PSB Portfolio Update January 2010

January 19, 2010

January Effect Lifting Penny Stocks

Penny stocks started the New Year off on the right foot.  They’re rising steadily in a solid upward trend.  Since the rally started in early November 2009, the Russell 2000 Index is up an impressive 15.4%.

The really interesting part is they’re outperforming their larger cap brethren.

Over the same time frame, the Dow Jones Industrials are up just 9.6%.  The S&P 500 has done a little better with a gain of 10.4%.  But, large cap stocks overall are clearly lagging small cap stocks.

This is actually a seasonal pattern we often see in the market this time of year.  It’s called the January Effect.  Simply stated, the January Effect is when small cap stocks outperform large cap stocks in January.

Why does this happen?

The simple answer is tax-loss harvesting.  Many investors sell small-cap stocks before year-end for tax reasons.  The heavy selling tends to drive small cap stock valuations down.

Then, these tax-sensitive investors reinvest in small cap stocks at the beginning of the New Year.  The wave of buying tends to send small cap stocks bounding higher.

The January Effect should probably be renamed the November Effect.

In recent years, we’ve seen the selling happen in October and the buying begin in November.  As more and more investors learn of the effect, they try to beat each other to the punch.

That’s exactly what’s happened this year.

Best of all, we’re profiting nicely from the effect in our portfolio.

Eleven of our penny stocks have recently set new highs.  That’s exactly half of our open positions.  And, several others are moving higher in solid uptrends.

Let’s take a closer look at some individual positions…

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 (NASDAQ: HGSI) – Hold

HGSI is off to a strong start in 2010.  The shares traded up to a new high of $32.07giving us a monster gain of 1,014%.  Congratulations to all on our first 1,000% plus winner in the service!

The amazing thing is we should see the stock set more new highs this year.

The company has a number of catalysts in 2010 to propel the stock.

First, HGSI could have two major new drugs approved by the end of the year.  The FDA is already considering the company’s application for its chronic hepatitis C drug (Zalbin). And, the company will submit an application for its lupus drug (Benlysta) in the second quarter.

FDA approvals would likely send the shares rocketing higher.

Next, the company could earn significant milestone payments from GlaxoSmithKline(NYSE: GSK) on two drugs the companies are jointly developing.  Two phase 3 trials of cardiovascular drug Darapladib are now underway.  And, six phase 3 trials of type 2 diabetes drug Syncria are ongoing.

Third, the company expects to release early stage clinical trial results for two important cancer drug candidates.

• Mapatumumab is undergoing three phase 2 trials studying its treatment potential for multiple myeloma, non-small cell lung cancer, and hepatocellular cancer.Results are expected in the first quarter and mid-year 2010.

 

• HGS-1029 is beginning a phase 1 trial to evaluate its safety, tolerability, and dosage as a monotherapy for advanced lymphoid tumors.  And, a phase 1 study started in 2008 for evaluating HGS-1029 as a monotherapy for advanced solid tumors is ongoing.

Finally, the company’s in a strong financial position.

HGSI expects to generate over $150 million in revenue this year.  And, it could be higher than that if Zalbin is approved… HGSI is entitled to milestone payments from GSK upon approval.

Most importantly, HGSI has plenty of cash to bring Zalbin and Benlysta to market and continue clinical testing of its developmental drugs.  The company expects to end the year with $840 to $890 million in cash and investments.

Clearly, the 2010 outlook for HGSI is very good.  Hang on tight to your shares for bigger gains to come.

. . . . Gulf Resources (NASDAQ: GFRE) – Hold

GFRE started the year off with a strong rally.  The shares traded up to a new high of $14.94.  That’s a 29% move in the first seven trading days of the year.  And, it gave us an amazing gain of 605% since inception of the trade.

The company’s riding a wave of momentum after closing out a very strong 2009.

Demand for the company’s bromine and environmentally friendly chemical products is very strong.  Bromine prices are rising on strong demand and supply shortages.  And, the company continues to boost production capacity through acquisitions and by building new plants.

All of these forces are combining to drive revenue and earnings higher.

We’re expecting strong growth when the company reports fourth quarter and full year 2009 results.  Continue holding your shares of GFRE for greater gains.

. . . . Hi Tech Pharmacal (NASDAQ: HITK) – Hold

HITK closed out 2009 with a strong rally.  And, it continued climbing to start the New Year.  The stock shot up to a new high of $29.89 giving us a terrific 478% gain.

Driving the shares higher was FDA approval of the company’s new drug… Tropazone.  It’s intended to treat a variety of different skin rashes.  The company plans on launching Tropazone in February 2010.

HITK’s preparing for another year of solid growth.

Strong demand for their generic drugs and over the counter medications should continue. Patients must continue taking their medications regardless of their financial situation.  And, more of them are looking to save money with lower-cost generics.

We’re expecting the stock to continue trending higher this year.  Hang on to your shares for bigger profits ahead.

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

CBPO is yet another holding that’s off and running in 2010.  The stock traded up to a new high of $13.70.  That gave us a super 270% gain.

The stock’s riding a wave of good news.

As we discussed in our last update, third quarter results were very strong.  Tight supply and demand for plasma-based products is driving prices higher.  And, the company continues to grow through strategic acquisitions.

We’re expecting more of the same for 2010.  Continue holding CBPO for even better returns going forward.

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

CPHI is continuing to stair-step its way higher and higher.  The shares traded up to a new high of $4.32.  Nothing like an 89% gain in just over four months’ time!

The shares are benefiting from two strong trends.

Investors are starting to recognize the huge growth potential of Chinese drug stocks. Remember, China’s rolling out universal health insurance this year.  And, CPHI is still trading at a big discount to its projected growth rate.

We’re expecting the shares to continue trending higher.  Hang on to CPHI for greater gains ahead.

. . . . Tianyin Pharmaceutical (AMEX: TPI) – Hold

TPI is another Chinese drug company that’s trending higher.  The shares hit a new high of $5.25 giving us a nice 58% gain.  All in just a little over four months!

A few items are driving the stock higher.

First, the company received regulatory approval for two important generic drugs.  They’re both antibiotics with large, fast-growing markets.  The Chinese market is currently $256 million… and, it’s increasing 20% a year.

We expect both products to contribute nicely to revenue this year.

Next, 23 of TPI’s medicines have been included in the latest edition of China’s National Insurance Directory.  This is great news because these medicines account for 70% of revenue.  We should see sales volumes increase substantially this year as a result.

Last but not least, TPI announced another quarterly cash dividend.  They’ll pay 2.5 cents per share on March 10, 2010.

This hyper-growth stock is still trading at a large discount to its growth rate.  We expect it to move significantly higher this year.  With the shares now trading above our buy up to price, we’re moving TPI from Buy to Hold.

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

Please note… L&L International Holdings (LLFH) changed its name and ticker symbol to L&L Energy (LLEN).  The shares continue to trade on the OTCBB.

LLEN is moving higher in a very strong uptrend.  The shares recently hit a new high of $8.09.  That gave us a sweet 48% gain in just over two months’ time.

Blowout second quarter earnings ignited this monster rally.

Revenue surged 139% to just over $24 million.  Net income skyrocketed 195% to nearly $7 million.  And, earnings per share almost tripled to $0.29.

The acquisition of Hon Shen coking and expansion of the DaPuAn and Su Tsong coal mines are behind this amazing growth.  Management expects these businesses to continue driving results in coming quarters.

LLEN also recently completed an acquisition of the Hong Xing coal washing facility. Management estimates this operation will add 150,000 tons of coal washing capacity and $19 million a year to revenue.

We’re expecting LLEN to continue trending higher from here.  The company’s growing like a weed and the shares are still badly misvalued.  However, with the stock trading above our buy up to price, we’re moving LLEN from a Buy to a Hold.

. . . . China Gengsheng Minerals (OTCBB: CHGS) – Hold

CHGS is off to a flying start right out of the gate.  This January recommendation traded up to a high of $3.05.  That gave us an impressive 36% gain in just six trading days!

Investors are clearly piling into CHGS with high expectations for their new precision abrasives business.  Heavy demand for solar panels is expected to drive strong sales of the company’s product.

CHGS has already blown through our buy up to price of $2.60.  If you didn’t get in yet, don’t worry… The shares may pull back a bit to consolidate this quick upward move.  Keep a close eye on it.  And feel free to buy CHGS on any dips below $2.60.

For now, we’re moving CHGS from Buy to Hold.

. . . . Taseko Mines (AMEX: TGB) – Hold

TGB broke out of a two-month sideways pattern with authority on Friday.  The stock surged to a new high of $5.13 on more than five times average daily volume.  That gave us a nice 22% gain in the first eight trading days!

The shares jumped on very good news.

TGB received an environmental assessment certificate for its Prosperity mine.  This is a very important step to beginning production.  The next step is applying for the leases, licenses, and permits needed to advance the project.

Remember, the Prosperity mine holds copper and gold reserves that could be worth more than $20 billion.

With the stock trading above our buy up to price, we’re now moving TGB from Buy to Hold. If you didn’t get any shares yet, don’t fret… you might have a chance to get in on a pullback.  Keep a close eye on it and wait for your opportunity.

. . . . China Marine Food Group (AMEX: CMFO) – Buy up to $7.50

CMFO jumped to a new high of $8.63 on news it completed its acquisition of Shishi Xianghe Food Science and Technology (Xianghe).  That gave us a nice 38% gain in just a little over a month.

The company purchased 80% of Xianghe for $27.8 million.  The purchase price included transfer of a $26.4 million loan that Xianghe owed to CMFO.  And, the remaining $1.4 million was paid to Xianghe’s founder and sole shareholder.

Management expects Xianghe’s flagship product, an algae-based soft drink, to generate revenue of $20 million in 2010.  And, they expect revenue to increase a whopping 60% to $32 million in 2011.

Best of all, the product should provide a nice boost to earnings.  Management expects profit margins of 20% in 2010 and 25% in 2011.br />
With the deal complete, management has updated its guidance for 2010.

They’ve increased their revenue estimate from $80 million to $100 million.  And, they’ve raised their net income projection from $18 million to $21.5 million ($0.93 per share).

That’s projected year over year growth of 64% and 52% respectively.

Nevertheless, the shares are trading at just 7.8x the 2010 earnings estimate.  That’s a 75% discount to the company’s projected long-term growth rate.

We think the shares are headed significantly higher this year.  As the company meets or beats quarterly earnings estimates, the shares should rise accordingly.

If you haven’t picked up your shares of CMFO, you might consider purchasing them now. They may not remain below our buy up to price much longer.

. . . . Trailer Bridge (NASDAQ: TRBR) – Hold

TRBR is screaming higher on no specific company news.  After hitting a low of $4.00 in late December 2009, the stock’s rallied to a high of $5.95.  That’s a 49% gain in just the past three weeks!

Investors could be buying up shares because TRBR’s an attractive takeover target.  The shipping industry is recovering from the recession.  And, one or more of the larger shipping companies might look to increase their market share by acquiring TRBR.

This is all just speculation on my part right now.  I haven’t heard any rumors or talk about TRBR being acquired.  But, the idea makes a lot of sense and would explain why the shares are surging lately.

With the stock now trading above our buy up to price, we’re moving TRBR from Buy to Hold.  Continue holding your shares for greater gains.

. . . . China Information Security Technology (NASDAQ: CPBY) – Hold

CPBY broke out of a two-month long sideways pattern.  The shares jumped more than 10% on very heavy volume.  More than 4.3 million shares changed hands… nearly 7 times average daily volume.

Driving the shares higher was news of strong new order flow.

The company signed new contracts during the fourth quarter of 2009 worth a record $36.7 million.  That’s 22% higher than the third quarter of 2009 and 30% higher than the fourth quarter of 2008.

This is great for CPBY and for shareholders.

Strong new order flow is an early sign revenue and earnings will be higher than expected in 2010.  And, since management did not revise its 2010 guidance, we could see quarterly upside surprises this year.

Of course, nothing drives a stock price higher like upside earnings surprises!

Continue holding CPBY for greater gains.

. . . . China Security & Surveillance Technology (NYSE: CSR) – Sell

CSR has been moving higher in a very strong uptrend.  After hitting a low of $4.83 in early November 2009, the stock recently reached a high of $9.04.  That’s an amazing 87% gain in just the past two months!

The stock is now bumping up against strong resistance around the $9.00 level.  While the stock is undervalued in our opinion, we just don’t see it breaking out of this year long sideways pattern.  Let’s go ahead and take our profits off the table now.

. . . . American Software (NASDAQ: AMSWA) – Sell

We’ve had a nice run with AMSWA.  The stock’s up 38% since we recommended it in January 2009.  However, it now appears stuck in a sideways trading pattern.  Let’s go ahead and book our nice gains and redeploy the capital into better opportunities.

. . . . VAALCO Energy (NYSE: EGY) – Sell

This trade just hasn’t worked out like we expected.  We believed the shares would rally when oil prices started rising again.  Well, oil prices have spiked, but EGY hasn’t budged.

Although we like the company’s long-term fundamentals, we see much better short-term opportunities elsewhere.  Let’s exit the trade now for a small gain.

Action To Take

• Move Tianyin Pharmaceutical (AMEX: TPI) from Buy to Hold
• Move L&L Energy (OTCBB: LLEN) from Buy to Hold
• Move China Gengsheng Minerals (OTCBB: CHGS) from Buy to Hold
• Move Taseko Mines (AMEX: TGB) from Buy to Hold
• Move Trailer Bridge (NASDAQ: TRBR) from Buy to Hold
• SELL China Security & Surveillance Technology (NYSE: CSR)
• SELL American Software (NASDAQ: AMSWA)
• SELL VAALCO Energy (NYSE: EGY)

Category: PSB Portfolio Updates