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(1.)  UNDERVALUED INVESTING IDEAS

In this section of the newsletter my goal is to introduce you to a variety of undervalued investing ideas that you may wish to consider for your portfolio. Below you'll find an in-depth look at several promising value stocks that I believe will outperform the market in the coming months...

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Natural Health Trends (BHIP, $9.14)
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Natural Health markets a wide array of health and skin care items, cosmetics, dietary and nutritional supplements, and other consumer products manufactured by third parties. The company sells its goods through a variety of distribution channels, including catalogs, natural food retailers, a commissioned sales force, and various websites.

Although based in Texas, this direct marketer rakes in the bulk of its sales overseas. In fact, Natural Health generates less than 10% of its revenues in North America. The majority (two-thirds) of its business is conducted in Hong Kong, with the remainder spread throughout Asia, Latin America, Australia and Eastern Europe.

I was first attracted to Natural Health by its strong financial position, along with recent expansion into a number of fast-growing international markets. Very few companies trading on our exchanges bring in 90% of their revenues from foreign countries. As such, BHIP provides domestic investors a convenient way to gain valuable exposure to the economic expansion that is taking place throughout Asia.

As you can see in the table below, Natural Health's top-line growth rates have been staggering over the past five years:

Over the same period, BHIP has seen a tremendous eight-fold increase in its gross profits, which have totaled approximately $145 million over the past four quarters. Gross margins have slipped slightly in recent years, but still remain at a very healthy 77%. And while increased commissions, personnel costs, and marketing expenses have all taken a toll on the bottom line in recent quarters, the company remains profitable -- posting both positive cash flows and net income in each of the past three years.

However, Natural Health has run into some corporate governance problems lately. Last August, an audit was launched to investigate alleged improprieties committed by two of the firm's former directors. While such charges are never welcome news, the company did move swiftly to remove the individuals in question and reorganize its upper management team.

Nevertheless, the shares have fallen sharply since then, and are currently hovering just above their 52-week low. As a result, BHIP is trading at a sharp discount to its industry rivals.

Though a sharp increase in the firm's outstanding share count raises possible concerns regarding shareholder dilution, I believe the rewards outweigh the risks at this point. Sales volumes continue to surge forward, and management recently pushed through a +5% price increase on all of its existing product lines. Furthermore, the company has bolstered its sales force by adding around 68,000 active distributors over the past year, and it currently has 169,000 individuals or groups promoting its products worldwide.

And although Natural Health has already established a foothold in more than thirty countries, the firm continues to expand aggressively into favorable markets. For example, the company moved into Mexico last summer and is expecting to hit the ground running in Japan this quarter. Perhaps the biggest business development project is taking place in China, where the government has recently taken steps to relax laws prohibiting direct selling.

In a recent press release, CEO Robert Hesse stated "China presents the greatest opportunity in our lifetime. Our products have already been permitted, the capital is now committed, and we have working offices in Zhuhai and Guongzhou of the Guondong Province, as well as in Beijing."

While there is still a great deal of uncertainty surrounding this vast untapped market, China could one day become an important growth driver. Any positive developments on this front could be a catalyst for a rebound in the stock. In any case, this undervalued company is well positioned for future growth, and any bottom-line improvements should translate into healthy gains for shareholders.

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General Employment Enterprises (JOB, $1.51)
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Incorporated in 1962, JOB is a temporary staffing firm that places information technology (IT), engineering and accounting professionals on a temporary or part-time basis. The firm conducts its business through 18 branch offices located in ten states.

I first introduced shares of General Employment to readers last June. At that point in time the shares were trading at $1.29. Those that acted on the recommendation were quickly rewarded, as the stock rocketed more than +65% over the next two months, reaching a peak of $2.18.

However, the shares have since relinquished much of those gains, slipping lower last month after the company announced flat first-quarter revenues and earnings. After this sharp pullback, the stock is right back where it was last summer -- and is once again poised to deliver attractive returns.

Before taking a closer look at the company's recent performance, let's review some of the highlights from last June:

• Despite its small size, General Employment was generating healthy gross profits and positive free cash flows.
• The company had a strong balance sheet with ample liquidity, as evidenced by a comfortable current ratio of 3.6.
• The firm's latest quarterly earnings had just swung from a $445,000 loss to a $21,000 profit.
• After ranking more than twenty firms in the staffing industry by several traditional metrics, JOB was among the most attractively valued in the group.

Nine months later, my original investment thesis on JOB remains intact. Although the first-quarter results that prompted last month's sell-off were somewhat soft, they were hardly cause for alarm. Essentially, General Employment's revenues are split between two sources: contract services and placement services. During the quarter, contract revenues dropped -11%, but that slowdown was offset by an +8% increase on the placement side. As a result, net revenues only dropped -3% to $4.7 million.

Despite the slightly weaker top-line figure, JOB delivered several notable improvements. First, management made a concerted effort to target higher-paying positions, which helped its average hourly billing rate spike +19%. Furthermore, the company reported a double-digit increase in the number of placements. Finally, net income actually ticked up modestly to $128,000, or $0.02 per share. JOB has now posted positive (and rising) earnings for six consecutive quarters.

Despite the improved financial results, JOB is still trading at a compelling discount to its industry peers. With only five million shares outstanding, the company has a market capitalization of just $7.8 million. However, the firm has a tidy cash stockpile of $4.8 million, which reduces its enterprise value (the amount investors would pay after adjusting for cash and debt) to a microscopic $3.0 million -- or $0.58 per share. By comparison, the company produced $12 million in gross profits last year alone.

As the table below shows, JOB is one of the most affordably priced stocks in the business services group.

At the same time, the company is on very solid financial footing, has above average gross margins, and has produced impressive return on asset (ROA) and return on equity (ROE) figures of 8.8% and 11.4%, respectively. Both show a pronounced improvement over negative figures from last year, and they also rank JOB in the top third of its industry.

As with most small stocks, JOB is relatively thinly traded, and investors must be willing to hold the stock during prolonged periods of slow volume and little news. Furthermore, in the current costly environment of Sarbanes-Oxley, there is always a risk that the stock might delist and be moved to the pink sheets.

Nevertheless, given the low expectations priced into the shares, any financial improvements should command attention. Considering the robust labor market in recent quarters, General Employment should see demand for its services -- and by extension its shares -- pick up noticeably in the years ahead.

(2.)  CONTINUED GUIDANCE ON PREVIOUS IDEAS

The goal of this section of the newsletter is to provide you with continued guidance and analysis of companies that I have profiled in previous issues. In the process, my aim is to help you spotlight companies that are now attractively valued at current levels, as well as to steer you away from stocks that have become overvalued or that no longer meet my stringent investment criteria.

The table below displays data for all previous ideas that I'm currently tracking at this time...

Recent Events:

Vodavi Technology (VTEK, $6.28) -- Shares of VTEK bounced higher late last week after the company announced a contract with CompUSA -- one of the nation's largest retailers of high-tech products. According to the deal, Vodavi will supply IP terminals as part of the VoIP services that CompUSA offers to commercial customers.

Scott's Liquid Gold (SLGD.OB, $0.72) -- This consumer product manufacturer recently delivered a +6% jump in 2005 sales to $24 million, while net losses narrowed from $0.09 to $0.02 per share. With ramped up advertising expenses, management is expecting continued losses over the next quarter or two. However, earnings could improve in the latter half of the year.

National Beverage (FIZ, $9.39) -- Last week, the soft drink maker reported a +6% gain in third-quarter sales to $109.6 million. More importantly, FIZ leveraged that gain into net income of $2.3 million, or $0.06 per share -- triple the $0.02 it earned a year ago. The unexpectedly strong results surprised analysts, most of whom were anticipating a breakeven quarter.

Scheid Vineyards (SVIN, $6.60) -- Scheid recently reported that it harvested more than 31,000 tons of grapes from its 5,700 acres of vineyards last year -- a new company record. Approximately two-thirds of that production was sold as grapes (as opposed to wine), which helped grape revenues swell +35% to $22.1 million. Meanwhile, net income for the year soared nearly +240% to $4.4 million, or $0.86 per share. That gives the stock a rock-bottom P/E of less than 8.0.

Scientific Technologies (STIZ, $7.65) -- STIZ jumped nearly +20% last Wednesday after the firm reported record fourth-quarter financial results. Net income for the period swung to a $0.12 profit from a -$0.50 loss a year ago on revenues that rose +25% to a record $16.9 million. The results capped of a solid year, with the company delivering net income of $3.4 million, or $0.35 per share, reversing a $5.1 million loss from 2004.

Competitive Technologies (CTT, $3.48) -- Competitive announced disappointing second-quarter numbers earlier this month, as the company posted a net loss of -$0.06 per share on revenues that plunged to $1.3 million. While the results were discouraging, it should be noted that substantial one-time upfront licensing fees of $5.8 million booked last year made for difficult year-over-year comparisons.

Rather than concentrate on hitting arbitrary short-term financial goals, management is focused on unlocking shareholder value over the long term. As such, the company's results might be volatile from quarter to quarter, but the long-term outlook over the next five years remains promising.

First Albany (FACT, $5.77) -- The investment-banking firm recently reported strong fourth-quarter results. Revenues for the period jumped +13% to $63.8 million, with earnings from continuing operations climbing +26% to $0.24 per share.

First Albany's core investment banking revenues have now risen for five straight years, reaching $47.6 million in 2005. Meanwhile, the company's venture capital subsidiary is proving to be a powerful growth driver. Last year, it plowed nearly $11 million into eight attractive companies, while raking in an impressive $31 million gain from the IPO of iRobot, of which FACT was an early investor.

(3.)  WATCH LIST

Below you'll find a list of companies that I'm now considering profiling in future issues of Margin-of-Safety Investing. I'm following each of these stocks closely and may profile a few of them if and when their risk/reward profiles meet my stringent criteria.

Watch List Comments:

I recently completed a performance analysis of all of my "Watch List" picks that never made it to the main section of the newsletter. If you had purchased every "Watch List" stock the first time it was introduced in this newsletter, then you would have earned an average return of +26% since this newsletter's inception last summer.

Below you'll find a listing of each "Watch List" stock, the date it was first introduced in this newsletter, and its performance to date. My reason for listing these ideas below is merely to highlight just how valuable this "Watch List" section can be. Although I don't provide full analysis of these picks, as you can see in the table below, these ideas have proven to be quite profitable over the course of the last year.

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To view my Margin-of-Safety Investing publishing schedule for the remainder of the year, please visit the following link:
http://www.StreetAuthority.com/msi-schedule.asp

Thanks for reading today's issue, and good investing in the coming days!

John DiStanislao
Editor
Margin-of-Safety Investing
http://www.StreetAuthority.com