PSB Portfolio Update February 2010

February 16, 2010

The Bull Market Resumes… Or Is It Just A Shakeout?

After a nearly two and a half week decline, the Russell 2000 Index has strung together five straight higher closes.  The question on everyone’s mind is simple.  Is this a resumption of last year’s bull market or a bear market rally?

Unfortunately, the answer is a resounding… maybe.

We’ll have to wait and see if the Russell 2000 can move past resistance around 650.  Until that happens, the fledgling rally could fizzle out at any moment.

With that said, I think investors have overreacted to world events.

The first event was the Chinese government raising reserve requirements for domestic banks.

Many investors freaked out thinking this was a prelude to China drastically raising interest rates.  It’s much more likely the Chinese were just tapping the brakes a bit to cool their blistering economic growth rate.

China will continue to grow at a strong pace… and Chinese companies will continue growing rapidly as well.  This bodes well for our Chinese penny stocks.

The other event is the lingering fear of a debt crisis in Europe.

Many investors used this as another excuse to take profits.  I believe the European Union (EU) has no choice but to help its struggling members.  The stronger countries face a much bigger catastrophe if they allow any of the weaker ones to fail.

How could any investor have any confidence in the EU if a member country is allowed to lose its membership?  The fear of an eventual breakup of the EU would kill the Euro, devastate European bond markets, and destroy European stock markets.

I think the situation will ultimately be resolved in a positive way.  Stronger countries (whether they like it or not) will provide bailout funds as needed.  And, struggling countries will be required to reign in their deficit spending in order to qualify for the bailouts.

Of course, we’ll have to wait and see how these events play out.

But for now, it appears investors are starting to view lower stock prices as a good buying opportunity.  That’s exactly the kind of attitude that can get the market moving up to new highs.  And, new highs will keep this bull market going.

Now, let’s take a look at a few 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.

Position Updates

. . . . China Biologic Products (NASDAQ: CBPO) – Sell

CBPO has come under heavy fire in the past few weeks.  The shares have declined sharply amidst allegations of financial misdealing at the company.  We’ve been expecting the shares to rebound, but they continue to head lower.

Rather than fight the trend, we’re recommending you sell your shares and lock in gains of up to 123%!

We still think CBPO has an awesome business model with huge growth potential.  But, we don’t see the stock moving higher as long as these allegations hang over the company.

We will continue monitoring the situation to see how the internal investigation turns out. We may even recommend getting back into the shares if the situation is resolved favorably.

Congratulations on another great trade!

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

We’re off to a strong start with this February recommendation.  SPU shot up to a high of $6.60 giving us a nice 23% gain.  Not bad for our first couple of weeks in the trade.

We’re expecting big gains in SPU this year.

Stellar revenue and earnings growth should drive the shares significantly higher. Management’s forecasting a 50% jump in revenue and a 40% surge in earnings for 2010.

What’s more, the shares are grossly undervalued.

They’re trading at P/E of just 5.8x our 2010 estimate of $1.05.  And, the company’s PEG ratio is a very low 0.27.

With the shares trading above our buy up to price, we’re moving SPU from a Buy to a Hold.

. . . . Health Grades (NASDAQ: HGRD) – Buy up to $4.90

HGRD was also recommended in the February Issue.  Right out of the gate, the shares popped to a high of $4.93.  That was good for a gain of 14%.

And, it’s just the beginning.

We think HGRD will move much higher over the next 12 months.

Tomorrow’s earnings report should get the ball rolling.

Full year 2009 results are due before the market opens.  We’re expecting revenue to jump 30% to over $51 million.  And, we’re looking for a whopping 47% increase in earnings to $0.22 per share.

The shares should keep trending higher on a strong outlook for 2010.

Management’s forecasting a 20% jump in revenue to over $62 million.  And, they expect earnings will increase by a hefty 27% to $0.28 per share.

Analyst estimates are slightly higher than guidance.

HGRD remains a buy up to $4.90 per share.  Don’t miss your chance to get these shares below our buy up to price.

. . . . China Gengsheng Minerals (OTCBB: CHGS) – Buy up to $2.60

CHGS has pulled back as part of the broader decline in Chinese stocks.  There’s been no bad news reported.  And, the company’s strong fundamentals remain intact.  Due to the pullback in share price, we’re moving CHGS from a Hold to a Buy.

. . . . Taseko Mines (AMEX: TGB) – Buy up to $4.65

TGB reached a new peak since our last update.  The stock jumped to a new high of $5.65 on the positive Prosperity Mine news.  That gave us a sweet 34% gain.

Not bad for our first month in the trade.

After a two-week pullback, the stock now appears poised for an upward move.  The stock was declining on falling copper prices.  But now, copper is again moving higher.

In addition, TGB reported good news about its copper hedging program.

They recently extended the hedge on half their copper production.  Best of all, they did it while copper prices were trading at recent highs.  This hedge will protect the company if copper prices plunge during the year.

With the stock now trading below our buy up to price, we’re moving TGB from Hold to Buy.

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

LLEN is making the jump to a major exchange.  The shares will begin trading on NASDAQ on February 18, 2010.  Until then, they’ll continue trading on OTCBB.

Moving to a senior exchange is a big milestone for the company.  And, it’s great for shareholders.  A NASDAQ listing will increase market visibility and improve liquidity.

The shares have been moving higher in anticipation of the big news.  They’re up more than 19% in just the past week!  Continue holding for greater gains.

. . . . Trailer Bridge (NASDAQ: TRBR) – Buy up to $5.50

TRBR’s shipping business is continuing to improve with the global economy.  Just take a look at recently reported full year 2009 results.

Net income surged from a loss of $3.2 million to a profit of $2.6 million.  And, earnings per share rose from a loss of $0.27 to a gain of $0.22.  (It’s good to see TRBR back in the black!)

Although revenue fell 14% in 2009, it has been improving each quarter.

Management expects that trend to continue in 2010.

They’re seeing a steady stream of new customers.  And, the company’s added more sailings to and from the Dominican Republic.

The outlook is for strong growth in 2010.

Revenue is expected to increase 5.2% to over $120 million.  And, earnings per share are expected to more than double to $0.45.

We think shares of shipping stocks will rise sharply as the economic recovery gains momentum.  TRBR is a well run company and they should benefit nicely from an industry rebound.

The recent pullback provides another good buying opportunity.  As such, we’re moving TRBR from a Hold to a Buy.

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

SOLR attempted to break out earlier this month on better than expected third quarter earnings.  Unfortunately, the move was cut short by sobering news from the German government.

Let’s first take a look at the company’s results.

Both revenue and earnings fell year over year, but they blew away analysts’ estimates.  Revenue of $173.6 million beat the estimate of $145.4 million.  And, earnings per share of $0.25 beat the estimate of $0.15 by 67%!

Strong demand from Asia drove the increases.

The stock popped 10% on the news.  But, the shares quickly fell back to earth on bad news out of Germany.

The German government announced plans to slash solar subsidies by 15%.  Investors sold off solar stocks on the news.  Germany is after all a major market for the solar industry.

After taking heavy criticism for the decision, the German government has agreed to delay the cuts until June.  This news has recently sent solar shares higher.  SOLR is up more than 10%.

The German subsidy cuts don’t necessarily mean SOLR will have a bad year.

The cuts should actually boost demand at Chinese solar companies.  Due to lower manufacturing costs, Chinese solar companies can undercut prices of their European and American peers.

Several Chinese solar companies are already seeing a huge uptick in demand.  And, they’re already saying they need to boost capacity to keep up with rising demand. This is great news for SOLR.

The surging demand in China could more than offset any declines SOLR experiences in Europe.  We’ll have to wait and see how it plays out.  For now, SOLR remains a buy up to $6.60.

. . . . China Pharma Holdings (AMEX: CPHI) – Hold

CPHI has pulled back with the broader Chinese stock market.  The shares have now stabilized.  And, they’re building a base to support the next move higher.

Despite the recent decline, we’re still sitting on a very nice 39% gain.

And, we could see the shares surge higher in coming months.

The company just posted excellent clinical trial results for a new potential blockbuster generic drug.  The drug is a generic version of Candesartan, the leading anti-hypertension drug worldwide.  Candesartan had global sales of over $2.5 billion in 2007.

Clinical testing shows CPHI’s generic is 10-fold stronger in effect, but just as safe.  Given these great results, CPHI has applied to China’s FDA for marketing approval.

The market for Candesartan in China is absolutely huge.

Nearly 60% of urban adults over the age of 65 in suffer from hypertension.  This market is expected to reach 100 million Chinese by 2011.

Once approved, Candesartan should generate strong sales in China.

The drug is covered by China’s national health insurance.  And, by the end of 2010, 90% of China’s citizens will be covered under China’s new universal health care system.

The expected approval of Candesartan by China’s FDA is a big potential catalyst for CPHI. Continue holding the shares for greater gains.

. . . . Tianyin Pharmaceuticals (AMEX: TPI) – Buy up to $4.27

TPI has pulled back as part of the broader decline in Chinese stocks.  This is a classic case of investors throwing the baby out with the bathwater.

The company’s knocking the cover off the ball.

Take a look at their record results for the second quarter of 2010.

Revenue surged nearly 48% to $14.9 million.  And, net income jumped almost 25% to $2.6 million.

TPI continues to see strong demand for its products both existing and new.  They recently expanded the sales force and distribution channels.  And, they’re effectively utilizing newly added manufacturing capacity.

What’s more, their product portfolio is continuing to grow rapidly.

The company recently received approval from China’s FDA for four new generic drugs. These generics are targeting multi-billion dollar markets in China.  With another 40 drug candidates under review, the company should have plenty of new products to keep driving its phenomenal growth.

We see the recent pull back as a great buying opportunity.  As such, we’re moving TPI from a Hold to a Buy.

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

After a brief pullback, GLDD is trending upward again.  Investors are driving the shares higher going into earnings scheduled for February 23rd.  We take this as a positive sign. With the shares now stabilized, we’re moving GLDD from a Hold to a Buy.

. . . . Overhill Farms (AMEX: OFI) – Hold

OFI is surging higher on several positive developments.  The shares are up more than 42% from the December 2009 low.  And, we’re once again sitting on a gain of better than 50%.

Strong first quarter 2010 results were the catalyst.

Although revenue increased just slightly, better gross margins drove earnings significantly higher.  Net income jumped 24% to $3.1 million.  And, earnings per share increased almost 19% to $0.19.

Best of all, the company saw a huge resurgence in the struggling foodservice business.Foodservice revenue soared 102% to $19.2 million.  Not only did the company experience higher volumes from existing customers, they generated revenue from new accounts as well.

The strong showing by the foodservice business has helped ease concerns about the struggling retail business.  Retail revenue dropped 17.3% due to the loss of the HJ Heinz account.  (Heinz is moving production in-house.)

If foodservice continues to grow and OFI replaces the HJ Heinz business, we should see OFI head significantly higher.  Continue holding OFI for greater gains.

. . . . Electronic Game Card (OTCBB: EGMI) – Hold

EGMI has been in a downtrend since mid-October 2009.  The shares have been falling despite strong fundamentals.  And, there’s been no negative news to drive the shares lower (other than the passing of Lord Steinberg).

We’re expecting management to provide some clarity next week.

The company’s going to host a conference call on February 25th.  The purpose of the call is to update investors on company operations.

With the shares now trading just above our stop-loss of $0.83, we’re moving EGMI from a Buy to a Hold.

Action To Take

• SELL China Biologic Products (NASDAQ: CBPO)
• Move SkyPeople Fruit Juice (AMEX: SPU) from Buy to Hold
• Move China Gengsheng Minerals (OTCBB: CHGS) from Hold to Buy
• Move Taseko Mines (AMEX: TGB) from Hold to Buy
• Move Trailer Bridge (NASDAQ: TRBR) from Hold to Buy
• Move Tianyin Pharmaceutical (AMEX: TPI) from Hold to Buy
• Move Great Lakes Dredge & Dock (NASDAQ: GLDD) from Hold to Buy
• Move Electronic Game Card (OTCBB: EGMI) from Buy to Hold

Category: PSB Portfolio Updates