PSB Portfolio Update January 2011

| January 18, 2011

January 18, 2011

Small Stocks Will Shine in 2011

2010 was the year of the macro trade.  Many investors ditched individual stocks in favor of ETFs and other macro investments.  In other words, investors focused on trading the big picture.

There are several reasons for this, but here’s the main one…

Significant macroeconomic events created a high correlation among asset classes.  To put it simply, almost all types of investments were moving in the same direction at the same time.

Major global political and economic events were causing this historically high correlation. The European debt crisis, the exponential growth in China, the crazy weather patterns… these types of major events were driving the markets.

It didn’t really matter if you were buying large stocks, small stocks, commodities, bonds, or real estate.  Everything was basically moving together.

Well, that’s about to change in 2011.

In fact, as the markets improved in the second half of 2010, asset classes started decoupling.  We finally started seeing stocks, bonds, and commodities move independently of each other.

With the investment landscape changing, investors are going to have to take a different approach.  After all, every investor wants to get the most bang for their buck.

Here’s the deal…

Historically, stock investors focus on individual companies.  Many investors are searching for “value” stocks… undervalued gems.  The best value stocks tend to be smaller companies and cheaper stocks.

With the asset classes decoupling, the search for value is once again gaining momentum. And that means investors are once again turning to small stocks.

It probably goes without saying… that’s great news for us!

The renewed interest in small companies is going to drive many cheap stocks higher.  And with our portfolio of small, undervalued companies, we’re in perfect position to profit.

Fasten your seatbelt.  It’s going to be a fantastic year for Penny Stock Breakouts.

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.

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

We think it’s time to pull the plug on CHNG.  We’ve given this company every opportunity to get things on track.  But they’re just not getting it done.

In fact, the company’s fundamentals have changed for the worse.

They’ve missed earnings estimates in three straight quarters.  And now they’re expected to grow earnings at just 5% annually over the next five years.  That’s a lot lower than what we expected when we recommended the shares last April.

Let’s go ahead and exit this position to conserve capital for better opportunities.  We see a number of other penny stocks gearing up for what could be sensational gains in 2011.

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

NVMI is on fire!

The shares have been moving higher in a strong uptrend since early June of last year.  And recently the shares spiked up to a new high of $9.65.

That’s a whopping 122% gain for us!

Investors are snapping up NVMI shares hand over fist.  And with good reason.  The company’s equipment is being used by chipmakers to make tablet PCs and smartphones.

These are two of the fastest growing segments in the consumer electronics industry.

Robust demand for these products should drive strong growth at NVMI for years to come. In fact, the company recently said they expect quarterly revenues to top $40 million by 2013.

That would be a huge 60% surge over current revenue levels.

Given the strong growth outlook, we’re going to keep NVMI at a hold.  If you already own the shares, keep holding for greater gains.

. . . . Group (NASDAQ: WWWW) – Hold

WWWW is continuing its amazing climb!  The shares rocketed to a new high of $10.35. That’s a remarkable 127% gain.

The company has recently been elevated to trade on the NASDAQ Global Select Market. The Global Select Market is the top tier of the three NASDAQ markets.  And, it has the most stringent listing requirements.

In other words, only the best performing companies qualify to trade on this market.  And that’s a great sign WWWW is growing into a true powerhouse in the small business online marketing space.

The good news keeps coming for this company.  Let’s continue holding WWWW for bigger gains.

. . . . Ultra Clean Holdings (NASDAQ: UCTT) – Hold

UCTT is flying!

What a month for UCTT, which has taken off in recent days.  The stock hit a high of $12.67… good for a 41% gain.

And the future looks even brighter for this chip equipment maker.

Intel (INTC), the world’s largest chip maker, rocked the semiconductor industry this month.  They plan on spending $9 billion to build a new factory and upgrade current factories.

And that’s fantastic news for UCTT.

They’re just one of a handful of companies generating at least 10% of sales from Intel.  To put it simply, Intel’s spending binge is going to directly benefit UCTT’s bottom line.

I think we’re at the start of big year for this company.  We’ve blown through our buy-up-to price so, I’m moving UCTT to a hold.

. . . . ZAGG (NASDAQ: ZAGG) – Hold

ZAGG is off to a great start.  The shares ran up as high as $10.56 late last week.  That gave us a solid 39% gain right out of the gate.

The stock got a nice boost from buzz generated at the 2011 International Consumer Electronics Show (CES).  CES is the electronics industry’s annual event in Las Vegas where companies showcase their hot new gadgets for the year.

At the show, ZAGG unveiled their new and improved invisibleSHIELD scratch-free protective film.  The latest version of ZAGG’s flagship product now eliminates smudges, fingerprints, and glare from the device display.  This should help drive even stronger sales of the company’s main product this year.

That’s great news for us.

But there’s even better news if you can believe it…

Verizon just announced they’re going to begin offering the Apple iPhone in February.  With the largest number of wireless subscribers in the US, Verizon is sure to sell millions of iPhones this year.  And a good number of those customers are likely to protect their new investment with ZAGG accessories.

Clearly, ZAGG’s sunny outlook just got a whole lot brighter.

With the shares now trading above our buy up to price, I’m moving ZAGG from Buy to Hold.  Hang on to your shares for bigger gains ahead.

. . . . Manitex (NASDAQ: MNTX) – Hold

We’re off to a great start in MNTX.  The share price recently shot up to a high of $5.10.That’s an excellent 32% gain in just two weeks!

And I think this is just the beginning.

Spending on heavy equipment is on its way higher this year.  The catalyst is the improving economy.  We’re seeing economic growth across the globe.

And with MNTX’s recent emphasis on international expansion, the company is in great shape to increase business overseas… not to mention the strengthening domestic market.

We’ve already climbed above the buy up to price.  I’m moving MNTX to a hold.  I’m looking forward to big gains from this company.

. . . . FSI International (NASDAQ: FSII) – Hold

Solid earnings are painting a bright picture for FSII.

The company recently released its fiscal first quarter earnings… and the news is good.

First off, the company’s first quarter loss was less than expected.  FSII posted a loss of $0.06 per share… significantly better than analysts’ expectations for a $0.09 loss per share.  While this past quarter saw a dip in revenues, management did a great job of keeping costs low.

Here’s the best part…

Next quarter is looking very strong.

FSII expects to increase revenue from around $11 million to $30 million.  That’s a huge jump!  And they’re expected to earn profits of $3.5 to $4.5 million.  Now that’s what we’ve been waiting for.

With positive numbers ahead, it’s just a matter of time before investors take notice… and send FSII shares soaring.

Let’s hang on to FSII for bigger profits.

. . . . Commtouch Software (NASDAQ: CTCH) – Hold

New business is driving CTCH higher.

Commtouch recently hit a high of $3.93… a nice 12% gain in just two months.  And I think this is just the tip of the iceberg.

The company is reaping the benefits of its recent acquisition of Command Antivirus. Several new customer agreements have been signed since the acquisition.

CTCH is successfully integrating antivirus solutions with its other top notch internet security products.  That means we can expect the company’s strong revenue growth to continue.

CTCH shares have climbed above our buy up to price, so I’m moving it to a Hold.  Hang on for bigger gains ahead.

. . . . Mindspeed Technologies (NASDAQ: MSPD) – Hold

An interesting turn of events for MSPD…

Fiscal first quarter revenues came in $2 to $3 million less than expected.  Slower demand for the company’s wireless communications products caused the drop.

As expected, shares immediately pulled back on the news.

But here’s the interesting part… the stock has since taken off!

After the announcement, MSPD shares hit a low of around $6.  Since then, the stock has rocketed up to a high of $7.68.  That’s a 28% gain in under two weeks – andafter bad news was released.

What that means is investors expected worse.  Keep in mind, investors’ expectations play a big role in the short-term price of a stock.  Even though MSPD announced lower than predicted revenues, it simply wasn’t as bad as what people expected.

What’s more, market conditions are improving.  We can reasonably expect MSPD’s next quarter to show real improvement.

All in all, MSPD is looking like a good bet to move higher.  Let’s hang on to our shares.

. . . . China Valves Technology (NASDAQ: CVVT) – Hold

CVVT has been rather volatile lately.  The shares dropped after a small brokerage firm published a hatchet piece on the company.  The brokerage firm accused CVVT of wrong doing related to the acquisition of a small valve manufacturer last year.

I don’t think these allegations have any merit.

The company issued a press release the very next day categorically denying the accusations.  The company’s CEO even went as far as saying “we stand by the integrity of our financial reporting and the quality of the assets that we have acquired.”

What’s more, in a conference call with investors yesterday, the company announced they’re hiring one of the Big 4 accounting firms to review their first quarter results. Certainly not the steps a company would take if they’ve defrauded investors.

Best of all, the company’s fundamentals still look just as strong as they were when we recommended the stock.  In fact, one analyst even raised their 2011 earnings estimate in the last seven days.

While the shares have now traded below our buy up to price, we’re going to keep CVVT at a Hold.  There’s too much uncertainty to move it to a buy right now.

Action To Take

  • Sell China Natural Gas (NASDAQ: CHNG)
  • Move Ultra Clean Technologies (NASDAQ: UCTT) from Buy to Hold
  • Move ZAGG (NASDAQ: ZAGG) from Buy to Hold
  • Move Manitex (NASDAQ: MNTX) from Buy to Hold
  • Move Commtouch Software (NASDAQ: CTCH) from Buy to Hold

Category: PSB Portfolio Updates

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