The short term investing stock picks blog

Five Percent Stocks Analysis
Stock: Cbeyond. Inc.
Symbol: (NASDAQ: CBEY)
Current Price: $28.90 (03/26/07 close)
Business profile: Cbeyond provides managed Internet protocol-based, or IP-based, communications services to its target market of small businesses in select large metropolitan areas. The Company’s services include local and long distance voice services, broadband Internet access, email, voicemail, web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and IT services.

My new position recommendations:
Short term: HOLD/WAIT below $29.85
Long: STRONG BUY
Short sell: NOT RECOMMENDED

My price targets:
Short term (1-2 mos): $30.50-$31.00 (5.5%-7.3%) (depending on when it comes over $29.85)
Long term (1 yr): $35.00 (21%)

Professional analysts:
Rating: OVERWEIGHT
Target: $34.50 (19.4%)
Last: Lowered to Outperform from Strong Buy by Raymond James (03/02/2007). 

My industry outlook:
Telecommunications: Neutral

Rationale: I am a little bit tentative about recommending an entry point for Cbeyond in the very near future.  This month has been an extremely bumpy one for the stock.  We are seeing the Bollinger bands narrow, which indicates some slow down in volatility and, possible, the formulation of a new trend.  Our MACD, EMA, OBV(5), and Fibonacci analysis looking very bearish for us.  The CMF(5) and Accumulation/Distribution(5) are looking pretty neutral and the Stochastic analysis is bullish.  As I mentioned above, I am really looking for this one to break, and maybe even consolidate above $29.85, before considering an entry point.

Looking long, I have to say that I am very excited about this growth stock.  It demolished analyst expectations by overwhelming margins each of the past three quarters.  The company has a focused mission to be the all-in-one telecommunications solution for small-medium sized businesses.  The Company’s services include local and long distance voice services, broadband Internet access, email, voicemail, web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and IT services.  While the company is centered on VOIP technology, its approach is simplicity for new and existing customers … ok, yes, it’s new technology, but you won’t even know - and it’s true, as one blogger put it: "it just works."  

At first, I was somewhat hesitant when I saw the wide-array of services offered by CBEY, but as I did my own little market research, I realized this is exactly the solution small businesses need.  I mean what business wouldn’t ask for "give me it all but keep it simple" from their service providers?  Moreover, small businesses are also largely attracted by the fixed-price model CBEY generally employs.  Tech, or tech-forward, companies will also love Cbeyond’s T-1 broadband connection, which is being offered at a price many could not afford previously.  Forbes recently reported that the company saved a real estate firm $65,000 annually.

The company has been successful in the roll out of their service in 5 metropolitan areas (Dallas, Denver, Houston, Chicago, and Los Angeles) with San Diego just under way.  The company has aggressive plans to grow, but here is what I love: they plan on growing the right way.  Sure this company could take on a billion dollars in debt and blow this thing out to the top 20 metropolitan areas today - but that’s not what has made them successful in the past.  They remain committed to aggressive growth, but in a very measured (and thus far DEBT FREE!) manner.  "In launching out business in each new market, we use the same disciplined financial and operational reporting system to enable use to closely monitor our costs, market penetration, and provisioning of customers, and maintain consistent standards across all of our markets."²  With San Diego already underway in 2007, the company promises (and I believe will deliver) two additional cities this year.

Cbeyond is not just growing out, but also up.  To help grow among existing, as well as new customers, they offer a variety of communications solutions, most recently with the addition of mobile service.  As mentioned in the profile, their total services include: "local and long distance voice services, broadband Internet access, email, voicemail, web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and IT services."  Customers in 2006 used an average of 5.6 CBEY applications.  I would hope they could work to increase this number to over 6.1 in 2007 while increasing customers in existing markets by 30%.  This would help the company maintain its impressive growth while it expands in a much more measured pace into new markets.

I need to clear the air on the main question mentioned by a lot of people, including the reader who requested this write-up.  The Vonage legal issues seem unlikely to effect this company, according to the CEO.  This has to do primarily with the type of network used by CBEY, which is also one of its greatest strengths.  To operate its system, Cbeyond does not use or borrow public or standard internet IPs.  Rather, in each of its coverage areas (currently 5 metropolitan areas, see below) it uses its own secure and private network - not the public internet.  CBEY, unlike most of its competitors, only uses a single all-IP T-1 connection for its data and voice communications.  According to the company, "Our network design exploits the convergence of voice and data services and requires significantly lower capital expenditures and operation costs compared to traditional service providers using legacy technologies."¹  This will help the company’s growth strategy by lowering the cost of network components necessary to start in a new marketplace; leasing fewer telecommunications circuits; minimizing staff needs, co-location space, and maintenance costs; and more.  Speaking of costs… what about billing?  Well Cbeyond wisely does not use paper statements - only email.  Full details are always available on the easy to use website and - get this - 35% of their customers pay online!  Imagine the costs they will save on customer support and no-skill accounting paper chasers.

There are a variety of potential risks facing Cbeyond.  For me, there is going to only be one true test to this company - and that will come from the roaring speed of technology and its ability to remain competitive in the field.  Right now,CBEY has a nice, almost quiet existence, in its 5 main cities.  As CBEY grows, so will its competition, including legacy carriers, cable companies and mimic providers.  Currently, I do not believe existing VOIP providers can (or want to) compete directly with CBEY.  However, the company may face stern competition from legacy telecom companies and almost surely  from cable companies.  The business play is a big chunk of the pie for them and they’ll hate to see CBEY siphoning off any piece of it.

1- 2006 Annual report
2- Ibid.

Disclaimer: I have no current or past position in Cbeyond Inc.  User Request post stocks are selected from a handful of questions that come to my inbox based on what peaks my own interest.  All recommendations, commentaries and information provided by FivePercentStocks.com, should be researched before making any investment decisions. I am not a professional analyst and do not expect people to make investment decisions based on my postings.  Investing in the stock market involves risk and you are the sole bearer of that risk.

Five Percent Stocks Analysis
Stock: UnitedHealth Group, Inc
Symbol: (NYSE: UNH)
Current Price: $54.30 (03/19/07 close)
Business profile: UnitedHealth Group Incorporated provides healthcare services in the United States.

My new position recommendations:
Short term: HOLD
Long: OVERWEIGHT
Short sell: NOT RECOMMENDED

My price targets:
Short term (1-2 mos): $56.00 (+3.1%)
Long term (1 yr): $60.00 (+10.4%)

Professional analysts report:
Rating: OVERWEIGHT
Target: $60.85 (12.1%)
Last: Reiterate HOLD by Goldman Sacks (02/26/2007)

My industry outlook:
Medical-HMO/Insurers: HOLD
I do not think this sector is one of the brightest when looking at the Healthcare field. 

Rationale:  Short term, this stock has some potential for a small boost, but it has some more work to do.  Our EMA and MACD are both very bullish right now and we had very strong money flow into the stock today.  I’d like to see continued strength to help move some of the technical indicators and candlestick analysis to the bullish side.  We definitely want to see the share price staying above the just passed resistance at $53.91.  If we can consolidate above that, I think there is a possibility we can make a run toward the much weaker upper resistance at $55.60.  If you look at the P&F Chart, you’ll notice the stock hit a double-top breakout earlier in the month and the trend line has it poised upward.  The Beta volatility on this stock is quite low which should help insulate us from too much fluctuation in this uncertain market. 

Long term, UNH is well poised for strong EPS growth.  First, of concern to everyone with UNH is the stock option granting scandal.  Whether or not the scandal will have adverse effects in the short or intermediate term is possible, but unlikely.  What you need to remember that the stock options scandal is that much of it is already priced into the  stock and, more importantly, the scandal represents the company’s past and its future will be buoyed by imrpessive growth.  I see the company’s growth at 16% for 2007 which will make the current share price look more even more attractive to investors and more on par with competitors WellPoint PE: 16.4, F P/E 14.3 (NYSE: WLP) and Cigna PE: 14, F P/E: 13.5 (NYSE: CI).  The reason everyone is so confident about UNHs growth is their incredibly consolidated position in the field.  Despite having strong cash flow projections, the company’s size in the sector will demand anti-trust forces block any further sizeable acquisition.  The company has sought to ossify its growth numbers through smaller acquisitions and even partnerships.  Two partnerships that will most benefit its EPS are with AARP (helping earn Medicare market share) and HarvardPilgrim (helping enter new geographical regions). The good news is that its growth strategy and estimates are based on present business structures and not possible acquisitions.  For UNH, its Ovations business which delivers health and well-being services to Americans over 50, may be its fastest growing unit.  The company had a successful initiation of its Medicare D and Advantage programs and should continue to shore up strength there.  I think the main barrier to UNHs success this coming year is the cost of medical supplies and services.  All signs point to a continued increase in these costs, so cutting other costs and making its infrastructure more efficient will be key offsets.  Of less concern is the potential for adverse regulatory action or political risks.  Despite this, I believe UNH is a great play with an appealing risk/reward ratio.  Oh and, if you care, Buffet owns 1 million shares of UNH. 

Disclaimer: All recommendations, commentaries and information provided by FivePercentStocks.com, should be researched before making any investment decisions. I am not a professional analyst and do not expect people to make investment decisions based on my postings.  Investing in the stock market involves risk and you are the sole bearer of that risk.

Five Percent Stocks Analysis
Stock: California Pizza Kitchen, Inc.
Symbol: (CPKI)
Current Price: $31.52 (03/18/07)
Business profile: California Pizza Kitchen, Inc. operates a chain of casual dining restaurants in the United States and internationally.

My new position recommendations:
Short term: NOT RECOMMENDED
Long: NOT RECOMMENDED
Short sell: HOLD

My price targets:
Short term (1 mos): $30.50 (-3.1%)
Long term (1 yr): $30.00 (-4.8%)

Professional analysts report:
Rating: HOLD
Target: $37.25 (18.1%)
Last: From BUY to HOLD by BB&T (02/16/2007)

My industry outlook:
Retail-Restaurants: UNDERWEIGHT
With a potential economic downturn, inflation, and housing slump hindering consumers, it’s hard to love this industry in 2007.

Rationale:  Short term, this stock is not one I would recommend approaching.  CPKI is in the midst of its slowest time of the year, with Summer and the Holiday Season being strongest for the company.  CPKI has seen extreme distribution and cash flow out of the equity last week.  If you are looking for an entry point I suggest waiting until the stock tests and confirms its support at $30.40 and then look to make an entry.  However, the MACD is trending bullish, contrary to the stock price, which may indicate a possible bounce.

Long term, this one really boils down to whether or not you have faith in CPKI instituting its growth plan successfully.  The number of restaurants is expected to grow by 8-13% in 2007.  These costs could cause volatile swings in quarterly bottom lines throughout 2007.  Management, however, reported in the annual report that expansion may not be as aggressive as planned due to a variety of factors.  The biggest concern, for me, here is the company’s ability to find enough profitable locations to proceed.  The company’s post-IPO growth plan,at the beginning of the decade, was a prime example of how aggressive growth can lead to the opening of unprofitable, or underperforming, locations.  With this history fresh on the minds of CPKI management, it is likely they will be as measured as possible when opening new restaurants.   While this will benefit the stock long-term, any slow down will significantly hurt the stock in 2007.  This is especially worrisome because the stock is not cheap.  It’s current P/E ratio is near 30 and PEG ratio is nearly 1.5.  Current P/E puts CPKI in the bottom half of its industry in terms of value.  Forward estimates place the price-to-earnings for CPKI at 23.38, which makes it much more attractive at this price.  This improvement in value would move CPKI into the top 40% of stocks in its sector in terms of how cheap the stock is relative to earnings.  Looking at the company’s financials, I am not all that impressed by its mere increase in restaurant sales of 15.4% when restaurants increased in number by 12.7% themselves.  In terms of costs, I am concerned with price inflation for agricultural products in 2007, because of the booming demand for corn products.   Moreover, with the increase in minimum wage sure to come this year in additional CPK locations, the company may be forced to pass along these costs to the customer, which could have a material effect on its bottom line.  The costs are especially of concern given my industry outlook: with a potential economic downturn, inflation, and housing slump hindering consumers, it’s hard to love this industry in 2007.

Disclaimer: All recommendations, commentaries and information provided by FivePercentStocks.com, should be researched before making any investment decisions. I am not a professional analyst and do not expect people to make investment decisions based on my postings.  Investing in the stock market involves risk and you are the sole bearer of that risk.