PSB Portfolio Update February 2012

February 16, 2012

Is It Time For A Pullback?

Stocks surged higher for five consecutive weeks to start the year.  The Russell 2000 Small Cap Index tacked on 12% over that time.

Overall it’s been a relatively calm period for the markets.  Volatility is low.  And stocks are steadily climbing higher on almost a daily basis.

It’s a nice change of pace from the end of last year.  That’s when turmoil in Europe would routinely toss the markets around like a rag doll.

But the steady grind higher came to an end last Friday.  And to no surprise, the culprit is more European turmoil.  (Thanks a lot Greece…)

Luckily, it’s not all bad news…

The US economy continues to pick up steam.  A slight uptick in construction spending is breathing new life into the economy.  And just as importantly, it’s helping to bring down unemployment.

Here’s the deal, construction has been a drag on the economy for years.  So a sustained uptick in construction spending could really push on the accelerator of economic growth.

Needless to say, a strong US economy is great news for our penny stocks.

Despite the strong fundamentals, we could see stocks pullback from the recent highs in the short term.

Take a look at this chart of the Russell 2000 –

As you can see, the small cap index has had a great run off the October lows.  And it really picked up steam after it broke through the 200-day moving average (gray line).

Now, the Russell 2000 is running into resistance at the downtrend line off the 2011 highs (red line).  Make no mistake… this is a big hurdle for stocks to clear.  And it means that we’ll likely see small cap stocks continue to pullback in the short term.

And, believe it or not, it’s a good thing… It gives us another chance to pick up shares of our buy recommendations at a great price.

Now on to 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.

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

NVMI has been a great stock.  We sold half of the position a year ago for a stellar 128% gain.  And after falling back late last year, Nova is once again surging higher.  We’re currently sitting on gains of more than 100%.

Now it’s time to grab those profits.

You see, NVMI makes equipment used in the semiconductor manufacturing process.  And in order for them to stay at the forefront of their industry, they constantly have to invest in their business.

Management just announced they’re increasing spending from about $8.5 million per quarter to closer to $10 million.  That’s just the cost of doing business.  But the higher expenses will also keep a lid on the stock price.

Sell your remaining shares of NVMI now for a cool double.  Congratulations on a successful trade.

. . . . Ultra Clean Holdings (NASDAQ: UCTT), FSI International (NASDAQ: FSII), and Mindspeed Technologies (NASDAQ: MSPD)

Our three other semiconductor equipment manufacturers are on the comeback trail as well.

As I’ve said before, the slowdown in semiconductor manufacturing is only temporary.  And these are three well run companies with huge upside when tech stocks get on a roll.

Grab your shares of these fast movers before they move beyond our buy up to price.

. . . . Culp (NYSE: CFI) – Hold

CFI is reaping the benefits of their cost cutting efforts.  And now that sales are on the upswing, the upholstery and mattress fabric maker should soar.

More importantly, strong consumer confidence and a housing market recovery bode well for future sales of mattresses.

What’s more, the shares have broken out of their downtrend and are in the early stages of a new uptrend.  The stock recently cleared technical resistance from the 200-day moving average and is picking up bullish momentum.

CFI is now above our $9.00 buy up to price so we’re moving it to a hold.  Continue holding these shares for bigger gains ahead.

. . . . Smith & Wesson (NASDAQ: SWHC) – Hold

SWHC took off like it was shot out of a… well, a Smith & Wesson.  The stock is up more than 20% since our recommendation.

Gun sales are strong and the new management team has the company moving in the right direction.  We’ll see exactly how well they’ve done when they report quarterly earnings next month.

Expectations are certainly on the rise.  Analysts have recently increased their earnings estimates for this year and next.

At this point, SWHC is now firmly above our $4.80 buy up to price.  As a result, we’re moving SWHC to a hold.

. . . . US Concrete (NASDAQ: USCR) – Buy up to $5.00

USCR got off to great start.  But as is the case with any turnaround story, there’s sure to be some ups and down.

The key is USCR has huge upside potential as the housing market recovers.

But remember this…

The housing market is just beginning to turn the corner.  And building material stocks like USCR may have gotten a little ahead of themselves over the last few months.

They could give back a good chunk of their recent gains before moving higher again. That’s just part of the process when investing in penny stocks.  Just so we don’t get whipsawed out of USCR, I’m lowering the stop loss down to $2.75.

Continue buying USCR up to $5.00.

. . . . Ambassadors Group (NASDAQ: EPAX) – Hold

EPAX reported earnings for their fourth quarter and full year earnings last week.  The company made about $3 million last year.  That boils down to 17 cents per share.  The earnings were in-line with analyst expectations.

More importantly, they gave upbeat guidance for next year.  They expect to earn between $3 and $5 million in 2012.

The positive outlook has sent shares of EPAX soaring past our $5.00 buy up to price.  So, we’re moving it to a hold.  Continue holding for bigger gains.

Action To Take

• Sell Nova Measuring Instruments (NASDAQ: NVMI)
• Move Smith & Wesson (NASDAQ: SWHC) from Buy to Hold
• Move Culp (NYSE: CFI) from Buy to Hold
• Move Ambassadors Group (NASDAQ: EPAX) from Buy to Hold

Category: PSB Portfolio Updates