PSB Portfolio Update August 2010

August 17, 2010

Market Seesawing On Earnings, Economic Data, And Outlooks

The market’s ups and downs over the past few months have been gut-wrenching to say the least.

After topping out around 746 in May, the Russell 2000 Index began a volatile two-month decline.  The small cap index fell more than 21% from peak to trough before finding bottom in early July.

The index appears to have put in a bottom (at least for now) around 587.  From there, the index rallied an impressive 14.5% to a high of 672 before month’s end.

Then it dropped again in early August to a low of around 604.  The good news is this low is higher than the previous low around 587.  It could be the beginning of a new uptrend.

We’ll have to wait and see how it develops.

The market volatility is a direct result of strong second quarter earnings and weakening economic data.  On the one hand, most companies are reporting blowout earnings.  And many bellwether firms are providing strong growth outlooks.

On the flip side, a number of economic indicators are signaling the economic recovery is starting to wane.  The usual suspects… high unemployment… a weak housing market… and soft consumer spending are a drag on growth.

As long as we keep getting mixed signals, the market volatility is likely to continue.  Frantic up and down swings will probably be the norm for a while.  Then some key data will tip the scales one way or the other.

I know sometimes it’s difficult to ride out the short-term swings.  But that’s exactly what we need to do.  We’re positioned in solid penny stocks that will provide outsized gains when the market starts trending higher again.

In the meantime, we’ll keep following our strategy.

It’s working very well despite a difficult market.  We’ll clear out any non-performers whose fundamentals change for the worse.  And we’ll keep booking terrific gains like we did with China Pharma Holdings (+25%), Health Grades (+87%), and Gulf Resources (+300%).

Now, let’s take a look at 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.
. . . . Gulf Resources (NASDAQ: GFRE) – Sell

In case you missed it, we put out a Sell Alert on GFRE last week.  You can get all the details here.  If you haven’t yet, sell your shares of GFRE and book gains of 300% or more!

Congratulations on a spectacular winner!

. . . . GT Solar International (NASDAQ: SOLR) – Hold

SOLR is leaping higher like a kangaroo on steroids!

The shares hit a new high of $8.23 last week.  That gave us a sizzling 56% gain.  Our patience is paying off in spades.

What’s driving the shares?

If you said blowout earnings and an upbeat outlook, give yourself a gold star.  Here’s a quick recap of the company’s awesome first quarter of FY 2011.

Revenue surged 88% to $135.2 million.  Strong sales in the photovoltaic segment drove the increase.  Demand is clearly accelerating.

Profits weren’t too shabby either.

Net income exploded 112% to $16.5 million.  Earnings more than doubled to $0.11 per share.  And earnings blew away analysts’ estimates by 175%!

What’s more, the company booked a whopping $352 million in new orders.  And SOLR exited the quarter with a backlog over $1 billion.  Heavy order flow and a huge backlog mean higher revenue and earnings in coming quarters.

In fact, the company jacked up guidance for FY 2011.

Management’s now expecting revenue of $700 to $775 million.  And they’re forecasting earnings of $0.90 to $1.00 per share.

A very bullish outlook indeed.

Analysts are scrambling to raise estimates as a result.

They’re now forecasting revenue growth of 38% to $753 million.  And they’re expecting earnings to increase a stunning 55% to $0.93 a share.

This is great for the stock.

Remember, rising estimates usually mean a higher share price ahead.  We moved SOLR from Buy to Hold in our August Issue.  Continue holding SOLR for bigger gains.

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

NVMI is on fire!  The shares surged to a new high of $6.89 last week.  That gave us a terrific 59% gain.

Blowout second quarter earnings sent the shares soaring.

Revenue exploded 179% to a record $19.4 million.  Net income increased from a loss of $0.1 million to an impressive $4.7 million.  And earnings of $0.18 per share blew away analysts’ estimate of $0.12.

But there’s even more.

Second quarter numbers increased sharply over the first quarter figures.  Revenue popped 22%.  And earnings soared 64%.  Growth is clearly accelerating.

Best of all, the company’s strong 2010 outlook just got even better.

Management raised revenue guidance sharply.  They’re now expecting revenue of $78 to $85 million.  We’re talking annual growth of 98% to 116%!

What’s more, analysts ratcheted earnings estimates higher by 84%.  Instead of $0.40 per share, they’re now expecting $0.74.  That’s potential year over year growth of a whopping 469%!

As you might imagine, I fully expect NVMI shares to rocket higher from here.

With NVMI now trading above our buy up to price, I’m moving them from Buy to Hold.  Keep holding NVMI for greater gains.

. . . . LJ International (NASDAQ: JADE) – Hold

JADE is yet another PSB company reporting strong second quarter earnings.  Revenue surged 47% to $33 million.  Net income rose nearly 12-fold to $2.3 million.  And earnings soared 800% to $0.09 per share.

Both revenue and earnings handily beat analysts’ estimates.

Two things led to the terrific quarterly results.

Previous cost cutting initiatives slashed operating costs to the bone.  And the opening of 13 new ENZO retail stores turbocharged revenue growth.

Look for more high velocity growth in the third quarter.

Management’s forecasting a 30% jump in revenue to $34 million.  And they’re expecting earnings growth of 200% to $0.15 per share.

JADE is trading higher in a nice uptrend.  The shares hit a new high of $3.25.  That gave us a solid 22% gain.

With the stock now above our buy up to price, I’m moving JADE from Buy to Hold. Continue holding the shares for greater gains.

. . . . ZST Digital Networks (NASDAQ: ZSTN) – Hold

Big news out of ZSTN!

Second quarter earnings beat estimates by a mile.

Here’s a quick recap…

Revenue surged 39.6% to $33 million.  Strong sales of cable TV networking equipment and vehicle tracking products drove the increase.  Net income more than doubled to $5.2 million.  And earnings jumped 50% to $0.45 per share.

But there’s even more.

Management raised full year 2010 revenue and earnings guidance.

They’re now expecting revenue of $125 to $130 million.  That’s a potential year over year increase of 25% to 30%.  And they’re forecasting net income of $17 to $19 million.  A hefty potential annual gain of 67% to 86%!

And that’s not all…

Analysts have jacked up earnings estimates.  They’re now looking for higher earnings in each of the next two quarters.  And they’re expecting full year 2010 earnings growth of 39% to $1.59 a share.

ZSTN is surging higher on the better outlook.

The shares jumped nearly 37% on the news to a new high of $7.24.  And despite the broad market pullback, they’re holding on to most of these gains.

With the stock now trading above our buy up to price, I’m moving ZSTN from Buy to Hold.  Keep holding for bigger gains to come.

. . . . FSI International (NASDAQ: FSII) – Buy up to $4.35

We’re off to a strong start with this recent pick.  FSII jumped to a high of $4.12 right out of the gate.  That gave us a nice 16% gain in just our first few days.

FSII is now pulling back along with the overall market.  Cisco Systems’ lower growth outlook is to blame.

But I’m not worried.  I see this temporary pullback as a great buying opportunity.  FSII will be moving higher again in no time.

In a couple of months, the company will report FY 2010 results.  Both revenue and earnings are expected to show huge year over year growth.  Strong results should send FSII dramatically higher.

If you haven’t yet, grab your shares of FSII now.  The shares are a terrific bargain at these prices.

. . . . Mindspeed Technologies (NASDAQ: MSPD) – Buy up to $7.77

MSPD made a nice upward move after our recommendation.  The shares quickly jumped out of our buy range to a high of $7.87.  Good for a gain of 11% right off the bat.

Then the shares dropped with the broad market.

The Cisco news is hitting MSPD particularly hard.  Remember, Cisco is one of MSPD’s biggest customers.

No need to panic though.

Analysts are sticking to their recently raised revenue and earnings estimates for MSPD.  They’re still expecting a revenue jump of 35% and an earnings surge of 255%.

That’s huge growth any way you slice it.

Use this pullback as a buying opportunity.

MSPD was misvalued before the recent drop in share price.  So, now the shares are an even better bargain.  Go ahead and buy MSPD up to $7.77 per share.

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

SPU is surging higher on strong earnings.  The shares are up more than 26% off the lows hit in late June.  And they look poised to move even higher.

More on that in a moment…

First a recap of the company’s stellar second quarter…

Revenue more than doubled to $13.4 million.  Sales of concentrated pear juice and kiwifruit juice were off the charts.  And sales of branded fruit juice beverages increased nicely as well.

But the big surprise was impressive sales of SPU’s newest product… turnjujube concentrate.

SPU just launched turnjujube this past quarter.  It’s a fruit concentrate used in the production of various traditional Chinese medicines.  And in its first quarter on the market, turnjujube sales hit an astonishing $1.8 million.

That’s a great start for a new product.  And it certainly looks poised to become a major new line for the company.

Now revenue wasn’t the only thing rocketing higher… Profits soared as well!

Net income increased a whopping 182% to $4.8 million.  Earnings more than tripled to $0.22 per share.  And earnings blew away analysts’ estimate by 175%.

SPU is firing on all cylinders!

Best of all, the outlook for the rest of 2010 is very bullish.

Management expects robust revenue and earnings growth to continue in the second half. Remember the third and fourth quarters are the company’s harvest and squeezing seasons.  These are typically the company’s biggest selling and most profitable quarters.

Based on this fabulous outlook, I’m expecting SPU to make a major move higher in the weeks and months ahead.  However, with the shares now trading above our buy up to price, I’m moving SPU from Buy to Hold.  Continue holding SPU for greater gains to come.

. . . . China Marine Food Group (AMEX: CMFO) – Hold

It looks like our bullish view on CMFO was spot on.  Since we moved CMFO to a Buy, the shares have jumped more than 26%.  Not too shabby.

What’s behind the recent surge?

Sensational second quarter earnings of course!

Revenue soared 87% to a record $27.6 million.  Seafood snack products are flying off the shelves.  And 400 new retail locations (2,300 total) provided an octane boost.

But the real story was phenomenal growth in the controversial “Hi-Power” beverage line.

Sales of the algae-based beverage skyrocketed 184% from the first quarter to $7.8 million.  And the drink accounted for an astonishing 29% of total revenue.

Remember, this is the business the “shorts” were claiming CMFO overpaid for.  Now, this business is expected to top management’s earlier forecast of $20 million in sales for the year.

Looks like a shrewd investment to me…

And revenue wasn’t the only thing going bonkers.  Profit growth is off the charts as well.

Net income rocketed 83% higher to $6.8 million.  Earnings jumped 63% to $0.26 per share. And, what’s more, earnings beat analysts’ estimates by an impressive 44%.

A very strong quarter all the way around.

CMFO should move significantly higher in the weeks and months ahead.  However, with the shares trading above our buy up to price, I’m moving CMFO from Buy to Hold.

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

It looks like III might be turning the corner.  The company just reported encouraging quarterly results.  Unfortunately, management provided a very cautious outlook which sent the shares tumbling.

Here’s a quick recap of the quarter…

Revenue increased 6% to $33.4 million.  Earnings were flat with the year ago period at $0.06 per share.  And earnings met analysts’ estimates.

It was the strongest growth the company has seen since the recession began.  Strong double-digit sales growth in the Americas and Asia Pacific regions drove the increase. Revenue growth would have been even higher but for a slight decline in Europe.

The real problem right now for III is the cloudy outlook.

Management says recent economic volatility may cause clients to postpone major outsourcing decisions.  If this happens, the company’s fragile recovery could be stopped in its tracks.

But, I’m not ready to throw in the towel on III just yet.

We could still see a surge in buying activity from III’s clients before year’s end.  Regardless of the economic environment, clients still face the same challenges.  And many of them will spend their outsourcing budgets rather than risk losing them.

However, I believe we need to exercise caution right now.  Given management’s outlook, I’m moving III from Buy to Hold.  Let’s give this trade a little more time to play out.

. . . . China Natural Gas (NASDAQ: CHNG) – Hold

CHNG is moving lower after disappointing second quarter earnings.

Revenue increased 1.9% to $21.1 million.  Net income jumped 18% to $4.6 million.  But earnings dropped 19% to $0.21 per share.

A larger number of shares outstanding caused the earnings decline.

Nevertheless, CHNG is poised for stronger growth…

The company recently added three new CNG fueling stations bringing the total to 40.  They also acquired a new compressor station that will support expansion into Hubei province.

CHNG also added 1,630 new residential and commercial pipeline customers.  This brings the total number of natural gas pipeline customers to 112,343.  An increase of 8.7% over the past year.

And, most importantly, the company brought their new LNG plant online.  The plant is one of the largest in all of China.  And CHNG plans on starting commercial production during the second half of this year.

I still believe these shares have excellent growth potential.  Right now they’re being weighed down by a very large short position.  When the shorts finally give way, the shares should surge higher.

However, with the recent decline, I’m moving CHNG from Buy to Hold.  Hang tight for greater gains to come.

. . . . Winner Medical Group (NASDAQ: WWIN) – Buy up to $6.00

WWIN is up sharply over the past six weeks.  The shares started moving higher in early July.  Investors were clearly anticipating strong third quarter earnings.

And the company didn’t disappoint…

Revenue rose 27% to $30.9 million.  The company’s seeing accelerating growth in North and South America as well as Europe.  And sales of PurCotton more than doubled.

Net income increased a respectable 10% to $3.4 million.  Earnings were flat at $0.14 per share.  But they beat analysts’ estimates by a penny.

WWIN is up a hefty 49% off the early July lows.  And I expect the prospect of strong FY 2010 results to keep the shares moving higher.

If you don’t own WWIN, you have a chance to grab them now.  The shares have dipped back below our buy up to price.  Go ahead and buy WWIN at $6.00 or less.

Action To Take

• Sell Gulf Resources (NASDAQ: GFRE)
• Move Nova Measuring Instruments (NASDAQ: NVMI) from Buy to Hold
• Move LJ International (NASDAQ: JADE) from Buy to Hold
• Move ZST Digital Networks (NASDAQ: ZSTN) from Buy to Hold
• Move SkyPeople Fruit Juice (NASDAQ: SPU) from Buy to Hold
• Move China Marine Food Group (AMEX: CMFO) from Buy to Hold
• Move Information Services Group (NASDAQ: III) from Buy to Hold
• Move China Natural Gas (NASDAQ: CHNG) from Buy to Hold
• Move Winner Medical Group (NASDAQ: WWIN) from Hold to Buy

Category: PSB Portfolio Updates