PSB Portfolio Update April 2010

April 20, 2010

Is The Market Finally Correcting?

The market’s 13 month rally has me wondering if the laws of physics no longer apply.  The market has been defying gravity for so long now it almost seems natural.

The Russell 2000 Index is up an amazing 108% from the March 2009 low.  And, it has moved up another 5.6% since our last update, setting a new 52-week high of 725 in the process.

However, some signs are emerging a long overdue correction is at hand.

On Friday, the Russell 2000 suffered its first daily decline in seven trading sessions… dropping 1.4%.  It also closed lower on the week for the first time in five weeks.

Investors started selling after the SEC dropped a bombshell… the filing of a civil fraud lawsuit against once “untouchable” Goldman Sachs.  Many are worried more lawsuits against other Wall Street firms are on deck.

Personally, I’m all for the SEC prosecuting greedy Wall Street fat cats who defrauded investors.  But, here’s why investors may be concerned about it.

A full-scale assault on Wall Street could undermine the financial sector’s fragile recovery. And, that could spark a larger sell-off not only in financial stocks but the broader market as well.

There are plenty of signs the market is ripe for a pull back.

The University of Michigan’s Consumer Sentiment Index unexpectedly dropped in April.  This index is viewed as the best gauge of how consumers feel about the economy. Economists were expecting the index to increase to 75.

But, it fell to 69.5.

Any reading over 50 is bullish.  But, the April drop shows consumers are still worried about the economy.  This could be a problem for the recovery.  Worried consumers don’t spend as much.

Another bearish signal was just provided by the Thomson Financial Insider Transactions ratio.  This indicator measures insider sales versus insider buys.  Any reading above 20 to 1 is bearish.  Last week’s reading… a whopping 40 to 1!

Insiders are selling feverishly into the market’s rally.

And finally, there’s the most recent Consensus Bullish Sentiment Index reading.  This index measures the views of professional investment advisors.  Any reading over 75% means the market is overbought.

Last week’s reading… 76%!

Clearly, most financial advisors are extremely bullish about the market.  And, you know what that means…

It certainly looks like the market is setting up for a correction.  But, I’m not concerned. Corrections are actually healthy for longer term market uptrends.  They provide an opportunity for the market to take a breather before the next leg up.

And, a short-term correction would be good for us too.

It would give us an opportunity to get into some quality penny stocks at lower prices.  The market’s meteoric rise has made it difficult recently to find fast growing companies trading at reasonable prices.

So, if the market does correct, don’t do anything drastic like selling out of all your positions.  Stick to our strategy and follow our recommendations.

Remember, we’ve been taking big profits all throughout the market’s rise.  And, our selection strategy is geared toward getting into strong growth penny stocks at bargain prices.  That strategy should protect us from outsized losses in a market correction.

Now, let’s see how our positions are doing…

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.

Position Updates

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

As we predicted, LLEN blew through our $11.28 price target.  The company reported monster earnings.  And the shares soared to a new high of $14.91.

That gave us a whopping 174% gain.

Here’s a quick recap of LLEN’s third quarter numbers.

Revenue rose an amazing 280% to nearly $38 million.  Net income rocketed 440% higher to $9.5 million.  And earnings more than quadrupled to $0.37 per share.

Any way you slice it, that’s incredibly fast growth.

Driving growth is the company’s aggressive expansion strategy.  Management is constantly boosting production levels.  And, they’re expanding the business through acquisitions.

What’s more, they’re showing no signs of letting up.

Due to the shares’ big run up, we recommended selling half the position in our April Issue. Our timing was spot on.  The shares hit their high of $14.91 the very next trading day.

I know many of you booked profits of 174% or more.  Congratulations on another great trade!

What to do now?

Continue holding your remaining shares of LLEN.

The company’s fiscal year 2010 just ended on March 31st.  When the company reports full year results, they should provide guidance for fiscal year 2011.  I’ll update my outlook and price target then.

. . . . Taseko Mines (AMEX: TGB) – Hold

TGB is moving steadily higher in a strong uptrend.  The shares recently hit a new high of $6.21.  That gave us a terrific 47% gain.

What’s driving the shares higher?

Rising copper prices are a big factor.  The price of copper is up around 6% so far in April. This is great news for TGB, which produced over 70 million pounds of copper in 2009.

Another factor is the company’s strong full year 2009 results.  Operating profit soared 79% to $48.3 million.  And, earnings before tax and other items increased from a loss of $2.1 million to a profit of $28.1 million.

But, here’s the key.

The company is close to getting government approval to begin construction of the Prosperity mine.  Remember, Prosperity is believed to hold copper and gold reserves worth $13 billion and $8.5 billion respectively.  Final regulatory approval is expected by the end of June.

The upshot of all this is simple.

TGB shares are heading higher.  Continue holding the shares for bigger gains ahead.

. . . . Kulicke & Soffa (NASDAQ: KLIC) – Hold

KLIC broke out of a two month base.  The shares surged on heavy volume to a new high of $9.58.  That gave us a nice 46% gain.  Not bad for our first month in the trade.

Blowout preliminary sales data sent the shares soaring.

The company said it expects to post revenue of $153 million for the fiscal second quarter. That’s nearly 20% higher than the first quarter’s figure.  And, it’s better than the $146 million analysts were expecting.

Guidance for next quarter was also better than expected.

Management’s expecting revenue of $205 million.  That’s much higher than analysts’ forecast of $143 million.  And, if achieved, it would be eye-popping sequential quarterly growth of 34%.

Management says they’re able to provide guidance earlier than usual this year. “Unprecedented” demand levels for ball bonders and wedge bonders are providing excellent visibility.

Clearly, business is going bonkers at KLIC.

What’s more, management sees demand continuing at current levels through the quarter ending in September.  If so, 2010 is going to be a year of huge growth for KLIC.

With the shares now trading above our buy up to price, we’re moving KLIC from buy to hold.

. . . . SkyPeople Fruit Juice (AMEX: SPU) – Hold

SPU is trending higher.  The shares are up an impressive 21% since late March.  And,we’re sitting on a nice 26% gain from our buy price.

Why are the shares rising?

Record full year 2009 results.

Revenue jumped 42% to $59 million.  Strong sales of kiwifruit juice concentrates and fresh kiwifruit drove the increase.

Net income soared 58% to $15.8 million.  And, earnings jumped 52% to $0.85 per share.

All in all, a terrific year.

Management sees more growth in 2010.

They’re expecting revenue of $92 to $102 million.  And, they’re forecasting net income of $19 to $21 million.

Thanks to an acquisition and two new lines, production capacity has increased a whopping 67%.  And, a new distributor in Beijing is expected to add $7 million in revenue.

Given this outlook, we see the shares moving significantly higher this year.  If management can meet or exceed guidance, we should see the shares hit our $13.65 price target.  Continue holding SPU for greater gains.

. . . . OMNOVA Solutions (NYSE: OMN) – Hold

OMN surged higher since our last update.  The shares jumped to a new high of $8.58. That gave us a nice 22% gain.

What’s behind the move?

Strong first quarter earnings.

Revenue popped 15% to nearly $184 million.  Rising sales volumes in both business segments drove the increase.  Clearly, the company’s new products and expansion into new markets are paying off.

The company’s reduced cost structure is also starting to pay dividends.

Net income jumped from a loss of $0.1 million to a profit of $7.8 million.  And earnings increased from breakeven to a quarterly record profit of $0.17 per share.

Both revenue and earnings beat analysts’ expectations.

The company has now shown earnings improvement in five straight quarters.  And, sales have improved in each of the last two quarters.

What’s even more impressive is the first quarter is usually the company’s weakest.

The trend at OMN bodes very well for the stock.  Sales volumes continue to outpace last year’s.  And, growth is accelerating as the economy rebounds.

Continue holding OMN for greater gains.

. . . . Gulf Resources (NASDAQ: GFRE) – Hold

More great news out of GFRE!

The global economic recovery is driving demand for bromine.  And, due to short supplies, bromine prices are surging higher.  They’ve already jumped 25% this year.

As a result, management sharply increased their outlook for 2010.

They’re now expecting revenue of $146 to $150 million.  That’s 33% to 36% higher than last year’s figure.

What’s more, they’re forecasting net income of $44 to $46 million.  A whopping 44% to 50% increase over last year.

Based on the number of shares outstanding, earnings would come in between $1.36 to $1.43 a share.

This is great news for us!

If GFRE delivers on these expectations, the shares should soar this year.  Right now they’re trading at just 8.6x the $1.36 estimate.  And, the company’s PEG ratio is a low 0.34.

Using a conservative PEG ratio of 0.50, GFRE’s P/E would be 12.5x.  At 12.5x the $1.36 estimate, the shares are worth at least $17.00.  Based on this analysis, I’m raising my price target for GFRE to $17.00.

Continue holding GFRE for greater gains.

. . . . GT Solar International (NASDAQ: SOLR) – Buy up to $6.60

SOLR is moving higher.  The shares are getting a nice boost from positive analyst comments.  They’re up almost 9% since our last update.

Credit Suisse got the ball rolling in late March.  They raised their rating on SOLR from neutral to outperform.  They hiked earnings estimates for this year and next.  And, they increased their price target.

The analyst sees global demand for solar improving this year… especially in Japan, the U.S., and Europe.

Then Wunderlich Securities reinitiated coverage on SOLR with a buy rating.  The analyst sees SOLR’s sales rising due to a shortage of solar manufacturing capacity.

This is great for us.  Positive analyst comments often help drive a stock higher.  We’ll have to see if the shares can now gather some momentum.

SOLR remains a buy up to $6.60 a share.

. . . . China Gengsheng Minerals (AMEX: CHGS) – Hold

CHGS has come back down to earth.  The company reported steady growth for full year 2009.  But revenue and earnings came in slightly below guidance.

Here’s a quick summary of the results.

Revenue increased 14.5% to $57 million.  Net income jumped 38% to $5.6 million.  And, earnings rose 35% to $0.23.

Management had forecast revenue of at least $58.5 million and earnings of $0.24 per share.  They cited higher raw material costs, government initiatives to reduce excess capacity, and the recession as reasons for missing guidance.

Despite the stumble, analysts are still forecasting strong growth for 2010.

Revenue is expected to jump 32% to $75 million.  And, earnings are forecast to surge 39% to $0.32 per share.

These estimates appear fairly conservative given the company’s growth drivers.  Overseas demand for fracture proppants should jump as the economy continues improving.  And, the company’s new line of precision abrasives should add significantly to revenue.

If management can deliver on guidance this year, we should see the shares trade up to our $6.72 price target.  Continue holding CHGS for greater gains.

. . . . China Marine Food Group (AMEX: CMFO) – Buy up to $7.50

CMFO has been drifting sideways since late January.  The shares seem to be stuck in a tight price range.  Not even great 2009 earnings and a strong outlook for 2010 could push the shares higher.

What’s going on?

I believe investors are concerned about the increase in CMFO’s accounts receivable. Last year, accounts receivable grew nearly four-fold to $18.8 million.  That’s a big rise.

Management says the increase is due to two factors.  One is the big rise in sales last year.  And, the other is the extension of the credit period offered to major customers.

However, it could be a sign the company’s having difficulty collecting payment from customers.

I don’t think the problem requires selling the shares.  But, it’s something I’ll be watching very closely.

The good news is CMFO knocked the cover off the ball in 2009.

Revenue soared 42% to nearly $70 million.  Net income increased an impressive 31% to $14.6 million.  And, earnings surged 25% to $0.60 per share.

Best of all, the outlook for 2010 is even better.

Management expects revenue to jump 43% to $100 million.  And, they’re forecasting a 47% rise in net income to $21.5 million.  Assuming no change in shares outstanding, earnings should rise 25% to $0.75 per share.

If CMFO can hold receivables steady and deliver on their growth outlook, the shares should move significantly higher.  CMFO remains a buy up to $7.50 a share.

. . . . China Natural Gas (NASDAQ: CHNG) – Buy up to $11.00

Our most recent pick is off to a slow start.  But, that’s not necessarily a bad thing.  It gives everyone a chance to get in at a good price.

If you haven’t yet, you may want to grab your shares now.  I think CHNG is going to move significantly higher this year.

In the April Issue, I told you all about the growth happening in the company’s natural gas businesses.  They’re building more CNG fueling stations in Henan province.  And, the company’s bidding on contracts to expand their pipeline gas network.

What I didn’t tell you about was the huge potential in the company’s newest business… Liquefied Natural Gas (LNG).

Construction of the company’s LNG plant is expected to be completed by the end of June. It will be the first LNG plant in Shaanxi province.  And best of all, it will have a virtual monopoly in the region.

With LNG, the company can expand their geographic market.

LNG enables transportation of large quantities of natural gas at a much lower cost.  As such, the company will be able to supply natural gas to customers virtually all over China.

The company already has plans to expand into nearby Hubei province.

They’ve received approval to build 47 LNG fueling stations and 3 LNG reserve stations. And, they’re going to build 9 harbor LNG fueling stations along the heavily traveled Yangtze River.  (The river transportation market is untapped and offers tremendous growth potential.)

CHNG can also use LNG to broaden their customer base.

Power generation companies are ideal customers as they’re shifting from coal to LNG.  And, many city gas companies are not located near a gas source or pipeline.

As you can see, completion of the company’s LNG plant should be a huge catalyst for CHNG.  It will mark the company’s official entry into the lucrative LNG business.  And, we’ll be nicely positioned in the shares when it happens.

CHNG remains a buy up to $11.00 per share.

Action To Take

• Move Kulicke & Soffa (NASDAQ: KLIC) from Buy to Hold

Category: PSB Portfolio Updates