About a year ago I wrote about J2 Global Communications (Nasdaq: JCOM), the Los Angeles-based company whose claim to fame is its eFax service that converts faxes into e-mails, which allows customers to send and receive them anywhere in the world with internet access. Small businesses can put a fax number on their business cards, projecting a more professional image. The only problem with this service is the simple reality that the fax machine is a dead technology. Despite long odds, I see it doing well as it adapts to changing business conditions. Just how well is another question.

IN PICTURES: Digging Out Of Debt In 8 Steps

Going Short
In the July 6 issue of Barron's, research firm Short Alert listed J2 Global as one of its top-five picks to short at this time. Short Alert believes the stock could go as low as $10 if the company stops making acquisitions and subscriber numbers decline at the same time. With the internet and next-day couriers FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS), the need for faxes is virtually non-existent.

That's the thought, but I don't think it's that simple. Much of J2's revenue is recurring, producing operating margins of 40% and free cash flow that's about 30% of sales. With a one-third market share in the fax-to-email business, it would take a complete collapse in the industry to hurt the company. Plus, with many of the world's banks, insurance and real estate companies using digital fax services as a safety precaution, it's unlikely that this would happen. Furthermore, J2 Global is building a serious revenue stream in automated receptionist services, now accounting for 15% of its estimated revenue in 2009, up from 2% in 2006.

I guess if you go short on a stock long enough (Short Alert recommended J2 stock in 2008 as well), you're bound to be right eventually.

Why Go Long
If you're a contrarian, you'll be at the top of this list. Currently trading at or near record lows for price-to-book, price-to-earnings and price-to-sales while its return on assets, return on equity and operating margins are at record highs, $20 might appear slightly overvalued; but you have to be interested. It's still growing despite a recession - with revenues up 3% to $60.4 million in Q1 and EPS up 20% to 42 cents - with its eFax brand providing more staying power than the shorts are willing to admit. Even if it were to experience a decline in sales, its operating margins grew 540 basis points in the latest quarter year-over-year. Eventually it's going to find related businesses that complement its two existing revenue streams.

Obviously, others agree. J2 Global's short position is at 4%, close to an all-time low. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

J2 Global And Competition

Company Market Cap 52-Week Change Return on Assets
J2 Global (Nasdaq:JCOM) $1.06B 2.79% 19.64%
Premiere Global Services (NYSE:PGI) $586.86M (36.79%) 7.45%
iBasis (Nasdaq:IBAS) $147.09M (45.97%) 0.07%
Easy Link Services International (Nasdaq:ESIC) $46.72M (43.77%) 7.04%

Bottom Line
Short Alert's theory that J2's stock could plunge to $10 is far-fetched in my opinion. In fact, given its ability to increase operating margins and free cash flow while developing its voice services business, I think it's more likely to hit its five-year high of $37.39 in the next year than the other way around.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  9. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  10. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center