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GroovyStocks submits: A few days ago we wrote about recent market reactions that didn’t match the news headlines. None of these examples beats what we saw yesterday with HouseValues (SOLD).

Tuesday night the company announced that for 2005, revenue was up 82% and net income up 101%. “‘2005 was the sixth year of extraordinary growth at HouseValues,’ said Ian Morris, chief executive officer of HouseValues Inc. ‘2006 will be another year of growth…’” Yet shares of HouseValues dropped over 25% yesterday. It seems that the market is taking the company’s ticker symbol to heart.

As always is the case, there’s more to the story than the headlines. HouseValues provides online subscription services to real estate agents and mortgage bankers, so there’s substantial housing bubble fear priced into the stock. Company guidance for 2006 seemed to affirm a coming slowdown and today’s downgrades from JP Morgan and Piper Jaffray have only added fuel to the fire. 2005 net income is also misleadingly attractive because it includes the result of a favorable settlement of a state tax audit.

HouseValues is a new name for us, so we can’t say that we know the company well. It’s certainly too early for us to say that we view the sell-off as a certain overreaction. What we can say though, is that the company has some attractive features and we hope to look at it closer in coming days.

For starters, SOLD has $89 million in cash, no debt, and a market cap of $250 million. Having no debt should help the company get through any downturns. Having over a third of the market cap in cash also provides a margin of safety and makes the valuation more appealing when you adjust for excess cash. The small market cap means that many investors will overlook the company. (Note: The numbers in this post are from Yahoo! Finance and may need to be adjusted for the latest results.)

Despite being a small and fairly new company, HouseValues has been profitable for several years. It has an operating margin of 23.3% and a profit margin of 16.9%. Return on assets is 18.9% and return on equity is 24.5%. We view these margins and returns as very attractive—assuming they are sustainable.

Insiders are motivated by 25% ownership in the company. Heavy insider ownership, especially in small caps, is always encouraging. The past few months have also seen significant insider selling, so do your homework.

Forget trading at a 52 week low — SOLD appears to be at an all-time low. True, it can fall lower still, but we are asking ourselves whether HouseValues is really worth 25% less than it was yesterday and whether this is the worst predicament in which the company has ever found itself, which is what the share price implies. The answer to both of these questions might be “yes,” but we need to do some more work until we come to a conclusion.

There are certainly a lot of people who are betting against HouseValues — 29% of the float is short and the short ratio is 21.8. If the shorts get squeezed this can work to the long investor’s advantage, but it also reminds us that there’s another side to the story that we have to make sure we fully understand.

John Bethel submits: My broker Charles Schwab gives great customer service and I can’t say enough good things about the firm. But when I scanned my holdings in Schwab Equity Ratings last night, I noticed most weren’t covered, and other got a smattering of C’s and D’s.

Suddenly I saw one of my stocks had an “F” rating — Deckers Outdoor (DECK). Schwab says its rating is based on data as of February 24, 2006. It breaks down its evaluation of Deckers on the basis of Fundamentals, Valuation, Momentum and Risk, giving the company a “D” on all four. (Why that equates to an overall rating of “F” instead of a “D” escapes me.)

I first recommended Deckers on October 18 at $20.92 a share. It closed yesterday at $33.90. That’s a gain of 62%.

The stock is up a bit since Meryl Witmer recommended it in this year’s Barron’s Roundtable, yet I’d imagine the fundamentals and valuation are intact (though it was cheaper last Fall). Momentum is surely on the side of the stock price. And ditto the company since Uggs can’t be seen as a “fad” anymore.

Risk? Well, you can make a case the stock is risky. It has had a wild ride over the past year. And regular readers know I had a wild ride with it myself. Plus, the share float is small, which some would say is risky in and of itself.

Still, I can’t imagine Schwab giving the company an “F” rating. I’m actually surprised Schwab even covers Deckers at all considering its small market cap. (It doesn’t rank Fairfax Financial, which is a much bigger company than Deckers and is listed on the NYSE.) In short, if this company deserves an “F,” I hope a lot more of my stocks “flunk” in the coming months.

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