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What’s in an investment newsletter — and inside your computer

This U.S advisory talks to a Canadian who founded his own U.S. advisory — and then talks about a stock that helps computers talk.

Since we’re in the business of studying investment advisories of all kinds, it seems a good idea to go straight to the horse’s mouth. What does a man who starts up a market letter think you, the investor, should get out of his publication?

We have an opportunity to do that because we have one editor of a market letter interviewing the editor of another. The interviewer is Mr. Max Bowser of The Bowser Report. The interviewee is Mr. David Robinson, whose publication is called The Bull & Bear Financial Report.

This publication is somewhat unusual in that it does not give investment advice directly. Instead, it brings in both bullish and bearish views from analysts on each stock it covers. Hence the name.

Mr. Bowser has a particular reason to like this market letter: it deals extensively with small stocks, his own area of specialty, and one that just doesn’t get enough respect. “Low-priced stocks are treated as a subculture by the upper echelon of the investment community, even though these small companies are recognized as creators of big jobs.”

Mr. Bowser writes from Newport News, Virginia. The Bull & Bear is published in Florida. If the latter publication has any bias, says Mr. Bowser, “it is towards resource stocks, which might reflect the fact that Dave Robinson, the editor/publisher, was born in Canada…”

And here’s us thinking that Canadians moved to Florida to get away from our rocks and trees, and all the snow that falls on them.

Making up their own minds

Mr. Robinson is not a market insider. He came to his current calling from the publishing business. And he has some interesting observations on how investment habits have changed over the years, what you will find on the Internet, and who reads investment advisories and why.

The Canadian publisher got the idea for his newsletter simply by listening to his broker friends argue about stocks and sectors over lunch or dinner. Obviously, consensus was hard to find. So why not publish the both sides of the argument?
That was 34 years ago. How have the markets changed since, he was asked?

“Individual investors are doing more of their own research,” replies Mr. Robinson. “They may take a newsletter just for guidance. On the other hand, the Net is a powerful tool for charting and so on. The advent of online brokers, most of whom do not offer advice, verifies that individuals are making up their own minds.”

That is why his publication does not give investment advice, but seeks to give investors the ammunition they need to make up their own minds.

Women want the challenge

Mr. Robinson estimates that people take fewer newsletters than they did in the past. Where they might have taken five of six, they may now receive one, or turn to the Internet for advice.

He does have a word of warning about the Internet: “Sometimes you have to be wary of what you’re reading there.” (Present company excepted, of course.) In short, stay away from the pump-and-dump schemes that disguise themselves as respectable online advice. There are more than enough credible web sites to rely on.

Finally, who reads investment advisories? Mr. Robinson estimates that on average, readers come in at an average age of 60 years. He has found, however, that more women are taking newsletters than ever before.

“You have two factors at work here,” he explains. “One, it is well known that women outlive men. Secondly, they have become better educated and consequently carry on their husband’s investments or develop their own approach.”

But that’s not the whole story. There are many younger women “who are doing well in their careers and want the challenge of guiding their own investments.”

That’s one man’s view of his mission of his newsletter and of the people he’s serving. But since he doesn’t offer direct investment advice, let’s get some from Mr. Bowser.

Contacting far-off places

“Deep in the mysterious world that enables your computer to contact far-off places is Network Engines,” says Mr. Bowser by way of introduction to his Company of the Month.

Specifically, he adds, a large portion of the revenue of Network Engines (NASDQ-NENG) is derived from the sale of server appliances to customers in the data storage and security markets.

The days when a computer was simply a jumped-up typewriter or handy games console are far behind us, of course. It’s the communications between computers that have made them an essential part of our daily lives, at work and at home.

The server is the computer that controls a network of computers or powers a web site. That’s where this company makes its money.

Network Engines has two divisions. The OEM (Original Equipment Manufacturer) Segment makes server appliance products that allow network equipment supplies and software vendors to adapt their software to specific servers.

Those customers then sell Network’s products under their own names. Among the names are one or two very familiar one: Nortel Networks, Borderware, Juniper Networks, EMC Corp. and Surf Control.

The Distribution Segment plays a lesser role. It basically markets the company’s NS Series Security and Acceleration Server Software. The biggest source of the company’s current growth lies in a big addition.

A life-altering decision

“It’s not often that one decision can be a life-altering one,” says Mr. Bowser, “but NENG’s acquisition of Alliance Systems last October qualifies as one. It almost doubled Network Engines’ top line.”

Alliance operates in the “same spooky hi-tech world” as Network Engines, as Mr. Bowser puts it, and the two firms’ products compliment one another.

Alliance’s server and storage products go out to the communications, enterprise and military markets. It also offers infrastructure to support wireless, VoIP and security and video communications. The head office is in Plano, Texas, with European headquarters in Bad Hamburg, Germany.

In its last full year as an independent company, 2006, Alliance had sales of $99.3 million with net income of $1,619,000. Its revenues have increased each of the last three fiscal years.

Network Engines was able to acquire Alliance without having to borrow, notes Mr. Bowser with approval. It paid some $32 million in cash and issued 2.9 million shares. As of the end of 2007, the Network balance sheet was clean. In the meantime, revenue for the first quarter of fiscal 2008 doubled from $27.2 million to $54.3 million. Net income went from a loss of $114,000 to a gain of $1,241,000.

Mr. Bowser credits the turnaround in Network’s fortunes to the CEO, Mr. Gregory Shortell, who took command in January 2006. Coming from a senior position at Nokia, the new CEO engineered the acquisition of Alliance with a central idea in mind: reduce the company’s dependence on one major customer. A year ago, EMC Corp. supplied 82 per cent of the firm’s business. By the first quarter of this fiscal year, the figure was less than 40 per cent.

There are 43,656,000 shares outstanding, with 19.9 per cent held by two institutions and 18.8 per cent held by current directors and officers of the company.

The shares of Network Engines have been sliding somewhat in today’s difficult markets. But as the integration of Alliance proceeds, Mr. Bowser reckons that the company’s life-altering decision could create some lively profits. The stock currently trades at $1.48.

Who knows? Reading the right investment advisory could be a life-altering decision for investors. Or reading about the right advisory on a web site that discusses advisories. At any rate, this web site wishes you a very happy Easter weekend. We’ll be back on Monday.