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Top Picks for 2011 Winners

As I mentioned here last week, every July the Dick Davis Digests publish updates on our contributors’ Top Picks for the year (which were first recommended in January). As promised, today I’m highlighting some of those picks that have performed best over the last six months. The first half of 2011...

As I mentioned here last week, every July the Dick Davis Digests publish updates on our contributors’ Top Picks for the year (which were first recommended in January). As promised, today I’m highlighting some of those picks that have performed best over the last six months.

The first half of 2011 hasn’t been an easy time for investors. Despite very strong surges in January, February and in the second halves of March and April, at mid-year the market was barely above breakeven. (The last couple weeks, of course, have seen significant gains.) While this environment has been challenging, trial by fire is always a great way to identify really strong stocks. And our Top Picks included plenty of market-beaters.

The top five performers (as of the end of last week) were a particularly interesting bunch. In order of performance, they are:

1) Elephant Talk Communications (ETAK), recommended by The KonLin Letter, was up 70%.

2) Allot Communications (ALLT), recommended by SmallCapInvestorPRO, was up 61%.

3) Global Defense Technology and Systems (GTEC), recommended by OTC Growth Stock Watch, was up 48%.

4) IAC/Interactive Corp. (IACI), recommended by The Buyback Letter, was up 31%.

5) Cover-All Technologies (COVR), recommended by The Quiet Investor, was up 28%.

The first thing that’s interesting about these five is that they’re all on the seriously small side (the gold, silver and bronze medals all go to companies with market caps under $500 million). This is especially notable given the market they were up against: Small-cap stocks are known for magnifying the market’s movements. During bull markets, they’re a great place to be, often soaring more than larger stocks or the general market. But during downturns, small caps are often punished severely. That makes these five’s standout performances all the more notable.

Furthermore, all five are technology companies. They serve diverse industries, but they all offer innovative technology solutions. This is interesting, but I don’t think it was the key to their six-month success. Over the last six months, the broad technology indexes have not significantly outperformed the market.

Rather, I think these five stocks’ strong performances reflect their strengths as individual companies, and that’s earning them growing attention from investors. Each one is a technology leader in a unique field.

Elephant Talk Communications, the winner, provides a variety of technologies and services to the telecom industry, but its most promising offering is technology for making secure payments with a mobile phone.

Allot Communications, the runner-up, makes deep packet inspection software that lets Internet service providers discriminate among Web traffic.

Global Defense Technology and Systems provides security and intelligence technology to clients including the U.S. Department of Defense.

IAC/Interactive Corp. owns and other online content generators.

And Cover-All Technologies (the baby of the group with a market cap of $62 million) sells business acquisition and intelligence software to the property and casualty insurance industry.

All five have developed unique, cutting-edge technology that offers their clients an edge in competitive industries. And all five are thriving today, attracting the attention of more and more large investors.

Below are recent updates on the top three stocks, two of which hold excellent potential for investors who get on board here:

The gold medal goes to Konrad Kuhn, editor of The KonLin Letter:

“Elephant Talk Communications, an international provider of business software and services to the telecommunications and financial services industry, is on the verge of providing access to mobile cloud, with the ability to securely process transactions through the ‘mobile wallet.’ Recently, Google announced plans for the Google Wallet and that particular wave of the future is coming soon. Providing the technology for mobile payments is one thing, but consumers need to be made aware of the security enhancements ETAK offers, which will make the mobile wallet and the stock’s (up 63% since January and 167% since our first recommendation) first target price of $6.00 a reality. Of the 100 million shares outstanding, about 68% are held by insiders. With a mobile wallet, the consumer will be able to wave or touch a mobile phone at a store terminal both to pay and receive discounts and coupons as part of one transaction. The Elephant’s ‘enormous’ global secure mobile cell communications presence, together with ValidSoft, the first and only mobile security software to be granted the rigorous European Privacy Seal by EuroPriSe (cutting-edge solutions to counter electronic fraud), makes the revolutionary mobile wallet technology realistic. In fact, ETAK is already in the process of providing security services for Near Field Communications (NFC) on which the mobile wallet is based, and will offer one of the first fully integrated mobile wallets. Furthermore, ETAK has begun integrating NFC technology into their mobile platform. This will allow mobile operators to immediately start offering their services without having to worry about all the time, costs and risk elements involved in upgrading their legacy back office systems to be NFC-ready. We would continue to Add/Buy the stock as ETAK’s software as a service model has the potential to generate billions of dollars in revenues as mobile payment volume is expected to ascend to $1 trillion by 2014. Ultimate target 9.00-10.00.”

Up 61% since January, Allot Communications is the second-best performing top pick so far. Ian Wyatt, of SmallCapInvestor PRO, writes:

“I’m pleased with the continued growth of Allot Communications (NASDAQ: ALLT) which reported on Tuesday and beat earnings estimates by delivering EPS of $0.07. The company grew revenues by 38% over the comparable quarter of 2010, and by 6% sequentially. To bring more recent subscribers up to speed, Allot manages broadband networks to maximize their performance. Its customers are wireless cell phone operators around the world, and its competition includes companies like Blue Coat (BCSI) and Cisco Systems (CSCO). The company is growing because its solutions help service providers manage their networks more efficiently—its products solve the pains that come with an overloaded network. With massive growth in mobile technologies, I don’t see this trend ending anytime soon and believe Allot will continue to enjoy growing demand for its solutions. This stock was added August 3, 2010 at $4.65 when I anticipated that it was soon going to become profitable on a GAAP basis (this includes extra and unusual items that are stripped out for non-GAAP results). This happened that quarter, and when the results came out the stock started gathering momentum. We’re up well over 200% now, and I believe the company still has room to grow.

“There are now five analysts following Allot, and on average they believe the company will earn $0.26 in 2011 and $0.38 in 2012 on revenues of $71 million and $83 million, respectively. These projections would put revenue growth at 25% this year and 16% next. I think Allot will do better. I’ll bump up the price target on Allot to the consensus of $17.50—that’s around 15% higher than shares currently trade. Allot is a buy on weakness.”

Finally, the bronze medalist, Global Defense Technology and Systems, was acquired in March at 48% above its January price. Geoffrey Eiten, of OTC Growth Stock Watch, writes:

“What a difference a quarter makes. In December 2010, when I picked Global Defense Technology and Systems as the breakout performer of 2011, it was trading around $15.50 per share. Like many of the stocks I recommend in my newsletter, GTEC was headed for a buy-out opportunity, but the ‘when’ remained an unknown factor. The company had a history of positive earnings and revenue growth, and results for the fourth quarter of 2010 were no exception. The company reported fourth quarter revenues of $82.2 million, up 47% year-over-year, and diluted earnings per share for the quarter of $0.39. Once it closed on a key cyber security systems acquisition, GTEC became too good to resist. In March of 2011, an affiliate of Ares Management paid $315 million for GTEC. The deal was valued at approximately 11.5x trailing 12-month pro forma earnings before income taxes, depreciation, and amortization, which included the last two acquisitions by GTEC. GTEC was bought for $24.25 per share, a gain of 56% from my original recommendation. It was a pleasant surprise for me, and a nice gain for those who got in early based on my recommendation.”

Wishing you success in your investing and beyond,

Chloe Lutts

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.