Monday, August 29, 2005

Still Sour on the World Poker Tour (WPTE)

It’s been nearly one year since the World Poker Tour (NSDQ:WPTE) went public after spinning off from parent company Lakes Entertainment (OTC:LACO). The once-hyped IPO opened at a disappointing $7/share after analysts questioned whether the stand-alone WPTE could achieve profitability from revenues generated solely from their televised Poker Tournaments.

Fast forward to earlier this summer where shares surged past $15 after WPTE announced they would be joining the online Poker craze by launching The timing was ideal as PartyGaming (LSE:PRTY), owner of, had just went public garnering an $8 billion IPO price tag.

Then poker legend Doyle Brunson added more fuel to WPTE’s roaring stock price. On July 8th, Brunson and a group of financial backers made an unsolicited bid to buy the whole company for $700 million in cash. The offer was double WPTE's closing price of $17.75. The news boosted WPTE shares by 56% the next trading day peaking at $29.50!

But right away, it was apparent that something was amiss. The $700 million offer valued WPTE at $34/share. So why the big gap? WPTE released further information on July 11, stating that it had contacted Brunson to get more information and that he "suggested that WPTE should not expect any further contact regarding the offer." Shares tumbled.

After peaking in early July, the World Poker Tour has since shed over half its value sitting around $12 today. Is this now a potential value play? Not quite yet. While the World Poker Tour brand name undoubtedly possesses great potential in one of the hottest industries, it should continue to suffer several negative catalysts in the short-term:

Near-term Catalysts:
1.) Online traffic at continues to disappoint. A quick check at the site shows only a couple hundred players playing at any given time. Compare this to who consistently hosts well over 10,000 players daily. Keep in mind that American players are not allowed to gamble on the site with WPTE being an American company.

2.) The company does not have an auditor. They were dropped by Deloitte & Touche after the accounting firm claimed WPTE was too small and did not want to "get their arms around" the online gaming business. This seems odd considering Deloitte & Touche also audits International Game Technology (NYSE:IGT), the leading slot machine manufacturer which also recently acquired Internet-Gaming firm WagerWorks. This auditing departure comes only 2 weeks before the quarter meaning WPTE should be late in filing until finding a replacement. Every day that goes by without an announcement should pressure the stock further.

3.) Last week, WPTE surprised analysts & investors by swinging to a $0.4 million loss on $6.6 million in revenues ($0.02 per share).

4.) Massive Insider selling continues.

5.) The Doyle Brunson conspiracy. Was this a classic “pump & dump” ploy? Were WPTE insiders involved? I wouldn’t be surprised if the SEC investigated the bluffed buyout, which would not be positive PR for the company.

From a business standpoint, WPTE is in decent shape as the company's licensing businesses are profitable. But from an investment standpoint, the stock is a bit of a gamble: The online business could be worth zero, in which case the stock is probably worth about half its current price. If WPTE is to justify its $250 million market cap, WPT Online must deliver. The online poker site officially launched at the end of the second quarter. Interestingly, the company accounted for zero contributions from online gaming in its third-quarter forecast, instead noting that any significant contributions may not come until toward the end of the year at the earliest. With the WPT Online hype fading and the reported loss last week, WPTE should continue to drop past $10/share.

Friday, August 19, 2005

Strong Buy of the Month Review - EYET

Since recommending Eyetech Pharmaceuticals on July 18th, the stock has enjoyed a 25% gain resting around $14/share today. Earlier this week, the stock soared as high as $15.65 before some predictable profit-taking took place. Even after these healthy gains, we remain bullish on the long-term prospects of Eyetech.

Check back next week for August's Strong Buy of the Month pick.

Monday, August 08, 2005

Don't Buy Housing Bubble Propaganda

Over the last year, the media has done an excellent job of warning the general public of the “imminent” real-estate bubble, comparing this irrational exuberance to the Stock Market Crash of 2000. But an end is nowhere in sight as most regions around the country continue to see double-digit appreciation. People are rushing to buy for fear that rates will increase and that housing prices will keep rising, locking them out of the market.

The most obvious red flag analysts will point to is the fact that price appreciation is far surpassing gains in personal incomes. Logic tells us that eventually people will take their money and run. But for the last decade, we have observed a fundamental shift in the amount of debt households have been willing to take on as Americans have leveraged themselves more than anytime in history.

Since 1990, interest rates on 30-year mortgages have plummeted from more than 10% to roughly 5.5%. The drop in rates, combined with an approximate 50% rise in national median income, has resulted in a 130% increase in the maximum mortgage that a family with a median income can qualify for. So it only makes sense that home prices in California have increased 131% since 1990. Nationally, home prices are up only 104% over the past 15 years, leading economists to wonder why prices aren’t even higher!

In addition, the statistics published by bubble mongers grossly inflate the actual price appreciation taking place. The numbers released by the Office of Federal Housing Enterprise Oversight (OFHEO) only include homes purchased with mortgages below $360,000 that can be bought or backed by Fannie Mae or Freddie Mac. That’s a big distortion, considering that the low end of the market is where most of the speculation takes place. It’s like judging the equity market based solely on penny stocks. Another major flaw is that the OFHEO make no adjustments for property improvements. If I buy a home for $200,000 and later spend $100,000 on renovations, then sell it for $350,000, the entire $150,000 difference would be treated as appreciation!

So don’t buy the housing bubble propaganda as normal market forces are driving the current housing boom. Even if prices do eventually fall, people who are looking for a house should not attempt to time the market. If you plan to live in the same residence for a long time, a potential bubble should never enter into your decision. Otherwise, your timing better be perfect. Remember December 1996, when Alan Greenspan first cautioned stock investors about "irrational exuberance"? The market more than doubled over the next 3 years, and even at the market low, didn’t fall to December 1996 levels. While prices may struggle to keep rising at their current pace, it’s highly doubtful the bubble will burst absent a recession. Most likely, we will see a few more years of considerable gains before leveling-off. Simply put: If it was so obvious that interest rates were going to rise, then rates would already be higher!

Thursday, August 04, 2005

Strong Buy of the Month Update - EYET

Since recommending Eyetech Pharmaceuticals (NASDAQ:EYET) only 2 weeks ago on July 18th, the stock has enjoyed an 15% bounce. Last week, the drugmaker said its second-quarter net loss narrowed to $7 million, or 16 cents a share, from a loss of $31 million, or 77 cents a share, a year ago. Sales more than quadrupled to $57 million from $12 million a year ago, as revenue of main product Macugen reached $50 million, up from $25 million in the first quarter.

More importantly, the hype appears to be slowing for Genentech's (NYSE:DNA) rival drug Lucentis. Rumors of deaths during trials of Lucentis buoyed EYET's gains last week. Already more than 2 years away from being on the market, if true, this news may delay the approval process even more. And today, the stock is up to $12.98 (at post time) on buyout rumors. Although nothing official has yet been released, Pfizer (NYSE:PFE) appears to be the obvious suitor.