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December 25, 2007 – Comments (0)

I recently read an interview with an investment advisor by the name of R. Brent Byrne, President and CEO of Divi-Vest Advisors, Inc.

What struck me as odd was that the article, titled Three Smallcap Stock Picks seemed to me to be written by both the interviewer and the interviewee, because they both seemed to me to be one in the same person.

The gist of the article was that Mr. Byrne was touting three companies for investment because they all highlighted his firm's investing philosophy...invest in companies that paid a high dividend to avoid investing in losers.

No offense, and no disrespect to Mr. Byrne, but why would anybody pay any attention to a guy whose investment philosophy is to invest in stocks that pay high dividends in order to avoid picking losers? And oh by the way, could you please define high?

Admittedly, I dance to the beat of a far different investing drummer, but it just seems to me that if you buy great companies, and you buy them at great prices (great is a synonym for cheap), then the fact that a company does or does not pay a dividend, really doesn't matter.

I mean buying a stock because the dividend yield happens to be high is fine, but yield is a function of price, so assuming the dividend amount stays the same, the yield will go up or down depending on the price.

Let's look at the first stock mentioned in the interview, Traffix, Inc. (Nasdaq: TRFX). The company lists itself as an internet media and marketing company that provides end-to-end marketing solutions for its clients.

I have to tell you, when I visited the company's website that I came away with the impression that if this company went out of business, at least half of the spam I get would stop.

At any rate, I did look at the company's latest annual financials which were for the period ending 11/06 and I have to say I personally wasn't very impressed.

The company's direct costs are 63% of sales, and their selling and administrative expenses are 30% of sales. Taxes eat up another 2% of sales, and dividends consume another 6% of sales, leaving absolutely nothing for a rainy day.

NOTE: Please do not freak out, the reason it doesn't total 100% is because of rounding.

On a value investing basis, I estimate that a reasonable value for the stock is $7, with a buy target of $3.50, a first sell target of $6.75, and a close target of $7.50.

On a fundamental investing basis based on the latest 10-K filing of 11/06, the stock has a PE of 35, a Return on Invested Capital of 10%, Free Cash Flow of $0.23, a Tangible Book of $2.36, and pays a cash dividend of $0.01 per share. Is this high?

On a short term investing basis, based on a recent close of $6.11, the stock has overhead resistance at $7.39, a 28% increase from current levels, first support at $6.05, a 1% decline from current levels, and second support at $5.71, a 7% decline from current levels.

So all of this brings me back to the company's investment philosophy, investing in stocks that pay high dividends to avoid investing in losers.

Now admittedly I'm not the sharpest pencil in the box, but it just seems to me that if the one penny per share dividend that Traffix, Inc. pays is considered a high paying dividend by Mr. Byrne, it might just be that his client base dies off before they are able to determine how well his investing philosophy actually works.

Wax

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