Special Note from the Editor: We're pleased to have John DiStanislao as a guest contributor yet again this week. In addition, we're delighted to announce that we've reached an agreement to launch a brand new micro-cap investing service with John on May 1st, 2005.

Please stay tuned for further details on this brand new product in the coming days. In the meantime, we sincerely hope you benefit from the following three micro-cap investing ideas.

DATAWATCH (DWCH, $4.00)
Datawatch develops and markets data mining and help desk software used by more than 20,000 companies and government agencies worldwide. The firm is best known for its flagship Monarch software, which has sold in excess of 400,000 copies. The product provides businesses with a way to uncover data that is locked inside reports/statements and then convert that data into a more usable format. Monarch can also pull information from HTML or PDF files on the Web.

To complement its Monarch software, Datawatch also sells a related suite of products that automate the extraction of data. In addition, the firm has made significant progress with an enterprise product that duplicates the functionality of its desktop Monarch software. Finally, the company also generates revenue from the sale of help desk software. However, that product has been losing market share, and at this point it is little more than a drag on the firm's bottom line.

Datawatch has seen its stock price rise dramatically over the last two years. Typically, as a value investor, this run-up would preclude me from buying the stock. However, in this case, there are several reasons why I still consider the company to be a good buy.

For starters, the company recently launched a new, impressive version of its flagship Monarch software. After examining the new product personally, I firmly believe that most current users will be persuaded to upgrade. In addition, the product should help Datawatch to attract new users. Furthermore, the company has also expanded its sales staff to market the enterprise version of Monarch.

The costs of upgrading and hiring additional employees were evident in the firm's recent quarterly earnings report, which it released on Monday. However, it's important to point out that the company has historically posted weak results in the period leading up to a significant upgrade. The stock declined –9.50% on the heels of the firm's earnings announcement, and this negative knee-jerk reaction could provide investors with an excellent opportunity to build new positions in DWCH. In addition, any future selling pressure should provide a good buying opportunity.

Although the firm's short-term financial results are likely to suffer as it expands its product offerings, the recent software upgrade should generate substantial revenues in the coming quarters. With this in mind, I believe patient shareholders will ultimately be rewarded here.

NATIONAL BEVERAGE (FIZ, $7.25)
National Beverage, like the name implies, is a nationwide distributor of beverages, specifically soft drinks, juice, and bottled water. The company produces drinks in one of its fourteen manufacturing facilities. It then ships those products to grocery markets, convenience stores, and other retail outlets all across the country. The company's most famous brand is Shasta -- a soft drink line first marketed over 100 years ago.

With a current market cap of around $262 million, National Beverage is larger than most of the companies I cover. Despite its larger size, however, the firm has a number of attributes that merit consideration.

To begin, the company's balance sheet is spotless, with nearly $50 million in cash and no debt. Furthermore, the stock's current valuation also looks compelling. National Beverage posted $42 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) last year. That gives the stock an Enterprise Value/EBITDA ratio of just 5.0 -- an extremely compelling valuation level. Meanwhile, FIZ is trading at only half of last year's sales, which came in at over $500 million. That gives the stock the lowest price/sales multiple of any major firm in the nonalcoholic beverage industry.

National Beverage is closely held by company insiders. CEO Nick Caporella alone holds a 77% stake in the firm. As a result, management tends to run the company in a shareholder-friendly fashion, doling out several generous one-time dividends over the past few years. In addition, the company boasts quality earnings, supported by healthy free cash flow. It is also worth noting that National Beverage owns most of its production facilities. This enhances the firm's value and could make it a more enticing acquisition target.

In the February issue of Forbes, National Beverage was singled out in a feature story titled "15 stocks for under $15." The company was given a glowing recommendation in the article, yet at that point in time the stock was trading as high as $9.43. Since then, the shares have shed nearly a quarter of their value -- presenting investors with an even better entry point.

Finally, the firm's insider trading activity has been positive over the last eighteen months, with no sales reported. With all of these factors in mind, I like this company, and I feel very comfortable suggesting it as a high-quality investment idea for long-term investors.

UNIFY (UNFY.OB, $0.45)
Unify is an enterprise software company with an established 24-year track record. The firm's products give organizations the ability to connect different data sources and automate their business processes.

This stock is much more speculative than either DWCH or FIZ, as the company has many areas that need improvement. Despite recent operational weakness, though, we believe Unify will head higher over the long haul thanks to its viable product line.

In February, the firm reported slightly wider third-quarter losses. However, after digging further into the company's financial results, I spotted several positive developments that have yet to be reflected in Unify's stock price.

To begin, revenues in the quarter climbed +13%, topping the $3 million mark. The gain was driven by a +24% jump in software licensing revenues, which now account for about half of the company's total sales. Also, gross margins expanded from 80% to 85%, and after backing out severance, restructuring, and other non-recurring charges, the company would have actually reported a modest $29,000 gain in net income. Finally, the company reported almost $4 million in cash on the books, more than $1 million more than this point last year.

Unlike most other tiny enterprise software firms, Unify has built a diverse customer base. The company sells to more than 2,000 active customers representing a broad range of industries in over 45 countries. These include such well-respected names as Boeing, Limited, Canon, Citigroup, Credit Lyonnais, Federal Express, GlaxoSmithKline, and Reuters. In the last three years, no single customer has accounted for more than 10% of the firm's revenues.

Lastly, it has been comforting to see positive recent insider activity in UNFY.OB from several major shareholders, including Diker Management and Austin Marxe & David Greenhouse. These institutions sport excellent track records of buying small software companies, and over the last two months both of these firms have purchased several hundred thousand shares of UNFY.OB at prices well above the stock's recent close. At these levels, I would feel comfortable investing in shares of this speculative, but potentially explosive, stock.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
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