idea of what's happening with the stock.

I also sell for small profits in other situations as well.  In fact, small profits are often the basis for my trading.  If I can make $50 in a day or two of trading, then I think that's doing pretty good.  Let's get real - I'm making a money by doing a bit of internet research and clicking a mouse button.  That $50 is easy money.  It's not a lot of money, but it's easy money, and it adds up.  --If I make $100 a week x 4 weeks of the month, that's $400.  To me, that's pretty good money.  Those small 3%-5% profits add up quickly.  And the real beauty of the "riding the up/down" wave is that I can usually get back in the stock at a decent price and go long term if I want.  Sure, by buying and selling often, I might miss out on a huge gain occasionally (like with TTWO), but I also miss some dramatic downturns if bad news comes out. 

Let's take CRNT, one of my new stocks as an example.  I'm averaged down to about $8.35 and I have about 160 shares.  The price is now at about $8.00, but over the last week, the stock has bounced between $8.75 and $9.00 fairly regularly.  So, if my 160 shares hit $9.00 again in the next 5-10 days, I'm looking at over $100 dollars profit in a week's time.  Of course, I think CRNT are going to hit $15 this year, if not $18, so I can always buy back in on a dip.  Sometimes a stock will keep going up, but if I've made a few hundred "riding the wave" I really can't complain about missing the rise.  There's also the danger that CRNT will bottom out at some ridiculously low level, but even then, I've got confidence in my purchase and will double down.  It's always important to be logical about respect a company's fundamentals, because the market will not.  The market almost always overreacts with hype and emotion.  The one troubled company that I did buy, BRLC, is where I have my worst losses. 

The real key here, to me, is picking companies that have good funadmentals and a good management history.  CRNT and TCHC both look like all-star small cap stocks to me that have been beaten up by a ridiculous market.  I hope to be able to "ride the wave" with both of them, but if either of them tank, I see no real reason to be afraid.  The market reacts with emotion and usually overreacts.  So a company grows at 25% instead of the analysts prediciton of 28% ???!?!!  The market reacts like "oh gosh, sell sell sell" and the stock gets unfairly hammered.  --That's the stock that I buy.  That's a lot of growth, whether or not they met expectations - a company that makes money and grows at a good clip is eventually going to have stock that goes up. In other words, I try to pick stocks that I'm preprared to go long-term with if I have to. 

Sometimes I'll sell for a small loss, just to get out from under a stock and re-invest elsewhere.  Sometimes I take a beating and run (BRLC).  Other times, I make a killing and the stock gets too rich for my blood (AFSI). 

I figure CRNT will see $15-$18 this year.  I figure that TCHC will jump to the same levels, provided that they continue their growth rate and announce good earnings next quarter and that no natural disasters hit Florida.  I'll likely buy and sell on the "waves" of each stock or else sell and get back in a few weeks before earnings announcements.  One of the problems with small cap stocks is that they often have low volume and don't change value much for days and days on end.  If there isn't enough of a "wave" to ride, or the stock looks dead in the water for a few weeks/months, I'll unload (even for a small loss) and get back in later.  --I was going to do that with TTWO.  Unload, buy in at a lower price, try riding the wave, and then load up on the stock before Grand Theft Auto IV hit.  Too bad EA spoiled my plans. 

Also, if I buy a good company at low prices, I'm usually guaranteed to at least get my money back if I ride out the "storm" of the market.  Also, with CRNT and TCHC, I'll likely be able to (eventually) ride the chart wave and make a few profits even if the stocks don't ever hit the teens.  At all costs, I try to avoid selling for large losses, but that does happen sometimes.  If I like the stock, I generally don't set "stop losses" but just accumulate more at cheaper prices and average down.   

--Really, with TCHC and CRNT, there's no reason to expect a huge jump in price until the next conference calls.  However, with any luck, they'll bounce and I can get a few small profits out of them soon. 

Anyways, I could be wrong about any stock I pick, but there are my general thoughts on trading.  The toughest part of trading, for me, is watching a good stock go down for no good reason.  And that's what's been happening to me in February (and so far, early March).  But like I said, I'm content to hold if I have to.  Upod is taking that approach with SBUX, and I'm willing to do that if I need to. 

Danny,

This Trade Note is featured in today's All-Star Trades blog! Read all about it here.

--Nicole Wachs

TradeKing Staff

All-Star Commentator

For a list of previous All-Star Trades, please click here.

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