Oh shit did the market get it’s buying on today as investors once again shunned the reality of Europe’s tenuous hold on the Euro (and Ireland, as the Fianna Fail party finally fucking failed this weekend.  And note to political leaders, if you’re going to start a party, here are some words you might want to leave out of the name of it: “fail,” “dictatorship,” and “cumshot”), ignored rising input costs (though Money McBags would pay any cost for this input), and failed to blink at the banning of porn at Marriott Hotels (and Romney, dude, seriously?  Perhaps you needed some looser special underwear).

In fact all the market focused on today was mixed earnings and potentially overflowing cash on company balance sheets for executives to either spend on M&A (which there was a shitload of today) or T&A (which is likely why Money McBags’ recent purchase of RICK was up ~5%).  The reality is, nothing can stop the market’s melt up as we now live in an economy where unemployment, actual production, and common sense don’t matter as apparently the wealthiest 5% of the people can spend enough of their easy earned manipulated portfolios to give the illusion of a functioning economy.  Keynes and Ponzi would be so proud.

Anyway, there was virtually no macro news today as the market braces for tomorrow’s State of the Union address to learn how awesome the recovery is and to see who won the fight to sit next to the delightful Mary Bono Mack (and there isn’t an aisle Money McBags wouldn’t cross to show Ms. Mack his “bono”).  That said, the theme of the day was cash; cash for buy backs, cash for buy outs, and cash for buying one too many boob jobs (though Money McBags can think of no nobler way of dying).  INTC announced they will be buying $10B of stock, and if their shareholders are lucky, it will be stock in AAPL, NFLX, or Flavor Flav’s new fried chicken restaurant that they will be buying.  There is also a rumor that BRK may start paying a dividend as they could end the year with $50B in cash and no large acquisitions to spend it on now that asset prices have risen and Kristin Davis has closed for business.

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In M&A news, Rock-Tenn announced they will acquire Smurfit for $3.5B after barely outbidding Gargamel.  The combination of the two will form North America’s second largest container board company which should benefit from the global trend of cardboard packaging being up 6% this year as both shipping is coming back and more people are losing their homes and having to look for alternative forms of shelter.  Also, Novartis is set to buy Genoptix for $470MM which represents a 27% premium above the closing price after Novarits found Genoptix’ balance sheet not to be cancerous (and seriously, you try writing a joke for a cancer diagnostic company acquisition and then let Money McBags know if you have anything better).  Genoptix basically has diagnostic tests to help understand who would benefit from certain medications, and all joking aside, this is a trend Money McBags has talked about before as medicine is becoming more personalized and we already saw CLRT being taken out, so keep your eye on these companies or others such as BRLI (and as always, keep your eye on these too).

In company news, RSH dove 11% as their CEO resigned claiming something about “you can just buy all of this shit on the internet” while JC Penney shot up 7% on news that noted hedge fund self-fellaters Bill Ackman and Steven Roth will be joining the board.  Ackman’s fund now owns 16.5% of the retailer and when asked what he would to to help Penney recognize value, he said “I’m going to take Eddie Lampert’s plan at Sears, and just do the exact fucking opposite of it.

In earnings news, MCD announced their Q and investors weren’t loving that MCD came up a penny short of analyst guesses of $1.16 per share thanks to snowstorms, rising commodity costs, and apparently taste buds.  MCD had 5% global comp store growth for Q4 but US comp store growth in December slowed to 2.6% as a result of the aforementioned snow as poor people had to spend their lunch hours digging out fucking driveways to earn extra money and thus didn’t have time to get their Big Macs on.  Guidance for January is 4% to 5% comp store growth, new items such as frappes and oatmeal continue to drive traffic, and the Hamburglar is still in jail for grabbing Grimace’s greasy fry (and thus causing him to literally grimace), so MCD remains a long-term, though expensive holding of Money McBags.  The one thing of which to be aware is that if you go to Argentina they are getting serious about collecting taxes, but the other thing of which to be aware is that MCD is going to be raising prices as the cost of meat is expected to rise as much as 3.5% per year according to the USDA and Peter North’s manager.  But remember, the Fed said inflation is minimal because according to core inflation, you can still buy shit you don’t need for the same price as last year.  The point is, rising costs are a huge theme for 2011, more so than Hayley Atwell‘s upcoming break out in that Captain America movie or the burgeoning Femen movement.

In small cap stocks, if you invested with Money McBags you likely spent all day salivating over the price action as if price action were your neck and you had Roger Ebert’s chin.  DTLK was up 16% (now up >50% in the 3 months since Money McBags pointed them out), RICK danced its way up ~5%, TMRK bounced back 4%, KITD stopped sucking and was up ~2%, shit even ININ, QCOR, CRUS (who Money McBags doesn’t own but is watching) were up 2%, and most importantly, the cute girl of the day was actually cute (though the lack of a bikini shot makes Money McBags think she may be hiding something, like a bacne or a gunt).  Mama always told Money McBags there’d be days like this, so hopefully you all got your dicks sucked with the rally (or for Money McBags female friends, a pedicure).

That said, if you follow Money McBags on the twitter, you can see he tweeted early on about a small stock, NEI, when it was up ~10% and it closed the day up 22% on almost 5x the daily volume.  Now look, this is kind of a shitty do nothing company but Money McBags used to own it a few years ago and actually met with management back in the day when Money McBags worked for the man (unfortunately, the man Money McBags worked for turned out to be a shit bag who cheated on his rich wife by fucking hookers off of craigslist, and that story never gets old, so Money McBags hopes that scumbag gets anal herpes and AIDS of the penis).

It’s not that NEI is a bad company, it’s just that what they do isn’t really all that differentiated and 75% of their revenue comes from two customers (EMC is ~50% and Tecktronix is ~25%).  Of course all of that is irrelevant right now because the company took a huge jump on no news other than an announcement almost a week ago that they are expanding their European manufacturing facilities, and as Money McBags pointed out with DTLK, when small companies make jumps like this, if they can build a base and not sell off, it usually means there are real buyers and something real is happening here.

As for the company, what NEI does is that they deliver application platform solutions which are “pre-configured server-based network infrastructure devices, engineered to deliver specific software application functionality, ease deployment challenges, improve integration and manageability, accelerate time-to-market and increase the security of that software application in an end user’s network.” Now Money McBags is no IT guy (though he would be “it” for Sara Jean Underwood) so his explanation of NEI’s business is likely way too rudimentary, but as far as he can tell, they basically take off the shelf hardware, like servers and then customize that shit for a specific client by adding software (usually off the shelf as well) which can be updated remotely and better meet client needs.   So if you need custom software on a server (like a financial services company), NEI will load the shit on for you, help you manage it, and then sell you a few years of servicing on the back end (and Money McBags would love to service this back end).  The point is, it’s not clear that there is a huge competitive advantage to what they are doing as they are basically just taking a lot of shitty busy work away from IT departments which is a nice cost save for companies, but it’s not like NEI is selling some hot shit product.

Anyway, EMC looks to be ramping up and introducing a new product, so perhaps that is what is driving NEI here because as EMC goes, so goes NEI (which you can see is what caused sales to slump in the downturn).  The company is now at a ~$60MM quarterly revenue run rate and has managed to keep operating costs in check ~$6MM per Q, but gross margin has slipped from 14% to almost 10%.  So if we say growth will be flat this year, gross margin will be 11%, operating costs stay flat, and NEI won’t pay taxes because of their NOLs, we get ~$.07 eps and ~$6.5MM EBITDA and with ~$15MM cash and no debt, that gets NEI to an EV/EBITDA of ~12x and an earnings multiple of 30x after today’s 20% run up.  So doesn’t seem all that interesting, even trading at 1/3 of sales.  But here’s the thing, they said they could grown revenue to $300MM to $400MM on basically the same infrastructure so there is huge fucking leverage in their model.  Let’s say this new EMC project takes off and they can grow revenue 20%, that gets them to $265MM and if we only tick up their op costs to $25MM, that would bring them to $.10 eps and put the company around 20x earnings right now, which again, isn’t really that cheap.  So what the fuck?

Well here is the fuck.  If this company can go from $60MM in revenue per Q (and guidance is for $59MM to $64MM) to $75MM per Q and hold costs flattish, then all of a sudden they are at ~$.20 EPS and trading at ~10x that with a nice balance sheet for what would be ~35% growth.  So is that scenario possible?  In the last few years, their growth has been 65%, -25%, and 50% so it is clear that they are basically at the whims of the market and EMC but if companies are going to spend on upgrading and adding new servers (which seems to the case right now), then perhaps growth can be maintained.

Anyway, Money McBags is just guessing on numbers there, he has no idea what scenario is right, but when shit names like this jump 22% on real volume, usually someone is on to something so spotting this shit early is key.  Fuck, if they can get to $300MM in revenue and put up ~35% growth, Money McBags could see people paying 20x for that and then all of a sudden this is a $4 stock which is almost 2x the current price.  So if NEI management is reading this (and why wouldn’t they be?  And shout out to SVP of Marketing Rusty Cone whose name could be a synonym for one of Joan Rivers’ boobs), they are welcome to email Money McBags at moneymcbags@gmail.com and help him better understand:

1. Their competitive advantage and who their competition is.

2. EMC’s new product release and the impact that could have.

3. Why the gross margin decline will stop here.

4.  What secret Oprah Winfrey is going to reveal (and Money McBags thinks that it will be that her real name is Dave and she pees standing up).

5. Why growth is real this time and not just a herky jerky hope for a big deal at the end of the Q like the last few up and down years (or what Jenna Jameson calls, her 20s).

Money McBags hates to be a trader, but good small cap investors have to realize when positive shit is happening at companies and if a jump like this can hold, this is a name with enough potential upside to buy.  So let’s see what tomorrow brings and then maybe dip our toes in to the NEI water.  Do some more research here but even with the 20% jump on no news (and that is the worrisome part to Money McBags because it is usually news that moves shit like this), there could still be a ton of upside.

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