The business climate for these VOIP survivors is a lot less harsh — and it looks like investors are starting to take note.  Five trends that should help VOIP over the near term include:

1. less competition.  The telecom sector will always be competitive, but a few years ago there were literally dozens of new VOIP companies.  Most have fallen by the wayside.  Given the difficulty new companies have raising capital today, I expect the competitive environment to remain favorable for some time.  
2.  real branding and differentiation.  Today's winners are able to carve out a brand identity and do not compete on price alone.
3. better broadband adoption.  Only recently have most American consumers shifted to speeds that the rest of the world considers "broadband."  That helps VOIP quality, as do better software algorithms.  
4. help from the incumbents.  a few years ago it looked like AT&T / Verizon / Comcast were going to crush the independent VOIP companies with their own VOIP offerings.  Frankly, they blew it.  Those companies continued to offer the poor "service" they are known for, and many customers were only to happy to ditch them.  They also overpriced the VOIP offerings, usually selling them at only a slight discount to POTS (plain old telephone service).   That's not competitive, and it just reinforces the feeling that these utilities are out to take advantage of their customers.
5. integration with smartphones.  between iPhone/Android apps and femtocells, expect VOIP services to integrate far more with smartphones over the next two years than ever before.

Vonage Holdings (VG)

Any review of VOIP stocks has to begin with Vonage Holdings (VG).  From high flying concept stock to near-total flameout, Vonage investors have had quite a ride. I don't expect past multiples to return, but Vonage is up about 70% since March lows and looks like it is heading higher.  Operationally, Vonage is near breakeven, largely the result of deep cost cutting.  Customer acquisition costs and turnover (churn) remain problems, though they are somewhat less than in years past.  

VocalTec Communications (CALL)

VocalTec used to be known as a VOIP software company, selling the codecs and other software necessary to run a VOIP platform.  But now it will be known for MagicJack — the $19.95 gizmo that plugs a phone into a USB port and promises free service.  VocalTec and YMAX (the MagicJack company) will soon merge.  VocalTec has a nice cash hoard, is cash flow positive, and is buying back stock.  There is a lot to like about this combination, even if the upcoming MagicJack femtocell turns out to be a bust.  But there is also a lot of optimism baked into the stock, which has more than doubled over the last two weeks.

8 X 8 (EGHT)

8 x 8 has carved out a niche for itself by focusing on providing VOIP to small business customers.  That focus appears to be paying off.  8×8 recently announced record first quarter revenue, posting both GAAP income and positive cash flow.  Like VocalTec, 8×8 is buying back shares and has enough cash on the balance sheet to increase buybacks if the board decides to go in that direction.  8×8 does trade more richly than Vonage on most metrics, like enterprise value to sales, or enterprise value to EBITDA.  8×8 might deserve the premium, but its worth noting.

Bottom line: the VOIP niche is gaining traction.  I'm considering a "field bet" in these companies, letting the market sort out the winners and losers.  However, as of today I have not bought any.  Are there any other VOIP companies you think investors should consider?  Leave a comment.

DISCLOSURE:  No positions.

Was I smart or just lucky to pick up GlobalSCAPE (Amex:GSB) at around $1.50 and add major size at $1.30 over the last 2 months?  The answer is lucky, but I'll take it.  Not wanting to look a gift horse in the mouth, I also took profits at $2.57 this morning.

DISCLOSURE:  No position.

Here are the preliminary deletions from the 2010 Russell Microcap Index.  Those that exited due to a decrease in size will be without index support in virtually all cases, and might be worth examining for short-term index deletion plays.

At these levels, HQ Sustainable Maritime offers a solid risk-reward. Here's why:

1. Rock-solid balance sheet:  In its latest 10-Q quarterly report, HQS reported almost $38 million per share in cash, and no long-term debt.  That works out to about $2.50/share in cash.
2. Sales and operating income are increasing:  Last quarter, HQ Sustainable Maritime reported a 33% jump in revenues year-over-year, and a 61% jump in operating income.  CEO Norbert Sporns explained "We are pleased to report a strong improvement in our sales and profitability. In the first quarter, we successfully recovered more than 80% of our doubtful accounts. The provisions for doubtful accounts were made in prior quarters as a result of a planned, strategic investment in our health and bio-product segment, in order to capture greater market share."
3. Position as "healthy" alternative should become more important as public focuses on dangers of polluted seafood.  Day after day, we see pictures of oily gunk washing up on Louisiana shores.  Nobody wants eat seafood coming out of that mess.  HQS's tilapia is a healthy alternative.  HQ raises the fish with organic feed in nonpolluted waters.  If this aspect of the fish gains traction with consumers, tilapia in general and HQ specifically could see large improvements in revenues.

I bought a sizable chunk of HQS shares near yesterday's bottom (average cost slightly below $4.90).  I am looking for at least a 50% jump over the next year.

DISCLOSURE:  Long HQS.

It is not the story of a detective, or an investigative journalist.  Instead, Harry Markopolos was a competitor who tried to develop and sell options-based trading products to institutional investors — just like Madoff claimed to do. 

When Markopolos began to hear stories of Madoff's eerily consistent and large profits through hot and cold markets using an options strategy called "split-strike conversion," he did his best to replicate the results.  But it quickly became apparent that something was amiss. 

At first, Markopolos wasn't sure whether it was a ponzi scheme or whether the Madoff funds were illegally front-running big orders processed through Madoff's market-making operations.  But when he compared the amount of money he believed investors had entrusted to Madoff with options volume, he was pretty sure that it was a ponzi scheme.  Had Madoff actually been trading options in that size — legally or illegally — the footprints would have been enormous.

Markopolos wasn't the only one who thought something was amiss with Madoff.  But he did something remarkable about it, which is the crux of this book.  Beginning in May 2000, Markopolos and the small team he assembled to investigate Madoff's claimed performance documented their work and submitted five reports to the Securities and Exchange Commission (SEC).

My take on the book

"No One Would Listen" is definitely a worthwhile read.  It is the best book out there on an important story with important lessons.  Most of the book is also well-written, and parts of it gripping. 

The only drawback to the book is its author — at times the focus is too much on Markopolos, and too little on Madoff and other surrounding characters.  Had this book been written by a financial journalist like Eichenwald with a better perspective, it could have been great.  Nonetheless, I recommend this book to all who trade in the markets.

Lessons for microcap and penny stock traders

There is not one sentence in this book about penny stocks or microcaps, but the broader lessons impact all traders. 

Markopolos shatters the myth that the SEC protects investors.  This is unfortunately a false belief of many microcap and penny stock investors.  Every time I expose a pump-and-dump scheme or potential fraud, I get emails from retail investors saying "I reported Company XXX to the SEC."   While I congratulate the initiative, as Markopolos reveals this is an exercise in futility. The SEC has not and probably never will protect investors from scams and frauds, including penny stock pump-and-dump schemes.

DISCLOSURE:  I received a free review copy of this book from the publisher.  Links above are affiliate Amazon links.

———————-

When I first started shorting stocks in the late 90s, a well-timed press release would frequently send a microcap stock into a dizzying ascent.

For at least one stock — Hauppage (Nasdaq:HAUP) — those heady days have returned.  

All it took was one press release mentioning those four letters that send tech hearts aflutter: iPad.  The big news, according to the release, was that:

[Hauppage's] WinTV-HVR TV tuner boards for PCs can now stream live TV over the Internet to the iPad, iPhone andiPod touch and any Apple Macintosh computer which supports a Safari web browser.

And with that single press release, the relatively sleepy stock tripled Thursday on several million shares volume, and spiked further today with a whopping 29.2 million shares traded.  Keep in mind the float is just under 8M, so every share traded, on average, more than 3.5 times today.

As backers will argue, Hauppage was well-primed for a spike.  Only a few days ago, it was trading at around its cash balance.  In other words, the market placed no value on HAUP's ongoing operations even though the company had a steady revenue base, a decent lineup of digital TV tuner products and software, and wasn't losing that much money.  It didn't surprise me that a positive news item boosted HAUP shares, but the magnitude of this move was startling.

The most bizarre part of the story though is that the so-called big news is not news at all.  There have long been video solutions for the iPhone and iPad, including SlingPlayer's popular iPhone app (soon to come out in a custom iPad version) and the EyeTV iPhone/iPad app from Hauppage rival Elgato.

The SlingBox app seems to be more powerful and easy-to-use than Hauppage's WinTV software, which works only with one lineup of its tuner boards.  SlingPlayer Mobile, when coupled with a SlingBox, works with any cable, satellite, DVD, etc.  PC TV tuner boards are notoriously difficult to setup, requiring extensive tweaks and channel programming.  SlingPlayer requires none.  EyeTV also looks like a better option.  And if you don't like either of those apps but want to extend your HTPC to your iPad, why not wait a month for the Boxee app to hit the iTunes Store?

The point is there are plenty of options now, and more are on the way.  This software is an incremental positive factor for Hauppage, but  is not revolutionary.  

Win-TV 7 is certainly not worth the attention that mo-mo traders have showered upon Hauppage, even if every person that owned both a Hauppage tuner and an iPad or iPhone went out and bought it tomorrow.  That's why I shorted HAUP into the close today (at an average price of $3.93).  Sooner or later, the mo-mo traders will find another hyped stock to chase.  When they do, I expect that Hauppage will lose half of its value.

DISCLOSURE:  Short HAUP.

I thought we would see a gap up on GlobalSCAPE's (Amex:GSB) earnings report, but I didn't expect this much of a jump.  GlobalSCAPE shares cut clear through heavy resistance in the 1.45-1.55 range to become today's top percentage gainer on the AMEX.  Gaining 26% is impressive on any day, but for a tech stock to do that on a day where the NASDAQ was down 47 points really is quite a showing.

I bought a healthy chunk yesterday at $1.30 (a fraction of which I trimmed today), but I regret not truly loading up the truck.   

DISCLOSURE:  Long GSB.

CEO Jim Morris expects even better performance in the second half of the year:

“Our first quarter performance was very strong and we dramatically improved every major financial indicator compared to the same quarter last year,” said Jim Morris, GlobalSCAPE president and CEO. “We are pleased to see financial results significantly better than our prior quarter,” Morris continued. “We are running in front of the broad guidance provided in our March 31 earnings call, and continue to look forward to the second half of the year where we expect to see even greater performance, driven by new solutions and partnerships.”

While GlobalScape is known among consumers for its CuteFTP software, enterprise products drive most sales by dollar volume and account for virtually all of GlobalScape's revenue growth:

Sales of GlobalSCAPE’s enterprise solutions continued to climb, to almost 90 percent of revenues, in the first quarter, continuing a trend that began several years ago. Increased enterprise revenue resulted primarily from continued growth in sales of the Enhanced File Transfer Server™ (EFT Server) solution. EFT Server sales increased to over $3.3 million in the first quarter, compared with just under $2.3 million in the first quarter a year ago. Similarly, sales of the Wide Area File Services (WAFS™) application increased to $530,000 as compared to approximately $421,000 in the first quarter of 2009.

Increasing enterprise revenue led to continued growth of maintenance and support (M&S) revenues during the first quarter, as more customers contracted for ongoing support of GlobalSCAPE’s business-critical solutions. GlobalSCAPE’s M&S revenue grew to over $1.9 million, or almost 44 percent of total revenue, in the first quarter, compared to just under $1.3 million, or 40 percent of total revenue, a year ago. Increasing M&Srevenue further strengthens GlobalSCAPE’s long-term financial position and reflects continued customer confidence in the Company’s solutions.

A $1.30 stock with $.51/share in cash and securities, growing and profitable businesses, and a reasonable PE multiple sounds great.  Let me be clear — I am long, having purchased GlobalScape in smallish quantities back in March between $1.46 and $1.49, and having added to that position today at $1.30 ahead of earnings.   But like any investment thesis there are risks: (1) GlobalScape has made a $2.3M investment in CoreTrace.  Early indications are positive but if CoreTrace flops then this will have to be written down; (2) the chart is not great.  There is an overhang of sellers, but I don't know how much.   Today's news might shake them out, but if there is another block to go then any pop could easily fade.  Watch for a sustained move above $1.55, which would flip the technical picture to positive; (3) if the positive guidance doesn't pan out, shares could trade down substantially, even from here.  

DISCLOSURE:  Long GSB.

The answer is yes.  Absolutely.  We saw a $30+ move (signal 1).  The junior miners and silver outperformed (signal 2), and individual junior issues show solid patterns (signal 3).  The only thing I didn't like was seeing Don "wrong way" Luskin predict a big move for gold.  

My preference is to wait for this kind of move before getting involved.  MarketClub also has an interesting strategy for trading gold.

DISCLOSURE:  No position in gold.  Affiliate relationship with MarketClub.