PSB Portfolio Update December 2008

| December 16, 2008

December 15, 2008

It’s no secret 2008 has been a difficult year.

The economy fell into recession.  The housing market imploded.  A credit crisis swept through and crippled our financial system.  Fannie Mae and Freddie Mac nearly failed forcing a government takeover.

The Fed loaned banks, investment firms, and insurance companies an unprecedented $2 trillion.  Congress bailed out the banks with $700 billion of taxpayer money.  Oil prices hit a record $140 per barrel.  Gasoline prices went over $4 a gallon.  “What next?”, you might ask.

These events are still taking a heavy toll on the market as the small-cap Russell 2000 Index is down about 40% year to date.

But as Albert Einstein once said, “In the middle of difficulty lies opportunity.”

We have an opportunity to buy high quality penny stocks at valuations not seen in decades.  I’ve found a number of stocks with great growth prospects, large cash positions, and no debt selling at huge discounts to their true value.

These low valuations are setting the stage for a very pronounced January Effect.

The January Effect refers to the historical trend of small cap stocks outperforming large cap stocks in January.  This has happened in 40 out of 43 January’s from 1953 through 1995.

The Effect is even stronger in January’s following a terrible year for the market.  Small caps returned 18% on average in the January following each of the 10 worst years for stocks since 1927.  Large cap stocks averaged a return of just 3.1%.

What most people don’t know, however, is that the January Effect actually starts in mid-December.  Many investors start buying up beaten down small stocks that were dumped for tax loss purposes in December.  They want to get positioned ahead of the New Year.

The tax loss selling this year has been more intense than usual due to the heavy losses most investors have.  As such, now may be an excellent time to add to many of yourPenny Stock Breakout positions.

Position Updates

. . . .VAALCO (EGY)
The market woke up and realized VAALCO shares were trading at ridiculously low levels. The stock hit a high of $7.43 earlier this month for a peak gain of nearly 73%.  Continue to hold this one.

PRM paid a cash dividend of $0.07 per share on December 10.  We adjusted our purchase price in our Performance table to $0.73 to reflect the dividend.  Management announced a program to repurchase up to $5 million of PRM stock over the next 12 months.  This shows that they have confidence in the future of the company and that the shares are undervalued.

More importantly the stock is showing a gain of more than 120%.  We recommend you sell half your position to take your original investment off the table.  Let your profits run with the house money.

. . . .MFA Mortgage Investments (MFA)
MFA announced a cash dividend of $0.21 per share to be paid on January 30, 2009 to shareholders of record on December 31, 2008.  The shares are relatively flat since we recommended them.  The Fed’s announcement that it will buy $500 billion of mortgage backed securities has bolstered the stock.

. . . . IXYS (IXYS)
Hit stop loss level.  Position sold according to initial stop loss levels (although the shares have bounced back up this month)

. . . .Alliance One (AOI)
AOI is trading dangerously close to our stop price of $2.  The stock’s been falling even though it reported solid second quarter results.  AOI’s earnings increased 77% year over year to $0.23/share. Revenue, Gross Profit, Operating Income, and Net Income all improved.  Keep an eye on AOI, and be prepared to sell if it closes below our stop price.

. . . .Questcor Pharmaceuticals (QCOR)
The shares of QCOR have been on a tear and recently set a new 52-week high of $9.81 (a gain of +79%).

The company reported strong results for the third quarter.  Total net revenues were up 64% to $24.2 million. Operating income was up 78% to $15.3 million.  Prescriptions of its Multiple Sclerosis drug, Acthar, were up 50% from the second quarter.  Management expects revenues to come in at the high end of guidance for the year – $91 million.  The company also bought back $23.7 million of its common stock.

. . . .infoGROUP (IUSA)
Hit stop loss level.  Position sold according to initial stop loss levels (although the shares have bounced back up this month)

. . . .Obagi Medical Products (OMPI)
OMPI shares have bounced off the lows set in November and are steadily rising higher. Despite horrible consumer spending levels, the company reported third quarter results roughly flat with the year ago period.  OMPI continues to execute its growth strategy effectively.  It signed distribution agreements in Australia and China.  It established 294 more physician accounts (up 12% yoy), expanded the sales force, and launched SoluCLENZ RX Gel for the treatment of acne.

Action To Take

•  Sell half of your PRIMEDIA (PRM) shares at a 120%+ profit.
•  Stopped out of IXYS shares
•  Stopped out of IUSA shares

Category: PSB Portfolio Updates

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