PSB Portfolio Update December 2010

December 21, 2010

A Strong Finish To The Year Bodes Well For 2011

2010 wasn’t the year we had hoped for perhaps… but it’s ending nicely.  Since late August, the markets have really taken off.

The S&P 500 has jumped from roughly 1050 to 1250, good for a 19% gain.  More importantly, the Russell 2000 small cap index has climbed from under 600 to about 775.

That’s an impressive 29% jump!

Clearly, the markets benefited from positive news the last few months of the year.

The biggest news was the Fed’s QE2.  However, the midterm elections have also been a bullish catalyst.  And don’t forget surging corporate earnings growth.

So what’s it all mean for 2011?

In my opinion, we’re positioned for bigger gains next year.

On the political side, the Bush tax cuts have been extended for two years.  That means lower costs for businesses.  More importantly, the trend of strong corporate earnings should continue.

What’s more, the economy is showing real signs of improvement.  Both industrial and retail spending is up.  Higher spending by companies and consumers means greater confidence in the economy.

That’s always good news.

Finally, the international markets should help next year.  China and India are still growing like crazy.  And it looks like the worst of the European debt crisis is behind us.

All in all, there are several positive forces moving in our favor next year.  And it should lead to a strong year for penny stocks.

I want to wish each and every one of you Happy Holidays and a Happy New Year!  I’m looking forward to great success in 2011.

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.

. . . . SMART Modular Technologies (NASDAQ: SMOD) – Sell

The fundamental picture at SMOD has changed for the worse.  They’ve guided revenue and earnings for the current quarter much lower than analysts’ estimates.

An unexpected drop in memory chip prices is to blame.  And weakening demand for the company’s products in Brazil (their largest market) is pressuring margins.

What’s more, Gartner Group says Apple’s iPad is taking a big bite out of computer sales.  As a result, Gartner has significantly lowered their growth estimates for global computer sales for 2010 and 2011.

While management claims the downturn is temporary, we don’t think it makes sense to hang around.  Analysts will be lowering estimates soon which will likely send the shares lower.

Let’s go ahead and sell our shares of SMOD now and free up capital for better opportunities.

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

WWWW continues to soar!  The shares jumped to a new high of $8.72.  That’s a fantastic 91% gain.

There’s not much new to report… the company is still benefiting from great earnings last month.

Investors are piling into the stock after seeing a 29% increase in net income and a tripling of net subscribers.  When a company is growing across the board, it’s going to attract investors.

With the economy improving, small and medium sized businesses are going to be looking to increase their online presence.  And that’s great news for WWWW.

I see big things ahead for this company.  Let’s continue holding WWWW for greater gains.

. . . . Nova Measuring Instruments (NASDAQ: NVMI) – Hold

NVMI continues to shine!

Remember, even when the semiconductor equipment industry was lagging, NVMI posted great earnings.  We felt that was a great sign for this company… and we were right.

Shares soared to a high of $8.08 for an excellent 86% gain.  That’s a solid return in any kind of market.

And that’s not all…

The semiconductor industry is again headed in the right direction.  Spending on semiconductor equipment is on the rise as companies prepare for a stronger 2011.

NVMI is perfectly positioned to take advantage of a strong year.  They have growing revenue, growing income, and have already increased guidance.  That’s an excellent combination for success.

I think these shares can go much higher.  Let’s hold on to our shares of NVMI for bigger profits.

. . . . FSI International (NASDAQ: FSII) – Hold

FSII is on a tear!

The shares shot up to a high of $4.69.  That’s a stellar 32% gain.  Just what we like to see.

And I expect to see even bigger gains in the future.

The semiconductor industry is back on track.  The economic recovery is gaining traction. Both business and retail spending are on the rise.

And FSII benefits from both.

As a result, we expect to see FSII post gains in revenue and income in the coming months.  In fact, the company just announced a big order from an Asian semiconductor manufacturer for their ORION wafer cleaning system.  Revenues will be recognized in 2011.

FSII has earnings coming out today after market close.  It may be a bit early to see the impact of the recent uptick in spending.  But, we’ll keep a close eye on the situation.

Let’s hold our shares of FSII.  I think we’ll see bigger gains ahead.

. . . . L&L Energy (NASDAQ: LLEN) – Hold

LLEN is making a strong move to the upside.

The shares are up more than 54% since late September.  And after looking at their preliminary second quarter results, we think the stock’s heading even higher.

Here’s a quick summary of the numbers…

Revenue soared 135% to a record $57.4 million.  Net income increased a hefty 44% to $12.7 million.  And earnings jumped 21% to $0.35 per share.

The company clearly had another fantastic quarter.  By focusing on improving acquired operations, LLEN has been able to more than double quarterly revenue once again.

With demand for coal in China continuing to outstrip supply, we see the strong growth trend at LLEN continuing.  Hang on to your shares for greater gains.

. . . . Commtouch Software (NASDAQ: CTCH) – Buy up to $3.80

CTCH is holding its own.  Within a week of our recommendation, the shares quickly hit $3.77 for a nice 8% gain.  It’s pulled back since then and is hanging out just above our entry point.

Nothing has changed fundamentally for this company… so I firmly believe we’ll see big gains ahead.

What’s more, the company just released new messaging and web security technology.  Remember, CTCH develops products in the internet security industry.  And it has some of the latest and greatest technology on the market.

This recent release of even newer and more robust security technology just goes to show CTCH is on top of its game.

If you haven’t done so, grab your shares of CTCH now.  Get in before the shares really take off.

. . . . SkyPeople Fruit Juice (NASDAQ: SPU) – Buy up to $6.20

SPU continues to do all the right things.  The company just had another record quarter. And they raised nearly $26 million in an equity financing.

Here’s a quick rundown of their quarterly results.

Revenue surged 71.5% to a record $18.2 million.  Net income increased an impressive 71.4% to $3.6 million.  And earnings jumped 36.4% to $0.15 per share.

Best of all, earnings beat estimates by 15%!

Driving these terrific results was strong demand in China for the company’s juices and beverages.  In fact, demand for apple juice concentrate is rising so fast the company’s going to double production capacity by the end of this year.  The money raised in the equity financing will be used to fund the expansion.

The outlook for the current quarter is for more strong growth.

The fourth quarter is the peak harvest and processing season for most of the fruit used in SPU’s products.  And, as a result, SPU has generated most of its revenue and net income for the year in the fourth quarter.

We’re expecting the shares to trend higher from here as investors anticipate strong fourth quarter and full year 2010 numbers.  As a result, we’re moving SPU from Hold to Buy.  Go ahead and buy SPU up to $6.20 a share.

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

SUMR is moving higher.  The shares hit a high of $7.80 for a nice 8% gain.  Not too shabby.  They’ve pulled back a bit since then but are still trading above our entry point.

Here’s the deal…

SUMR shares are doing exactly what we expected.

Remember, last quarter’s earnings were slightly lower than analyst estimates.  So, we warned about potential profit-taking after the stock’s big run higher this year.  And that’s exactly what happened.

But, we also believed the shares would move higher once the short-term selling was out of the way.  We’re not surprised that’s exactly how it played out.

Now SUMR is back on track.

And with the holiday season in full swing, the company has excellent potential to post big gains.  The retail market is hot right now, which bodes well for SUMR.

If you haven’t grabbed your shares of SUMR, get them now.  Buy SUMR up to $8.00 while you still have the chance.

Action To Take

• Sell SMART Modular Technologies (NASDAQ: SMOD)
• Move SkyPeople Fruit Juice (NASDAQ: SPU) from Hold to Buy

Category: PSB Portfolio Updates