CVV Worth $17.08?

I’m sorry about yesterday – I wanted to nail the thing about Charles’s relationship to money but then I got sleepy, and when I get sleepy my mind reverts to ‘roses are red’ and I’m useless.

Which is too bad, because now there is now SO much important stuff backed up, starting with this assessment from Time:

The Stimulus Turns Two: How Obama Quietly Changed Washington
By Michael Grunwald

President Obama is often mocked for failing to change Washington, and clearly, his lofty campaign vision of post-partisan cooperation hasn’t come true. But behind the scenes of the Beltway perpetual-conflict machine, Obama has made quiet progress towards reforming Washington – not politically, but bureaucratically. The most important reform, launched two years ago today, was tucked inside his unpopular stimulus package, and inside his new budget, he’s trying to expand it.

The reform is a simple concept that certainly ought to be post-partisan: Harnessing the power of competition in the spending of taxpayer dollars. Most federal programs spread cash around the country like peanut butter through rote, check-the-boxes, everybody-wins formulas. Obama has tried to divert funds into competition-based, peer-reviewed, results-oriented grant programs that reward only the worthiest applications. The best-known is the Race to the Top education program, but the stimulus hatched similar competitions in energy, transportation, housing, health care and broadband. And Obama’s 2012 budget proposes new races to the top in everything from juvenile justice to workforce development to agricultural research. (Read TIME’s report card on Obama’s first year in office.)

At a Cabinet meeting today to commemorate the second anniversary of the stimulus, Vice President Joe Biden will release a lessons-learned report that includes a section titled “Competition Brings Results.” (His aides gave me an exclusive copy of the report, titled “A New Way of Doing Business: How the Recovery Act Is Leading the Way to 21st Century Government,” because I was already writing about the topic. And perhaps because I’m the only journalist in America who keeps writing nice things about the stimulus.) At the meeting, Education Secretary Arne Duncan, Energy Secretary Steven Chu and Transportation Secretary Ray LaHood will all talk about the power of competition to promote good government, encourage innovation and get better returns on taxpayer investments. Biden is sure to gush about stimulus successes, and the various ways the budget aims to build on them.

But their self-congratulation probably won’t get much attention, because bureaucratic progress is a lot less dramatic than political warfare. And it’s quite possible that the progress will end with the stimulus; in not-yet-post-partisan Washington, the only thing House Republicans consider deader on arrival than an Obama budget initiative is an Obama budget initiative inspired by the stimulus.

Still, the $4.35 billion Race to the Top program does have some bipartisan support – Jeb Bush, George Will and Arnold Schwarzenegger love it – and it does show how competition can create laboratories for change. By setting clear goals and guidelines – the cash was reserved for states that carefully measured student and teacher performance, promoted charter schools, and adopted other accountability-oriented reforms – the program encouraged 41 states to change laws or policies before the feds even spent a nickel. The application process also put a premium on cooperation among school leaders, teacher’s unions, parent groups and elected officials. So the impact of a program that amounts to less than 1% of the education budget will extend well beyond the twelve states that won grants. The stimulus also financed a separate $650 million competition to identify innovative evidence-based school programs; it received over 1000 applications for 49 grants, a vivid illustration of pent-up demand for something different. (See pictures of homeschooling in America.)

Now Obama wants to pour another $1.4 billion into new education competitions, including an Early Learning Challenge Fund to encourage reforms in early childhood education, a “First in the World” program to improve outcomes in higher education, and an additional Race to the Top targeting school districts instead of states. “By introducing competition, you get a much better bang for your buck,” says Jared Bernstein, Biden’s top economic advisor. “You can’t do it with every federal program, but it’s one way to reinvent government for the 21st century.”

There were grant competitions scattered all over the stimulus, and almost all of them were dramatically oversubscribed. A $2 billion program seeking innovative approaches to stabilizing foreclosure-ravaged neighborhoods received $15 billion worth of applications. Obama’s $8 billion high-speed rail initiative received $55 billion worth of applications. The Department of Energy received an astonishing 3700 responses to its solicitation for radical blue-sky ideas that would transform the clean-energy landscape if they happened to work; only 37 received first-round funding. But the department’s seal of approval apparently meant something to private funders; a half dozen of those projects have already attracted additional venture capital.

Meanwhile, with $35 billion in stimulus cash to distribute through a slew of competitive programs – for everything from energy efficiency programs to battery factories to advanced biorefineries – the energy department itself became the world’s largest venture fund. To help evaluate the applications, Chu recruited over 3,000 independent experts, who devoted about 50 person-years to the task. That kind of scrutiny isn’t required for formula programs that distribute cash to all qualified applicants, much less earmarks that simply dump the money into congressional pet projects. (Watch a Q&A with Chu.)

Obama’s budget includes $100 million for a “Race to Green” competition for innovative state and local building codes, and $200 million for a similar race for communities that invest in electric vehicles and charging stations. There’s $380 million for a Workforce Innovation Fund to reward successful approaches to job training, and $120 million for “a new performance-based Race to the Top-style Juvenile Justice System Incentive Grant Program.” And there’s $32 billion for competitive transportation grants designed to promote safety, livability and innovative approaches to reducing congestion, along with a $30 billion national infrastructure bank that would also provide merit-based loans and grants.

It’s hard to overstate how radical this approach is, especially in the world of transportation. Aside from earmarks, almost all transportation funding is formula-based, where every state is entitled to a slice, and any project is acceptable as long as it fits into a neat silo (highway, airport, etc.) and provides all the necessary paperwork (traffic studies, minority hiring plans, etc.) It’s nobody’s job to ask whether the project actually makes any sense or serves any national purpose. But the stimulus included $1.5 billion in competitive grants for major projects that wouldn’t necessarily fit into a neat stovepipe but would provide significant economic and environmental benefits, from public-private partnerships to expand freight-rail capacity in seven states to new streetcars in Tucson, Dallas and New Orleans to a green-themed revitalization of a tough Kansas City neighborhood.

The Department of Transportation was inundated with nearly 1400 applications for its first 51 grants. And DOT officials say the program galvanized their bureaucracy; it turns out that civil servants work a lot harder when they’re assigned to help evaluate whether projects would be good for America, rather than whether projects have submitted all their paperwork. “Republicans ought to love this stuff,” said one senior administration official who requested anonymity. “It’s evidence-based, it’s merit-based, it’s results-based. It’s not government telling you what to do; it’s setting the goals and letting the applicants figure out how to get there.”

There could be legitimate nonpartisan concerns about the Race-to-the-top-ification of federal spending. Rigid formulas provide certainty and a measure of equality; competition introduces subjectivity, and opportunities for political shenanigans. Rigid formulas are determined by Congress; competition introduces flexibility, and additional power for the executive branch. And some programs don’t lend themselves to competition; formulas work just fine for Social Security benefits and food stamps. (Comment on this story.)

But legitimate nonpartisan concerns won’t drive the debate over Obama’s budget, especially where stimulus-related initiatives are concerned. At his Cabinet meeting today, Biden will present the good news of the Recovery Act, which helped avoid a depression, reduced the unemployment rate by 2%, cut taxes for 95% of Americans, bailed out every state to prevent mass layoffs, funded over 75,000 projects to upgrade roads, parks, sewers and just about everything else, and made unprecedented investments renewable energy, health information technology, broadband, the smart grid and much, much more – with no earmarks and virtually no fraud. But to Washington Republicans it’s the “failed stimulus.” That was their story in 2009, when they opposed it en masse, and after their sweeping victories in November, it’s hard to see why they would want to change it. Anyway, most Americans believe it.

Obama wasn’t the first presidential candidate to promise a new era of bipartisanship; his polarizing predecessor, after all, was supposed to be a uniter, not a divider. But it’s a silly promise to make, because your opponents can break it for you by refusing to cooperate. Washington is remarkably resistant to that kind of cultural change. On the other hand, bureaucratic change ought to be genuinely achievable, if only because the 24-hour cable yappers don’t really care about bureaucracy, and the sillier aspects of government are obvious across party lines. Obama’s stimulus did begin to usher in a new era of rationality through competition, where you had to do more than just check the right boxes and extend your hand to qualify for a federal check.

But the most important competition took place in November, and Obama’s team lost. It’s possible to change Washington, but Washington can change back, too.

DEFUND THE WILD WEST

Jim Leff: ‘Re ‘Defund Kentucky‘ Wednesday, you and Begala overlooked a far larger and longer-standing version of the same hypocrisy. How about the entire American west? It’s been a powerhouse of American libertarianism for decades, yet its economy depends on deep federal subsidy. Big ranchers grew rich from a federal dole and used their wealth to push for denial of basic needs for everyone else – strictly on ‘philosophical’ grounds. I don’t blame the right for this hypocrisy. I blame the left for being too wormy to point it out.’

BIG PHARMA PROFITS

Joel Wesson: ‘If the US moves toward a more rational health care system – and the government is allowed to negotiate what Medicare pays for drugs – the speculative drug stocks you and Guru suggest would be less likely to be so profitable. We might also have a healthier population at lower total cost.’

☞ And that’s not the only big picture trend that could someday pinch these stocks. This Newsweek story features a highly regarded genius who says that much of the expensive medicine we rely on is worthless. Ouch.

DYAX

First suggested at $3.17 and briefly topping $5, it closed at $1.98 yesterday. Back in November, we suggested selling it for a tax loss. But I held some . . . and so yesterday checked back with Guru for an update:

The DYAX competitor I told you about came out with its data and it was positive. I expect a launch of the competitor in 2011 and it should have the upper hand. It will likely have no meaningful sales. Still, the company is in lots of partnerships for other drugs. You never know, out of the blue something could be announced and make the stock pop. If you are comfortable treating this as an option without an expiry date where ‘you never know’ – one of 14 partnerships could suddenly say something positive (though these partnerships pay DYAX at best single-digit royalties) – then you can hold. If you prefer the theory that ‘I want to know why I should be making money,’ then you want to sell this and go into something like CBRX, or pretty much any of the other recommendations.

CVV

Aristides’ Chris Brown: ‘We have built a significant position (3% of the fund) in a very speculative company named CVD Equipment (ticker CVV) which makes products that enable R&D, prototyping, and manufacture in a variety of extremely high-technology industries (e.g. nanomaterials, solar, LED). Prior to the global economy falling apart, the company had a record revenue year in 2008 ($18 million, up from just under $14 million in 2007). Recently, the company has received orders at an unprecedented pace: over $7 mil in 3Q10, $8 mln in 4Q10, and $9.3 mln in January 2011 alone. The stock has flown higher on these recent press releases, in spite of the fact that the company filed a $20 mln shelf registration [for sale of $20 million worth of stock] at the same time it revealed its January orders. It is a NY-based company with a seemingly very well qualified management team. . . . If one annualizes orders for the last 7 months, that yields a very rough forward annual revenue run rate estimate of $41 million/year. Given the high-tech nature of the company’s business, in this market environment I believe enterprise value-to-revenue is an appropriate way to value the company, and believe it is very reasonable to assign a value of at 2.5x EV/forward revenue based on public peers in other high technology applications. The company has no net debt, so its EV is its market cap. The company has about 5 million shares outstanding, and I believe they are likely to issue another 1 million shares in a secondary offering, as they will need more working capital given the recent order flow. The stock last traded at $11.21. Assuming they do issue shares, and they use the proceeds to buy inventory (so that it’s no longer cash), that gives an enterprise value of $67.26 million, versus a target of $102.5 million. In other words, based on what is known about the company right now, I think the shares should be trading about 50% higher ($17.08). If future orders resemble anything like January’s, then the price could go much, much higher than that. If you blog it, please remind your readers to use limit orders if they are buying something small and illiquid like this.’

☞ By the time I read Chris’s email, the stock was $11.68 bid. It touched $12.60 in the middle of the day. When it calmed down a bit, I bought some for $11.90. I sure would have preferred to buy it at $8 a few days ago but (and here is the main thing) I paid $11.90 only with money I can truly afford to lose.

Have a great long Presidents Day weekend.*

*There once was a man from Manhattan
Whose writing was like purple satin.
He said with a grin
To make right Thursday’s sin:
‘Posting Monday — but maybe in Latin.’