It was a quiet day on the Street as the bond markets and federal offices were closed to celebrate one of the greatest threesomes of all time, and no, Money McBags isn’t talking about the Three Stooges, the Dahm triplets or that scene in Meggann and Hanna love Manuel, he’s talking about the voyage of the Nina, Pinta*, and Santa Maria as today was Columbus day so hopefully you all coughed in to a blanket and handed it to your neighbor in order to celebrate.

As for the market, investors came down from their weekend long party celebrating the destruction of 95k jobs (minus another 11kish due to the birth/death model) which has made QE2 a near certainty as 93% of economists now surveyed believe Benny B will get his asset buying on at the beginning of November (of course 90%+ of economists didn’t see the global financial collapse coming but that is because they were all likely distracted by Art Laffer’s oddly dyed hair as the aged and lilliputian witch doctor, which is actually the formal term for economist, tries to blend in to normal society to keep his pot of gold safe).  The market has had a stunning run considering not much is getting better (other than rush hour traffic, prices at WalMart, and Minka Kelly) so it will be interesting to see if buying the rumor will persist until the next Fed meeting in November when the “sell the news” algorithm kicks in for all of the HFT’s (and if you haven’t watched the 60 Minutes piece on HFTs from last night, it was decent enough in an informative way yet lacked the anger, insight, and Leslie Stahl nip slip that Money McBags would have liked to have seen).

In macro news, not much happened today other than Foreclosure-gate keeps ramping up as apparently mortgages had less documentation than Meg Whitman’s maid.  With foreclosed upon houses driving homes sales as they are cheaper and usually contain less old lady smell than owner occupied houses, a slow down in processing foreclosures will severely impinge upon the government’s desire to move housing inventory.   This is because sellers still refuse to come down in price as they try to avoid taking losses on their mortgages which are more underwater than Mary Jo Kopechne.  It will be interesting to see how all of this plays out, though more interesting to see how this plays out.

The only other interesting piece of macro news was that Janet Yellen (who was speaking for her first time as the Federal Reserve’s vice chairperson after taking over for Donald Kohn thanks to her stunning victory in the swimsuit competition where she became the first vice chair candidate to rock a two piece since Frederick H. Schultz in 1979) said that the Fed’s accomodative policy of keeping rates low could lead to excessive risk taking as companies can easily lever up now that money is cheaper and easier to access than Paris Hilton‘s vagina (though with a bit less cocaine on it, but just a bit less).  So it will be up to the Fed to “take the punch bowl away” (her actual words) before the economy overflows it with turds.

Internationally, nothing really happened today other than a reservoir of toxic waste (also known as Bette Midler’s one woman show) burst in Hungary killing 8 people and spilling almost as much hazardous sludge as the recent Gulf oil spill thus making both the country’s financial system and now their topography, covered in shit.  Otherwise it was pretty quiet as the currency wars continue on and European countries brace for future downgrades.

In the market, MSFT released their new phone so now they can lose to AAPL and GOOG in another vertical, the C bank analyst said he expects the sector to meet or beat guesses (and of course most bank stocks sold off on that ringing endorsement), and WYN shot up ~8% after they bet it all on red.  Also, NYT jumped 9% because some analyst at UBS apparently piled on the BS by saying newspaper ad sales are increasing while apparently forgetting that the newspaper industry is within a decade of going the way of the dodo bird, the Edsel, and cost of living adjustments for social security checks.  Finally, solar stocks were on fire thanks to revenue raises, ASTI getting full IEC certification meaning their panels can withstand prolonged exposure to the elements and thus can move in to the building market, and investors realizing solar companies main source of energy is entirely fucking free.

In small cap news, GYMB shot up 22% after Bain Capital said they will spit up $1.8B for the children’s retailer, KITD rose another ~5% and is now creeping up to $13 (and remember when they dropped in to the $8s, Money McBags said it was a screaming fucking buy), and little old HSTM rose 3% back to near its 5 year high.  Money McBags pointed this company out ~3 weeks and ~20% ago but he is still trying to dig in to the facts to understand what exactly is driving this rally.

Strangely, a sell side initiation report came out last week on HSTM and Money McBags was hoping to maybe glean some insight from it but unfortunately it is from some place called Craig-Hallum and if you haven’t heard of them before, well, you’re just like everyone else.  Money McBags isn’t saying that Craig-Hallum is bad at research, but he heard Sidoti called and they want their analysts back (drum shot please, and don’t forget to tip your analyst on the way out).

The point is, Money McBags has significant questions about HSTM’s competitive advantage, market growth rates, and catalysts to propel the stock higher now that it no longer appears to be cheap, and the analyst report basically helped with none of that.  You see, Money McBags gave the report a quick skim before jumping to the back to see the numbers because he was curious if there was a catalyst that management would have mentioned that would show strong growth and he couldn’t believe what he saw.

The analyst built his valuation off of a DCF on an 8 year earnings estimate.  That is fucking unbelievable.  No really, Money McBags believes a Craig-Hallum analyst’s (or any analyst for that matter) estimate of HSTM’s revenue and earnings in the year 2019 as much as he believes in the Lochness monster, efficient markets, and foreplay.  Seriously, trying to build a credible valuation off of an 8 year forecast and then a terminal value starting in year 2019 is as preposterous as giving the 2010 Nobel Prize in Economics to a bunch of guys who spent their time trying to figure out why people can be unemployed when there are many job openings (you know why dingbats?  Because with unemployment insurance, nobody is going to work at McDonalds until they raise the minimum wage.  People have egos and standards.  Was that so fucking hard?  Now where’s Money McBags’ Nobel?).

So this analyst values HSTM, a company he has growing 14% a year through 2018 (and why not 12% or 7% or 16%?  Why 14% every fucking year?) at $8 per share with ~60% of that value coming from his ridiculous terminal value calculation based off of that 2019 number, a 3% perpetual growth rate, and a cost of equity of 11%.  Awesome, really great stuff, but Money McBags could change the perpetual growth rate to 2%, the cost of equity to 10%, or just one of the yearly revenue growth estimates in the forecast from 14% to 3%, and get WILDLY different answers as all of those numbers are pulled out of thin fucking air.  So this is where the analyst needs to use a little fucking common sense.

He has next year’s Non-GAAP EPS at $.26 which is ~24% growth over his 2010 estimate and his revenue growth is ~12.5% and per his $8 DCF, that means he thinks the stock should trade at a p/e of ~31x.  Now who the fuck does that make sense to?  There is no catalyst in his numbers, just steady low teens growth and yet per the brilliantly ridiculous misuse of a DCF, the price target is 31 fucking times earnings.  Who would pay 31x earnings for anything other than maybe an angry dragon with Kate Bosworth, much less for a pretty vanilla little marginal growth story?  Wow.  Money McBags didn’t go back to read the rest of the report because that valuation is so unbelievably bizarre that there is no way the report contains anything useful for someone with a fully functioning frontal lobe.

—-

So look, Money McBags doesn’t see a catalyst for this company other than maybe their SimVentures JV of which he knows nothing about, so lets say the company grows topline ~15%, gets some leverage, and somehow earns $.32 next year (which is a total fucking high end guess), wtf would you pay for that?  15x?  18x?  Well HSTM is now trading at ~20x that which is just too expensive so unless someone can find a clear catalyst that will boost their growth from here, Money McBags would take his profit and go home.  That’s not to say there isn’t something that will drive this further, but Money McBags is fucked if he or the Craig-Hallum analyst has any idea what it is.  So HSTM seems like a perfectly fine little company that has had a nice run from being cheap to being at least fairly valued, unless there is something hidden in their business model that can accelerate growth.

*Money McBags realizes that he linked to a woman with the last name Pinto and not Pinta, but the only person he could find with the name Pinta is a transexual porn star (true story) and as only a few of you likely work at the SEC, he decided not to link to that.

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