Risky moves in 2006 -- my worst decisions

I haven't yet done the math on my whole portfolio, but I expect overall I puttered along somewhere near in line with the S&P in 2006 -- I'll update that here in the coming weeks to continue my full disclosure.

But I do know what some of the smartest and dumbest things I did with my money this year were. Or, to be more charitable, my best and worst decisions.

My worst investment decisions this year all related to the riskiest moves I made -- investing in OTC stocks and buying after hours, both things that I would probably be better off not getting involved with (but sometimes, I just can't resist).

I own three OTC stocks (and a couple pink sheet listings, though those are for big companies that happen to be based overseas and not actively traded here), but only one of them was purchased in 2005. I've owned SpaceDev (SPDV) and Cryo-Cell (CCEL) for well over a year now, and they are two of the worst performers in my portfolio, so they might qualify as big mistakes for 2005, but not 2006.

The worst timing this past year was my purchase of MMC Energy (MMCN) -- shares of which I bought in early December at $1.24, and could now buy for about 80 cents.

MMC Energy shares have been declining because of a big registration for insider selling, which generally wouldn't worry me that much in a brand new company (it doesn't bother me when venture capitalists and insiders want to get paid for their work) ... but in this case, it's a LOT of shares, and a company with a very small float, and those two facts combine to mean that the shares are likely to be under pressure for a while. Add that to the fact that MMC is not yet on the AMEX, an event they predicted to occur by the end of the year, and the steep decline is not that shocking, even in the absence of any bad news about the company's actual operations.

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Regardless, while I still think the rule to avoid penny stocks is generally a good one because of volatility like that experienced by all my OTC shares, I still have hope for all three of these companies -- SPDV and CCEL should be profitable in 2007 if things work moderately well for them, and MMC Energy is in a capital-intensive growth phase that I think has a solid chance of building a good company.

I also know, however, that all the money I put up for these companies is at risk and might all be lost -- that's the price you pay for investing in a tiny company with potential, and I'm willing to be quite patient as these stories play themselves out.

And my second worst investing decision last year was buying shares of a company that reported terrible news in the after hours session. I thought -- and this shows you how smart I am -- that the beating that Imax (IMAX) took following their announcement that they hadn't found a buyer was terribly overdone, so following the news I picked up some shares in the after hours session at about $6. It's never even gotten close to returning to that level since.

So what are the lessons for me?

When investing in OTC stocks that are notoriously hard to value, especially new ones, go in with your eyes wide open and the expectation that you might lose all your money. At this level, you're really investing in business plans and management and potential most of the time, all of which can be a bit ephemeral. I'll continue to wait on these stocks, and to keep them a tiny portion of my diversified portfolio.

And the second lesson, learned after making this mistake several times, is to never ever ever trade in the after hours or pre-open trading. For the few times when an informed investor can make money in these sessions with some lucky timing, you pay with the many times that you had the wrong conviction which, given the time frame allowed for this kind of trading, is almost always going to be based as much on emotion as anything else.

I've learned lots of other things from my mistakes and victories in the past year, but these two risky areas stand out in terms of what they've cost. I'll share some of the better decisions I made, and what I might have learned from those, in the days to come.

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Sad news for SpaceDev (SPDV)

Well, the news came out after the market closed last week that SpaceDev (SPDV) is not going to be one of the winners of the COTS contract for NASA.

The COTS contract is a huge one for the small companies that were involved, and it would have brought tremendous upside to SpaceDev -- but SPDV was not built to win this one contract, and the company is set up to be sustainable without any one contract.

Still, it's disappointing news. The news was much better for Rocketplane Kistler and SpaceX -- both of which, coincidence or no, are private companies -- one is the result of a merger this Spring between Rocketplane ltd. and Kistler Aerospace, and SpaceX is the pit into which Paypal founder Elon Musk throws his money. SpaceX, actually, is key to the potential of SpaceDev's private microsatellite program, as they have already contracted for a launch of the (still not operational) SpaceX Falcon launch vehicle to bring a payload of SpaceDev microsatellites into orbit.

Rocketplane Kistler arguably has the design that's most like SpaceDev's DreamChaser, in that it's based on a spaceplane design somewhat like a smaller version of the current shuttle, so if there was a spot for SpaceDev on this contract I expect we have Rocketplane to blame for them not getting it. SpaceX's Dragon spacecraft is essentially a capsule that rides on the Falcon launch vehicle.

It's hard to argue with NASA's decision -- they're hedging their bets with two designs, and while I wish they would have selected SpaceDev's design I don't know of any technical reasons why it would have been a better choice -- and SpaceDev is one of the smaller and less experienced companies in the mix, so a win was always a long shot (even if I was a bit more optimistic earlier).

But while this contract would have been a huge positive for SpaceDev, the loss of it does not mean the company is in particular trouble -- as you can see by the fairly benign 5% drop in SPDV shares today, compared to the 23%+ drop of the shakier SpaceHab (SPAB) even though they're also involved in the SpaceX contract team. T/Space and Andrews, the other two finalists, are also privately owned (and significantly younger than SpaceDev).

So it's unfortunate, but it's not a deal breaker. It's encouraging that there clearly wasn't much hype over COTS built into the SPDV price, which is how I read today's tepid decline, but I will be watching SpaceDev closely over the next quarter or two as they continue integrating Starsys and winning contracts and subcontracts for their satellite, propulsion, robotics and mechanical space work. I continue to believe that the company is stable and has a bright future, and is reasonably priced given their current sales and technological capability, but if they fail to continue growing their contract pipeline significantly that future will dim considerably.

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SpaceDev presents (SPDV)

SpaceDev (SPDV.OB), the little entrepreneurial space company that's vying for some big NASA contracts, is presenting to NASA on their biggest potential piece of business yet, and generating some news in the process.

I wrote last month about SpaceDev's selection as a finalist for the $500 million COTS program to provide NASA with a viable service and delivery vehicle for the international space station to take the load off of (and partially replace) the aging and expensive Shuttle. No decision is expected about this contract until at least August, but NASA officials are making the rounds and hearing presentations from the various finalists -- including, yesterday and today, SpaceDev's presentation and prototype display at Centennial Airport outside Denver.

I didn't buy SpaceDev based on their ability to get this particular contract -- in fact, one of the reasons I really like this company is that they are not totally reliant on any one contract, though their performance is clearly very "lumpy" as larger contracts come and go. If they did get this contract, however, the impact would be absolutely huge on this company. That's a $500 million contract over several years, for a company that currently sports a market cap of under $40 million and had sales of about $14 million last year. All of the other finalists are tiny, too, so I expect that whoever gets this contract is going to have a fire lit under their seats, even if this isn't enough money to really cover the full development of a commercial space program ($500 million is only about 2 percent of the annual NASA budget, I think). All of the finalists in this program, including SpaceDev are planning to use this as basically government sponsored R&D to help them build commercially viable orbiters, though hopefully there will be some significant profit in there as well.

There has been some interesting news, including photos of the prototype craft and a lot more background on the plane and the various companies that are involved in the contract proposal (including the folks who will fabricate the composite airframe, the Starsys division of SPDV that will handle the robotics and the docking mechanisms, and the core SpaceDev folks who designed the engines and propulsion system that powered SpaceShipOne).

The articles are local cheerleading to some extent, so I wouldn't take their boosterism as any guarantee that SpaceDev is going to get any of this business, but they're still worth reading.

Dream assignment: Colo.-based team vies for NASA contract to build new spacecraft is an article from today's Denver Post that talks about the Starsys folks (the Starsys division, formerly an independent company that SpaceDev just acquired very recently, is headquartered in Colorado).

and the Daily Times-Call of Longmont, CO, had a nice article today as well, also building on the Starsys Colorado roots --The next generation: Gunbarrel company hopes to help fill shuttle void. This article goes into a little more depth on the SpaceDev "philosophy" of off-the-shelf design, efficiency, and space commercialization.

Finally, the Boulder Daily Camera pitched in with an article, too -- Proposed NASA orbiter has Boulder ties. For a little non-local perspective, there was also a good article on Space.com today about the presentation, and MSNBC's science editor Alan Boyle wrote last night that Spaceship Dreams Get Real and included some nice updates on the other five finalists.

I'm encouraged after seeing all this reporting about SpaceDev's presentation -- I don't know whether they'll get any of this contract, but the more I learn about the bid the stronger it sounds. SpaceDev has put together a good team with a diverse set of specialties and I suppose they've got as good a chance as anyone -- and perhaps the fact that they seem to be the only ones who are basing their proposal on a tested space plane will help (the other candidates are generally focused on capsules, or at least reusable vehicles that look like capsules and, I assume land in the water using parachutes instead of at airports as SpaceDev's DreamChaser is capable of).

We'll see. Final presentations in August, and it seems most folks expect that this initial work will be split among at least two of the contenders.

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SpaceDev a finalist (SPDV)

At the risk of alienating all the folks who read this site and who don't follow pink sheets and over the counter stocks, I have a couple things to note about SpaceDev (SPDV).

Though the share price has been in the doldrums for months, currently in the $1.30s and looking somewhat attractive, SpaceDev had some very good news last week -- they're a finalist in NASA's $500 million program to replace the space shuttle with a lower-cost vehicle to service the International Space Station.

SpaceDev is one of six finalists, all of whom are small space companies (no Lockheed Martin, Boeing, etc. on this contract). The contract is for a transport vehicle to be demonstrated by 2009 and possibly flying by 2010 to supply the International Space Station while the Shuttle is on mothballs for a few years (between the current shuttle, which will be retired by then, and the next generation shuttle, which will not be ready for probably ten years).

The companies are all small concerns -- some, like SpaceX and Andrews Space, have collaborated with SpaceDev in the past on various smaller projects. I don't know enough about the business to tell which one might win, but SpaceDev's strength is low-cost, standardized products built with off the shelf, reliable commercial parts (as opposed to the 1960s electronics that run most legacy spacecraft today), and I think SpaceDev's strengths closely match NASAs new focus on cost-effectiveness and safety.

I don't know anything about some of these companies, but a few are familiar. Andrews Space is very well respected and worked with SpaceDev on a moon-related pilot research project last year. SpaceX is owned by Elon Musk, the founder of PayPal who has sunk a ton of his own money into developing low-cost launch vehicles to compete with the massively expensive satellite launchers that are currently available (and SpaceDev is one of SpaceX's first customers).

My guess is that those three would be the frontrunners, though a lot of folks like Spacehab as well. I like SpaceDev's chances because their vehicle is based on an old NASA design that has been tested in space to some extent and on SpaceDev's proprietary non-volatile propulsion system that safely launched SpaceShipOne when it won the X-Prize a year or so ago.

Here's an article about the finalists, and the press release from SpaceDev, and more information from SpaceDev about their proposed vehicle, in case you're interested.

It will be at least a couple months before more news is out, and I have no idea whether NASA is likely to fund more than one company or project. SpaceDev and Starsys, which they recently acquired, also have multiple smaller projects and contracts that help to pay the bills, they don't depend solely on the hope of getting the COTS contract (though they do depend significantly on a current satellite contract with the Department of Defense, which is their biggest current project but which would likely be dwarfed by COTS).

SpaceDev has been around for a long time and just started being marginally profitable -- there's every chance that the shares could go down as quickly as up, though I've been thinking of adding some more down here in the $1.30s (my cost basis is closer to $1.70 at the moment). Part of my excitement about SpaceDev earlier this year was that they seemed close to ready to being relisted on a major exchange following their acquisition of Starsys (they're now big enough), but SpaceDev management has downplayed that possibility and seems content to focus instead on winning new business -- which is commendable.

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SpaceDev's Turbulent Flight (SPDV)

Anyone who, like me, has been holding shares of SpaceDev (SPDV.OB) over the past several months has probably gotten a little case of motion sickness -- the charts have shown a number of the stomach-numbing drops that make Space Mountain such a thrill ride for the adolescent set.

I bought shares last Spring and again in the Fall when they announced the Starsys acquisition, and just as when I looked at SPDV in my annual checkup in January I am now holding a position with an average cost of about $1.70 -- it's been ugly with the price recently hitting below $1.15, and I probably would have been better off just ignoring the price movements since January (though I have been tempted to buy more on a few of these dips).

And this hasn't just been the erratic movement of a manipulated bulletin board stock -- the business, the share count, and the management have all changed significantly in the last few months as the acquisition of Starsys was finalized and Jim Benson, SpaceDev's founder, stepped up to the Chairman (and Chief Technology Officer ... a la Bill Gates) position to make room for a new CEO ...

... and not only that, but the AMEX has changed it's listing rules, so the likelihood of SpaceDev (delisted from NASDAQ a long time ago) making it's way up to a major exchange is probably now pushed a bit further into the future (I had guessed that relisting would happen relatively soon this year given the doubling of market cap with the Starsys acquisition, but management downplayed that on their recent conference call).

I read the earnings release and listened to that conference call, though, and I'm convinced that all of these changes were for the better.

SpaceDev had to shell out a fair amount to buy the bigger Starsys, but will now have much stronger cash flow from Starsys' larger sales base and broader product offerings, and enough working capital from the secondary offerings to put them on fine footing to build the business. I'm guessing that some of the recent selling may be the Starsys' smaller shareholders cashing out, or SPDV shareholders who don't like the acquisition heading for the exits ... that's fine, I think in the long run the new, larger company will have a greater chance of success.

And while Benson has been a visionary in the space business (and before that, a very successful entrepreneur in the computer business, from whence came many of SpaceDev's strategies), it's often wise to have a seasoned outsider come in as CEO when you're trying to take your company to the next level -- and this merger makes now a pretty good time for that to happen, in my opinion.

SpaceDev still seems to me to be on the cusp of some truly dramatic greatness ... but it's also possible that they'll fail to reach the heights that optimists are seeing, they've certainly had such failures in the past.

They intimated in the conference call that they expect the final work on the Missile Defense Agency satellite array work to be authorized and underway soon -- and this is the final design, fabrication and test stage, by far the most lucrative part of what is by leaps and bounds their largest contract.

And they're also continuing to pile up more work, both in the Starsys line and in SpaceDev's traditional microsatellite and propulsion businesses -- they just got a $1.25 million contract for the ANGELS nanosatellite program from the Air Force, and they are now offering bargain priced commercial launches of their microsatellites in conjunction with SpaceX (assuming that those SpaceX rockets end up working, they've had a lot of launch delays in the last few months)

But the big news that everyone is looking for, beyond the gradual growth of SpaceDev and Starsys' business lines and the piling up of more contracts for commercial and government work, is news of NASA's plans for a service vehicle for the International Space Station to take the load off of the shuttle. SpaceDev has a proposal for that mission called the Dream Chaser, based on an earlier NASA design (this follows a trend at SPDV that I really like -- they don't reinvent the wheel) ... but almost all the other significant actors in this realm are aiming to get this contract, too. With the focus on cost effectiveness and fast design and execution I'd like to think SpaceDev has a chance to get some of this business, but I'm certainly no expert in federal procurement or in space engineering ... thankfully, with the Starsys acquisition SpaceDev has doubled the number of experts they have on hand. Hopefully that will help.

And as I've said before, even if they fail to get the occasional rock star contract that gains all the attention, SpaceDev has proven over the past year that they can build a profitable business based on a large variety of smaller contracts, something they'll have the chance to really excel at with their new micro and nanosatellite products and services and the great reputation of Starsys products (Starsys built a lot of the components of the Mars rovers that are still performing many years after their expected useful lifespan).

SpaceDev had a great recovery in the stock price today after folks had a chance to listen to the conference call and absorb the fact that SPDV just completed it's first full calendar year of profitability -- they're on the right track and I just might fall to temptation and take another bite for my portfolio, but for now I'm just watching. It should be a very interesting year for SPDV.

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Annual Checkup -- SPDV

I have been invested in SpaceDev (SPDV -- free RT quote) since early last year, with an average purchase price of about $1.70 -- you'll notice that's a fair cry from the $1.50 it's been peaking at this week, and my holdings have been underwater for most of the time I've owned them. I'm still confident in the long-term future of SpaceDev, however, and though it's always a worry when a very lean and successfully managed company acquires a larger, unprofitable one as is the case with SpaceDev's purchase of Starsys, I bought more on the merger news and I think they're going to make it work. I like the fact that the Starsys acquisition is going to quickly grow the company to the point that they're ready to be relisted on one of the major exchanges, which might be a near-term catalyst, but more importantly I like that they're bringing in another company with great complementary capabilities and a history of excellent execution in government contracts. SPDV's biggest income stream right now is from a continuing huge contract for missile defense microsatellites, but they also have recently offered their first real commercial product -- they'll design a microsatellite for you and launch it at a much lower price, and they have plenty more smaller irons in the fire with, among other things, a compelling proposal for a space shuttle replacement. I jumped on doing my checkup of SPDV today because I read a Motley Fool article that I liked a lot this morning, and you can go to that for some more detail and more caution about the merger risk and their reliance on government contracts, but I personally remain very optimistic about SpaceDev's future. I probably should wait to see how they execute post-merger and get a handle on the impact of dilution (though it will be accretive to sales, if not earnings) before buying more, but I must admit I'll be tempted to add more early this year if the price remains low.

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Broke the rule again (CCEL and SPDV)

I have a personal rule, borne of bad experiences with companies like Mooney Aerospace, and of reading of the bad experiences of others with penny stocks, OTC Chinese shell companies, and the other scams of the pink sheets and over the counter market.

The rule is: Don't buy companies that aren't on the major exchanges (NYSE, NASDAQ, AMEX).

But sometimes we all break the rules, and I am no exception. I now own two companies that are traded over the counter, SpaceDev (SPDV-full writeup here), and Cryo-Cell (CCEL-full writeup here) . Both have been making waves lately, but I've held SpaceDev for while -- it's Cryo-Cell that's the new rule breaker here.

I bought CCEL yesterday at what turned out to be the closing price, $3.89. It has actually already dropped a hair below that, which is neither unusual for my investment choices nor a problem for my long-term outlook.

Just to quickly update you on SpaceDev, which I still consider to be a great investment for the long term:

They are planning a merger with Starsys, which I already wrote about.

They have now launched a genuine microsat product, available for sale to anyone who needs to get a little dishwasher-sized presence in space. Could be communications companies, or researchers in Universities ... anyone. Microsats are now for sale on the open market, and I'm sure the price is negotiable.

And perhaps more importantly, they have firmed up their plans to develop what is in effect a private space shuttle replacement in the SpaceDev Dream Chaser that's based on an old NASA design (recycling -- another way to be the low cost provider!). They have been awarded a pretty big contract from the Air Force to work at upsizing their hybrid rockets, and they are aggressively pursuing work under NASA's new plan to develop viable commercial projects that can run supply flights to the International Space Station. There's no guarantee that the Streaker will get those contracts, but I think there's a good chance given SpaceDev and Starsys' track record and great pricing.

This is all big money stuff if they can get it working, and it's all on top of what is currently their biggest project, the Missile Defense Agency microsatellite array which is in the middle stages of development. SpaceDev's plan to use government contracts to research and develop commercial space products and services that they can then sell more widely is working, and what's more, the government wants it to work -- still lots of possible bumps in the road, but I'll be enjoying watching these folks reach for the stars.

And if this growth continues apace, I think we can expect SpaceDev to list on one of the major markets in the next year or two.

But the new news is that I did indeed decide to buy Cryo-Cell, despite the fact that they're not only on the OTC market but have already been delisted from the big exchange once. That was quite a while ago, and they really seem to have their act together now and are fully planning to apply for relisting with the big boys next year.

Like SpaceDev, CCEL is profitable -- the current PE is high at around 40 or so, but with the growth potential they have I think that's pretty fair. I wrote such a long bit about them the other day that I can't imagine anyone actually read the whole thing, but suffice to say that they have the largest customer base in what might be a really huge market. Right now they are the largest cord blood bank in the US with about 100,000 customers (almost twice as big as their biggest competitor), but they believe that their addressable market is 25% of US births -- that would be one million possible customers every year. To my ears that's a pie in the sky ambition, but I'm happy to see them aiming high and who knows, maybe they'll reach it.

I listened to several CCEL presentations and executive interviews yesterday as I was making my final decision to purchase -- links are here, here and here if you'd like to hear them, management sounds aggressive, sober and capable, which can always be an act but is still nice to hear.

The company has ambitious goals, a great balance sheet and growing and predictable recurring revenue stream, and is the low cost provider as well as being the largest and the provider of the (arguably) highest quality service. Add that to a new placental stem cell preservation service that they're launching in 2006 to distinguish them further from their competitors, and I really like what I see.

If you think stem cells will be important and that medical discoveries will make people start to realize their value (they've already shown that placental stem cells may cure diabetes in mice, which is huge), then you'd have to believe that parents will begin to think it's irresponsible not to preserve the stem cells that might help their family. Add that to increased marketing, and I think we have a winner in CCEL for the decade to come.

Of course, I didn't get the price I would have gotten had I jumped aboard CCEL at my first impulse, or even as I finished my earlier writeup -- but that's OK, I think a few cents here or there will be immaterial by the time I want to sell, which hopefully will not be for a very long time.

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Ending the week with a moonshot (SPDV)

Thanks to the recent decision by SpaceDev (SPDV.OB -- get free real time quote from ADVFN) to merge (really acquire) the private Starsys, I've decided to up my position on SPDV with the money I cleared up by selling Cendant this morning.

Just for the record, Cendant was a bit of a loss. Had bought Cendant at $20.38 back in May, and sold today at $17.63. So that's about a 15% loss, which is a shame but certainly something you have to accept now and then. My real regret is that I held it for such a short time, because I continue to believe the CD is undervalued -- but after their decision to break the company up I have lost interest in holding Cendant. Enough said about that, if you want my full sell rationale you can see it in my prior writeup earlier this week.

I wrote about SpaceDev in some length last month, and pretty much everything I said then I still believe. What has changed is that SpaceDev, in acquiring Starsys, has dramatically increased their potential revenue stream and become a much more significant and capable space company. Here are a few quotes from SpaceDev President and CFO Richard Slansky at a PIPES conference presentation earlier this week, around the time the merger was announced:

"Number one, it diversifies our revenue. Number two, it brings us to a much higher level of core capability ... there's a lot of vertical integration that goes on.

"We deal with a lot of the same companies and customers. SpaceDev right now is about a 50 person company, we're going to end up closer to a 200 person company.

"And the revenues are going to scale up as well -- Starsys in the first six months of this year did about $11 million in revenue, we did less than four. So you can see it's a smaller company sort of acquiring a larger company."

He went on to say that this increased size of the company should help significantly in enabling them to get additional government and other contracts.

For those who haven't read up on this at all, the basic thrust is that SpaceDev's strengths are in microsatellites and propulsion systems, and Starsys' strengths are in mechanical systems and drivers. One of the things you hear every time someone mentions Starsys is that they designed a lot of the key maneuvering components for the Mars rover program ... components that have been proven by the extremely long life of those rovers. The fact that SpaceDev's products, like the microsatellite CHiPsat currently in orbit, also continue to be productive well beyond their expected lifespans should tell you something about the quality of engineering at both of these companies. I expect them to be a good match culturally as well as financially.

The fact that SpaceDev is still traded over the counter means that they aren't getting all that much attention for this huge development ... and while it's certainly a risk to grow this big this fast and they will likely have some integration hiccups, I think this significantly reduces overall risk for SpaceDev shareholders. They now have another proven business division beyond satellites and propulsion, which were their core competencies, and they have a division with a much larger revenue stream than they had previously enjoyed.

As far as I can see, it's up in the air whether or not this will be immediately accretive to earnings because I don't think anyone outside the room knows whether Starsys will bring in net income right away, but it will certainly dramatically increase their cashflow and their ability to handle larger and more complex projects and contracts. SpaceDev has earned the benefit of the doubt from me to this point, too, as in recent years they've proven to be excellent at financial management and stewardship of investor dollars as they have finally begun to achieve steady operating profits.

There is certainly some significant risk here -- among other problems, the conventional wisdom is that acquiring companies generally go down in price while the acquired company shoots up -- but in this case, Starsys was private and pretty debt-ridden, and SpaceDev looks like it should be able to do much of this transaction with stock and still make it extremely accretive at least on a revenue basis given Starsys' much higher revenue numbers. It's also certainly possible that SpaceDev has bitten off more than they can chew, but even though they'll be quadrupling the size of their workforce I'm not worried about that -- Starsys will be a division within SpaceDev, and they'll be bringing along management with them who certainly know the business.

SpaceDev should still be considered to be a very, very long term investment -- I certainly plan to hold for many years and see how this story plays out, but this merger caused me to rethink my investment and decide that I'd like to commit a little more money to this moonshot right now instead of later.

My guess is that listing on one of the exchanges could now be coming sooner rather than later, perhaps by the end of next year when the combined company can really show a track record of significant earnings and business growth. And while the downside of that will probably be increased volatility and increased tracking of our little hidden company (right now you can see that this merger news hardly moved the stock at all -- huge news, and the stock moves less than ten percent), the upside of increased capitalization and exposure and liquidity should dramatically outshine that downside. I'd rather have all of my shares in hand before they reach the exchange and before the good news about this acquisition really reaches the stock, but I think I'm at the point now where I will stop buying and just watch my investment. I bought my first position in February at $1.80, and the second position this morning, October 28 at $1.60.

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SpaceDev Cadet

OK, now to one of my favorite stocks that is lightly traded, tiny tiny tiny, in a sector built more on dreams and government whim than on earnings, and almost impossible to fairly value.

But it's awfully fun.

Bought SpaceDev (SPDV) on February 18, 2005 at $1.80.

SpaceDev (SPDV.OB) is one of the few stocks that I've ever considered, let along bought, that wasn't traded on a major exchange -- they're traded over the counter, but shares are fairly liquid considering their small size. At $33 million market cap they are certainly very very small, but they're far from the smallest fry on the OTC plate.

And you can certainly tell that I didn't pick the perfect time to buy -- my position is down about 20% at this point, and every now and again I think about buying a little more. I think the company may be nearing an inflection point where their earnings should increase substantially over time and they may soon approach listing on the Nasdaq or ASE, which is one of their goals as a company.

SpaceDev is small and flies under the radar (or over it, more accurately), but it's not brand new. Founded by Jim Benson in 1997, SpaceDev's basic business premise is to bring the microcomputer and microelectronics revolution to space. That means, for the most part, making space exploitation and travel easier and more affordable and thus commercially viable for more users.

They have a pretty good strategy, I think, and one that has started to bear some really tasty looking fruit of late. Their basic strategy is to use government and academic research contracts to build their own products and knowledge base, and use subsequent contracts to continue building on their technologies and capabilities. The end result, if they are successful, will be a very accomplished space services company with the ability to build, sell and service manned and unmanned space flight, satellite launching and management, etc. The products they build use off-the-shelf parts, are modular and where possible miniaturized, and are all designed with an eye to making it cheaper to take advantage of space, whether it's for tourism, missile defense, more efficient satellite communications, or something else.

SpacDev is no rookie in this game -- they actually have products in space right now, and in their biggest news breakthrough of late they supplied the safe and effective fuel that powered Space Ship One in it's successful effort to win the Ansari X Prize. That's an example of what SpaceDev's innovation can do -- they used this particular project to create and perfect a safer rocket fuel, one that they can then use in the vehicles they're developing.

But their biggest moneymaker right now -- and they have recently started posting positive earnings -- is still government contracts, specifically Defense and NASA contracts. Their biggest contract, which is still ramping up to it's big-cash stages, is a microsatellite array that could be part of a possible missile defense system. Again, this is development of a set of satellites that are small and work in a network for maximum efficiency and capability, and that technology can be used for more than just this one (huge though it is for SpaceDev) government contract.

The strategy means that SpaceDev has a lot of very small irons in the fire at any one time -- they work on sometimes very small contracts of sometimes just a hundred thousand dollars, but each of those contracts is a building block either toward a bigger project that SpaceDev can be heavily involved in, or toward developing their own technology further and using the contract to basically subsidize their R&D on that particular widget. The plans, contracts and accomplishments sound so cool it's hard not to get excited about them -- servicing the interplanetary lunar base, sending satellites or probes on a "Interplanetary superhighway" to the moon to validate a lower cost route, running an array of microsatellites from the internet and creating a space-based internet node, and building reusable passenger vehicles for low earth orbit, then outer orbit, then deep space, that make the space shuttle look huge, clunky and decades out of date -- which of course, it is.

These guys are tiny, and they're not spending a lot of money marketing themselves -- even their annual report with it's pixelated logo on the cover looks like a high school kid put it together in 1980. That's a sign of smart management, in my opinion, and the fact that the Bensons control so much of the stock and they and the board have in the past provided cash infusions when SpaceDev had some lean times also means we have a core group of very motivated and committed insiders running the show with an eye to the success of a long term business in the sky.

Oh, and they've posted ten consecutive quarters of revenue growth (not to mention six quarters of operating profit, and two quarters of actual net income) -- that brings us closer to the inflection point I mentioned earlier. If you read the 10-K (actually a 10-KSB in this case) for SpaceDev, look down through the history of the company that they provide in the first pages. It covers lots of what I've mentioned above -- lots of small contracts used to develop exertise, some notable achievements including the fuel for Space Ship One, and the last contract mentioned blows all the others away -- up to $40+ million for the missile defense microsatellites. They finished phase one which brought in about a million dollars, and the phases coming up -- phase two ends in January according to the initial plan, with total allotment of up to eight million dollars -- continue to grow significantly as the project gets closer to actual construction, launch and testing.

That, by my reading, puts SpaceDev in a whole new league. It's a cost-plus contract, so obviously not all of that cash will trickle down to earnings, but beyond increasing SpaceDev's capability in satellite work, this contract, if effectively executed, gives SpaceDev a much higher profile in the business and perhaps could open the doors to a lot more work ... if their part of this works.

But it's also a lot bigger than the other irons SpaceDev has in the fire right now, so if they prove unable to build on it with more work, their revenue could drop off precipitously. I'm not worried at this point, but it looks like a significant risk. And while their plan of attack gives them a very different approach than Boeing, Lockheed or the other titans of aerospace, to some extent they may have to compete with those big guys on contracts -- and there are some other small players, too, including the several companies that have popped up with plans for commercializing space flight and that got a lot of attention after Space Ship One. I like the fact that SpaceDev has a diversified approach and has built up a business over the years with incremental successes -- while commercializing space flight will be great for SpaceDev, they aren't just relying on a pie-in-the-sky plan to fly buses into space for millionaires as some companies seem to be (or hoping for a huge windfall from Richard Branson to put Virgin Galactic into operation).

Of course, SPDV is a highly volatile little stock. It might never make it to the big boards. They have had lots of dilution to pay the bills over the years. And they are highly dependent on the personal involvement of their board and leadership, so there's certainly some risk if any of them leave the company.

But it's a nice dream -- a successful little space company just coming into it's own, and may be worth a twirl for those with fond memories of The Right Stuff. But be careful. I bought this for fun and a chance of great success, but with full expectations that it might not work. I'll keep it most likely until SpaceDev is either a big success on the Nasdaq, or bankrupt.

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