Tough month for the Undervalued Growth Companies portfolio

The performance of the Gehman Capital Solutions portfolio took a hit last month, but the news continues to get better. The stock market, in general, is very robust, but the small cap stocks that I own have not caught fire yet. I have no way of knowing for sure, but I believe they will.

EZchip (EZCH)reported reported revenues of $20.3 million, up 1% from last quarter and up 33% from the first quarter of 2013. Non-GAAP gross margins were 81.7%, with non-GAAP net income of $10 million.

EZCH’s cash position increased $7.1 million to $210 million with almost no debt outstanding. Fully diluted EPS on non GAAP basis was $0.33, slightly below the $0.34 in the previous quarter.

The company is mostly financing the development of one of its most innovative chips and still is able to contribute significant cash flow every quarter.

Eli Fruchter, President and Chief Executive Officer, said that “We believe that EZchip’s NPS (the new chip) stands out as the most powerful network processing silicon ….. We believe that EZchip is well positioned to benefit …..”

EZchip NP-4 has “about 100% growth year-over-year.” The next generation chip, the NP-5, will move into production in the second half of 2014. NP-5 will cost about 60% more than the NP-4 and nearly all NP-4 customers, plus some new customers will use NP-5.

The profits on NPS should be much higher than the NP-5 and it should go into production in 2016. Eli said that the NPS will replace the NP-6, and will come to market one year sooner than the NP-6 would have come to market.

QuickLogic (QUIK)reported Q1 2014 earnings on May 1. Total revenue was $11.2 million, with new product revenue of $8.9 million. One negative: the company was told that their major customer – Samsung – will cut back on orders for its tablets next quarter.

Even though QUIK has announced steps to improve its sales in the cell phone market, investors sold the stock because of the lower projections in the smaller tablet market.

I recently purchased some shares in Nokia (NOK), whose money-losing devices business (cell phone manufacturing) was purchased by Microsoft (MSFT). Nokia now has a significant cash position which will help it develop its business in networks, maps and licensing of patents.

I believe the Gehman Capital Solution (Undervalued Growth Companies) portfolio will perform well over the next year. Unfortunately, the market can take the price of small cap stocks up and down at will. Therefore, the results will be volatile.

DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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