PSB Portfolio Update August 2009

August 18, 2009

Most of our positions recently reported quarterly earnings.  Because we have a ton of updates for you this month, we’re going to jump right in…

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

. . . . Human Genome Sciences (HGSI) – Hold

The case for HGSI just keeps getting better and better.

Wall Street analysts got caught with their pants down on BENLYSTA.  Now, they’re scurrying to catch up.  Four analysts upgraded the stock from a Hold to a Buy.  Earnings estimates are moving higher.  And, one analyst raised his price target to $25.

These events should help push the stock higher.

And, that’s not all…

In a remarkably shrewd move, management used the BENLYSTA results to raise some much needed cash.  A secondary stock offering at $14 a share raised $360 million for the company.

The offering helps HGSI in several ways.

It provides additional funds for research and development.  It helps bolster the company’s balance sheet.  And, it effectively put in a floor for the stock’s price at $14.

The stock’s already getting a boost from all the positive news.

Since our last update, HGSI set a new high of $16.87.  It’s highest price in over six years.  That’s a gain of 486% for us in just six weeks time!

For reasons cited here and in our last update, we think HGSI offers excellent upside potential.  Continue to hold your shares for greater gains.

. . . . Gulf Resources (GFRE) – Hold

Big news out of GFRE has the shares rocketing higher.

First, the company announced a reverse stock split.  The reverse split will be within a range of 1 to 4 to 1 to 9.  This is the first step toward listing the shares on a senior U.S. stock exchange.

The split will increase the share price while reducing the number of shares on the market. This combined with listing the shares on a major exchange should attract more institutional investors.

This is great for us.

Institutional buying should push the shares significantly higher.

The other big news is exceptionally strong second quarter results.

Revenue jumped 25% to $29.6 million.  Gross profit margins expanded by 4 percentage points to 44%.  And, net income surged 43% to $9 million.

A robust recovery in China’s chemical industry is driving demand for bromine and crude salt.  Plus, a resurgent oil and gas industry is driving strong demand for environmentally friendly chemicals.

Management also reaffirmed their 2009 guidance.

They expect revenue of $98 million to $103 million.  And, they forecast earnings per diluted share of $0.22 to $0.24.

As you might imagine, the stock is soaring.

GFRE hit a new high of $1.50 on very heavy volume.  That’s a gain of 183% in just the past six weeks.

Nevertheless, we think the stock has a lot further to run.  With GFRE trading well above our buy up to price, we’re moving it from a Buy to a Hold.

. . . . DRI, Corp. (TBUS) – Buy up to $2.00

TBUS is surging higher.  The stock hit a new high of $2.21 for a gain of 86%.  Not bad for just two and a half months work.

What’s driving the stock?

First, the company reported strong second quarter results.

Revenue jumped 13% to $21.5 million.  Earnings per share tripled to $0.09.  And, earnings beat analysts’ estimates by 50%.  All in all, a very strong quarter indeed.

But, that’s only half the story.

Management also raised their earnings guidance to $0.22 per share.  That’s a solid 10% increase over their prior guidance of $0.20 per share.  And, it’s more than double last year’s figure.

In other good news, Congress is about to authorize a huge spending increase in TBUS’ target markets.  This could be a major source of new business at TBUS for years to come.

According to industry insiders, Congress is preparing to spend $450 billion on transportation over the next six years.  That’s almost double the amount spent under the expiring legislation.  They’re also supposedly allocating an additional $50 billion to create a national high speed rail network.

Given this unprecedented government spending, management is scrambling to update their three year business plan.  We expect significant upward revisions to their revenue and earnings outlook.  Stay tuned for more on this in future updates.

TBUS remains a buy at $2.00 or less.

. . . . Overhill Farms (OFI) – Hold

Despite a tough operating environment, our OFI position is performing very well.  We’re currently sitting on a solid 40% gain.

OFI has been pulling back since it reported second quarter earnings.  We think this is just a temporary price correction.  You see, the second quarter results look worse than they actually are.  Comparisons with an exceptionally strong quarter last year are skewing perceptions.

The weak economy and the loss of the HJ Heinz business clearly impacted results. However, the company is continuing to show strong profits.  Significant cost reductions and increased sales to new and existing accounts are boosting the bottom line.

Management believes OFI is well positioned for renewed growth as the economy improves. In fact, they’re so confident that they made a voluntary loan prepayment of $5 million to their principal lender.

We see substantial upside from here.

At recent prices, the stock’s PEG ratio is a measly 0.51.  In other words, the stock’s trading at a 50% discount to its long term growth rate.

We believe the stock will eventually trade up to our $9.72 price target.  However, with OFI trading above our buy up to price, we’re now moving it to a Hold.

. . . . China Biologic Products (CBPO) – Buy up to $4.26

Our recommendation from August is off to a great start.  CBPO hit a new high of $4.61 for a 25% gain.  Not bad for our first two weeks in the trade.

The stock is surging on strong second quarter results.

Revenue skyrocketed 178% to a record $33.2 million.  Gross profit margins expanded 3 percentage points to 72.5%.  Net income soared 243% to $7 million.  And, earnings per share leaped 256% to $0.32.

Management expects the tight supply and demand situation for plasma-based products to continue for some time.  This bodes very well for the company going forward.

CBPO is a buy at $4.26 or less.

. . . . China Information Security Technology (CPBY) – Buy up to $5.00

Despite the weak economy, CPBY reported solid second quarter results.

Revenue grew 4% to $25.8 million.  Gross profit margin expanded 2.48 percentage points to 47.6%.  Net income increased 10.6% to $7.8 million.  And, earnings per share of $0.17 beat estimates by 21%.

First half results were clearly impacted by the economic recession.  But, recent developments confirm business is improving.

During the second quarter, CPBY signed $26.8 million in new contracts from customers all across China.  Order backlog increased slightly to $34.7 million.  More importantly, pricing for CPBY’s products and services are firming up.

The outlook for the rest of 2009 remains very good.

Management reaffirmed their prior revenue and earnings guidance. Plus they had this to say, “We have seen marked improvements across all of our business segments, as the rate of our contract wins has reaccelerated and our pipeline continues to expand….  We are currently optimistic about our business momentum for the remainder of 2009.”

The stock is also showing some life.

The shares jumped 37% from our last update to $4.10.  It’s not a new high, but the stock is clearly showing some upward momentum.

CPBY remains a buy up to $5.00 a share.

. . . . Great Lakes Dredge & Dock (GLDD) – Buy up to $6.50

GLDD reported blowout earnings for the second quarter.

Although revenue was virtually unchanged, earnings skyrocketed on better dredging fleet utilization.  Net income surged 155% to $7.4 million.  And earnings per share of 13 cents beat analysts’ estimates by a whopping 86%.

The shares trended higher into earnings.  They hit a high of $6.56 for a gain of 26%. But, the stock dropped when a couple of shareholders said they’re going to sell 12.5 million shares.

Now, the stock’s moving higher again.

Investors are realizing stimulus funds are finally starting to find their way into GLDD’s market.  Newly offered government projects caused the domestic bid market to double from the first quarter.

Management sees this as a good sign for the remainder of 2009 and into 2010.

GLDD remains a buy at $6.50 or less.

. . . . Electronic Game Card (EGMI) – Buy up to $2.06

EGMI is trading sideways despite solid second quarter earnings.

Revenue jumped 23% to a record $3.1 million.  Repeat business, new sales in the promotions market, additional licensing, and trial orders of new products drove the increase.

Net income surged 54% to a record $2 million.  The company’s now shown a profit in ten straight quarters.  Earnings per share of $0.03 met the consensus estimate.

EGMI’s new management team is clearly off to a strong start.

And, they expect even better performance going forward.  New manufacturing capabilities are expected to boost capacity while lowering costs by an amazing 35%.

Since we recommended the shares earlier this month, EGMI hit a high of $1.80 for a gain of 9%.  Not a bad start.  But, we expect much bigger returns going forward.

Buy EGMI at $2.06 or less.

. . . . China Security & Surveillance Technology (CSR) – Hold

CSR made a strong move heading into earnings.  The stock shot up to a high of $10.24 giving us a nice 86% return.

And, second quarter earnings didn’t disappoint.

Revenue surged 53% to $141 million.  Adjusted net income rose 11.7% to $19.6 million. And, adjusted earnings per share of $0.39 beat the consensus estimate by a penny.

But, that’s not all.

Management reaffirmed its prior revenue and earnings guidance for the year.  They expect revenue of $600 to $630 million.  And, they forecast earnings per share of $2.16 to $2.26.

Despite these solid results, the stock is now pulling back.  We see this as a normal price correction following the big rally.  The company’s strong fundamentals will eventually drive the stock higher.

Continue holding CSR for greater gains.

. . . . ChinaCast Education (CAST) – Hold

CAST reported another quarter of profitability.

Revenue rose 4% to $11.2 million.  Net income increased 2% to $3.8 million.  And, diluted earnings per share of $0.11 beat estimates by 22%.

Management reaffirmed its prior revenue and earnings guidance.  But, we think actual results could come in better than forecasted.

Here’s why.

The estimates do not include any contribution from the pending acquisition of a second university.  That transaction is expected to close very soon.  We should see revenue and earnings from this asset in both the third and fourth quarters.

Continue holding CAST for greater gains.

. . . . MFA Financial (MFA) – Hold

MFA is continuing to trend higher.  The shares hit a new high of $7.83 for a gain of 51%.

Strong second quarter earnings are behind the move.

Net income more than doubled to $67 million.  Net income per share jumped 50% to 30 cents.  And, MFA beat estimates by a solid 15%.

Management is deftly steering the company through this difficult financial environment.

Return on equity for the quarter was 15.9%.  Management once again achieved its goal of double digit ROE.

And, management reduced the portfolio’s exposure to a potential rise in interest rates. They sold off $438.5 million of their longest term Agency MBS for a nice $13.5 million gain.

Finally, the company paid a hefty dividend of $0.25 per share on July 31st.

The stock has recently pulled back to strong support at its 20-day moving average.  We see it moving higher from here.

With MFA now trading well above our buy up to price, we’re moving it to a Hold.

. . . . Questcor Pharmaceuticals (QCOR) – Hold

QCOR has been on fire since mid-May.  The stock ran up to a high of $6.66 in early August for a phenomenal 115% gain.

You’ll recall the stock sold off when the FDA approval of Acthar for infantile spasm was delayed.  But, as you can see, the sell off was way overdone.  The stock’s almost recovered all of the lost ground.

Credit management for the hasty recovery.

They brilliantly adjusted the company’s growth strategy in mid-stride.  QCOR is still pursuing approval of Acthar for infantile spasm.  But in the meantime, they’re diversifying by increasing sales of Acthar for treatment of multiple sclerosis.

And, these sales are skyrocketing.

Second quarter 2009 sales jumped 64% over the first quarter and 281% over last year’s quarter.  Sales to the infantile spasm segment still make up the lion’s share of total revenue.  But, sales outside infantile spasm now account for a solid 40%.

The strategy is starting to boost results.

In the second quarter, revenue increased 1.6% to $25.3 million.  Net income rose 5.7% to $9.3 million.  And, earnings per share popped 16.7% to 14 cents per share.

Management is clearly optimistic about the company’s future.

Over the past 15 months, the company has returned more than $57 million to shareholders through its stock repurchase program.  And, now management has authorized the company to repurchase an additional 6.5 million shares.  That’s about 10% of outstanding stock.

They obviously see the stock moving higher from here.  And, we do too.  However, with QCOR now trading above our buy up to price, we’re moving it to a Hold.

. . . . ERT (ERES) – Hold

We’re starting to see business improve at ERES.  Performance is still below last year’s levels.  But, second quarter results were a bit better than the first quarter.

Revenue increased 1.7% to $24.2 million.  Gross margins expanded by 2 percentage points to 52.3%.  Net income jumped 19% to $2.5 million.  And, earnings per share popped 25% to 5 cents.

Results were in line with management’s prior guidance and met analysts’ estimates.

Management said customers are still largely delaying their TQT trials until later in the drug development cycle.  However, it appears business is starting to gain momentum.  They’re seeing a pickup in new business even though it’s the historically slow summer period.

After ERES reported earnings in late July, the stock fell to a low of $5.32.  Since then, it’s jumped nearly 15%.  We’re now sitting on a slightly better than 8% gain.  Not bad given the company’s difficulties this year.

Continue holding ERES for greater gains.

. . . . VAALCO Energy (EGY) – Buy up to $5.25

EGY’s making a strong upward move since hitting a low of $3.55 in June.  The stock’sup nearly 35% in the last month and a half.

Despite posting a loss in the second quarter, the company’s showing marked improvement. Daily average production reached a new record of 24,000 barrels of oil per day.  And, the dry hole costs impacting first half results are now fully behind them.

Management sees production rising from here.

A new development well began production in the first quarter.  This brings the number of producing wells offshore Gabon up to eight.  And, production is expected to begin at two new development wells in the fourth quarter.

EGY is also expanding exploratory activities.

Two exploratory wells offshore Angola are planned for the fourth quarter.  And, a second exploratory well is planned for Gabon in early 2010.  Management expects these wells to add significantly to EGY’s reserves.

EGY continues to face very difficult comparisons with last year due to the huge drop in oil prices.  Average selling prices are about half of what they were during last year’s price bubble.

Nevertheless, management is optimistic about the company’s future.

Just take a look at their aggressive stock repurchase program.

Last quarter, EGY repurchased 146,354 shares at an average price of $4.15.  So far this year, EGY has repurchased 1.5 million shares at a cost of $6.2 million.  And in June, management authorized EGY to buy back another $10 million worth of stock.

Management clearly sees the stock heading higher from here.  And, so do we.  EGY remains a buy at $5.25 or less.

. . . . CECO Environmental (CECE) – Buy up to $3.79

CECE dropped substantially after reporting disappointing second quarter earnings.

The global economic recession is clearly impacting results.  Revenue fell 42% to $33.5 million.  The company posted a net loss of $600,000.  And, they had a net loss per share of $0.04.

The good news is management is feverishly cutting costs.

They’ve frozen wages, delayed hiring, reduced work weeks, cut staff, and reduced manufacturing overhead.  These efforts should position the company to outperform as the economy recovers.

We believe the current weakness in the shares offers a good buying opportunity. However, we’re lowering our buy up to price to $3.79.

. . . . Alliance One International (AOI) – Buy up to $4.14

AOI had a strong run from late April to early June.  The stock soared 79% to a new 52-week high of $5.71.  That gave us a solid 42% return.

But, then AOI announced it would sell $700 million in debt and the stock plunged. Investors were primarily concerned about the $100 million in convertible notes.  If converted to AOI’s common stock, they will dilute existing shareholders’ positions.

To make matter worse, AOI reported disappointing first quarter results.

Revenue fell 10.6% due to later southern hemisphere purchasing and processing driven by crop timing.  Although gross profit and operating income improved, net income fell 5.3%. And, earnings per share fell nearly 6%.

Nevertheless, it looks like the shares could recover soon.

Management says supplies of flue-cured tobacco are much tighter than previously believed.  This should cause prices for AOI’s leaf tobacco product to rise.  Plus, their financial results should benefit from more favorable currency exchange rates.

Given the decline in share price, we’re lowering our buy up to price to $4.14.  If you already own the shares, continue holding.

Action To Take

• Move Gulf Resources (GFRE) from Buy to Hold
• Move Overhill Farms (OFI) from Buy to Hold
• Move MFA Financial (MFA) from Buy to Hold
• Move Questcor Pharmaceuticals (QCOR) from Buy to Hold
• Reduce CECO Environmental (CECE) buy up to price to $3.79
• Reduce Alliance One International (AOI) buy up to price to $4.14

 

Category: PSB Portfolio Updates