PSB Portfolio Update March 2011

March 15, 2011

Market May Be Providing A Rare Buying Opportunity

After a strong six-month rally, the market looks like it’s starting to roll over.  But it’s not as bad as you might think.  The recent volatility is due to fears over the ongoing Middle East uprisings and the Japanese earthquake – tsunami – nuclear meltdown crisis.

In other words, the recent pick-up in selling is not due to a worsening economic outlook or wide scale cuts to earnings estimates.  Those kinds of problems would surely send the market down at a much more rapid pace.

Here’s my take on what’s going on…

Many investors are using these big, frightening events as an excuse to take some overdue profits.  Don’t forget, the market has surged by 36% since late August 2010.

It’s not uncommon for some investors to take profits off the table after such a powerful short-term upward move.  Heck, we’ve done it ourselves several times.  Of course, our strategy is a bit longer-term focused.  So, we’re not trying to move ‘all in’ or ‘all out’ in response to short-term market gyrations.

Remember, it’s much more damaging to your long-term performance to miss out on the big gainers.  The cost of our strategy, however, is riding out the occasional nerve-racking short-term market swings.

If you’re feeling a bit worried right now, remind yourself how well our strategy has worked in the past.

Take Web.com Group (NASDAQ: WWWW) for example.  Right after we recommended this stock it tumbled 11%.  But had we sold it, we would have missed out on gains of nearly 200%!

Another great example is Nova Measuring Instruments (NASDAQ: NVMI).  Shortly after we recommended NVMI, the stock declined more than 16%.  The volatility was certainly discomforting.

But we held on and rode this terrific stock up for gains of 164%!

I think the current market weakness will prove to be a rare buying opportunity.  There haven’t been too many pullbacks over the past couple of years.  So, be sure to use any pullback to your advantage by adding one or more of our buy recommendations to your portfolio.

Now on to the position updates…

Position Updates

Please Note:  We don’t necessarily update every open position each month.  We focus on the positions experiencing significant news, notable price movement, or a change in recommendation.  Please refer to the Performance page on our website for our current buy, sell, or hold recommendation for any positions not mentioned in the Update.

. . . . MFA Financial (NYSE: MFA) – Sell

We’ve had a phenomenal run in MFA.  But the time has come to lock in our huge gains.

The shares have soared on the Fed’s bond buying spree and easy monetary policy.  In fact, QE2 is responsible for the recent six-month rally in the shares.

However, with QE2 set to end in June, we think it’s time to cash out.

We’re concerned no one will step in and buy long-term treasuries when QE2 ends.  This potential lack of buyers combined with stronger global economic growth is likely to send interest rates significantly higher.

Rising interest rates will make it difficult for MFA shares to keep moving higher.  As rates increase, the value of existing bonds is sure to decline in value.  Since MFA holds billions of dollars worth of bonds, their portfolio is likely to take a big hit in coming months.

Let’s go ahead and lock in our terrific gains of 116%.  Remember, bulls and bears make money in the market, but pigs get slaughtered.

Congratulations to everyone on a fantastic trade!

. . . . Aurizon Mines (AMEX: AZK) – Buy up to $7.90

Great news out of AZK…

The junior gold miner has sharply boosted gold reserves at their Casa Berardi mine.  Thanks to an aggressive diamond drilling program, AZK has discovered an additional 542,000 ounces of the yellow metal.  The mine’s total gold reserves are now 1.5 million ounces.

That’s an impressive 44% increase!

What’s more, AZK has extended the mine’s lifespan from six to ten years.

The larger reserves at AZK’s primary mine clearly boosts the company’s value.  We should see the shares move higher in the months ahead.  Go ahead and grab your shares of AZK before they move out of our buy range.

. . . . Web.com Group (NASDAQ: WWWW) – Hold

WWWW keeps moving higher.  The shares hit a new high of $13.49 last week.  That gave us a peak gain of 196%.

Investors are continuing to buy WWWW after the company reported very strong earnings. We highlighted the company’s blowout fourth quarter in our last update.

Now analysts are raising estimates for 2011 and 2012.  This should help drive the shares even higher.  Hang on to WWWW for greater gains.

. . . . Information Services Group (NASDAQ: III) – Hold

III is pulling back on slightly disappointing fourth quarter and full year 2010 results. Investors had driven the stock higher ahead of earnings.  Many were clearly expecting signs of a stronger recovery in the company’s consulting business.

Unfortunately, the anticipated recovery is not yet showing up in the company’s numbers.

We still believe the ongoing global economic recovery will boost revenue and earnings at III.  We just need to exercise a little more patience.  The run-up in share price ahead of earnings shows our investment thesis is spot on.

When the company delivers, we should see the share price soar.  Continue holding III for bigger profits.

. . . . Summer Infant (NASDAQ: SUMR) – Buy up to $8.00

SUMR reported fourth quarter and full year 2010 results.  And investors clearly liked what they heard.  They drove the shares 9% higher on the news.

Here’s a quick recap…

For the year, revenues jumped 27% to $194 million.  That easily beat management’s guidance of $190 million.  Multiple new product launches and deeper market penetration drove the sales increase.

Profitability improved as well.  Earnings jumped an impressive 27% to $0.47 per share. That was slightly below guidance of $0.50 per share, but investors didn’t seem to mind.

Attention was focused on management’s guidance for 2011…

And they didn’t disappoint.  CEO Jason Macari said the company’s sticking by their earlier forecast of at least $220 million in revenues and $0.60 in earnings per share.

These estimates represent year over year increases of 13% and 28% respectively.

What’s more, the estimates appear to be highly conservative.  We’re likely to see some upside surprises in coming quarters.

SUMR is a good buy up to $8.00.  The ongoing economic recovery combined with greater market penetration should boost these shares nicely higher.

. . . . ZST Digital Networks (NASDAQ: ZSTN) – Buy up to $6.50

ZSTN keeps knocking the cover off the ball.  The company recently reported blowout full year 2010 results.

Here’s a quick summary…

Revenues surged 34% to $135 million on strong growth in the company’s GPS-related business.  Net income more than doubled to $22 million.  And earnings mushroomed 64% to $1.90 per share.

A fantastic year by any measure.

The shares rocketed higher by an impressive 29% on the news.  They’ve given some back on profit taking.  But I see this as a great buying opportunity.

Management’s outlook for 2011 is bullish to say the least.

They expect revenues to jump by 17% to 30%.  And they see net income expanding by a stunning 27% to 36%.

As the company delivers on this terrific forecast, investors should pile back into the shares.  And we’ll be perfectly positioned to cash in when the herd rushes in.

With the shares now trading below our buy up to price, I’m moving ZSTN from Hold to Buy. Go ahead and buy ZSTN up to $6.50 a share.

Action To Take

• Sell MFA Financial (NYSE: MFA)
• Move ZST Digital Networks (NASDAQ: ZSTN) from Hold to Buy

Category: PSB Portfolio Updates