PSB Portfolio Update July 2011

| July 19, 2011

July 19, 2011

Don’t Be Afraid Of Stocks

It may seem like investors are shunning the stock market right now – especially small cap stocks.  But this is exactly the sort of opportunity savvy investors take advantage of to earn big profits.

You see, small cap stocks are undervalued by the market right now.

Basically, when economic conditions become challenging, some investors flee the stock market.  And they usually depart small caps first, because small companies are often perceived as riskier.

But I’m not worried.  In fact, I think this is a great time to buy penny stocks.

Here’s why…

There are legitimate problems impacting the global economy right now.  The European debt crisis is weighing heavily on investor confidence.  And the US debt ceiling debate isn’t helping matters either.

But I believe these are short-term issues for US stocks.

For one, the Eurozone debt crisis will get resolved in the near future because they have no other choice.  There are several reasonable options on the table for dealing with this situation.  It may not be the most orderly unwinding, but it won’t be some cataclysmic event either.

Moreover, the US debt ceiling debate isn’t a legitimate issue.  It’s nothing more than a bunch of grandstanding by politicians… and it will be resolved before the US defaults on their debt.

Not one serious bond trader believes default is a possibility – and this sentiment is fully represented by the current prices in the bond market.

Here’s the bottom line…

Once these macro issues are out of the way, investors will focus on what’s important for individual stocks… strong earnings.

And with some of the key economic metrics improving recently, we won’t be surprised if several companies post better than expected second quarter earnings.  And that should do wonders for stocks across the board.

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.

. . . . Magnetek (NYSE: MAG) – Hold

MAG shares remain solid in a tough market for small cap stocks.

The motion control systems company is up 31% off their June lows.  And the shares could be poised for an even bigger move higher.

At current levels, the stock is trading at just 7.2x projected earnings.  That’s a low P/E ratio for just about any industry.  And if the economy continues to improve, MAG could really jump.

And don’t forget, institutions own 72% of outstanding shares.  These guys are in for the long run – so any rally in the stock will likely be sustainable.

Hang on to your MAG shares for bigger profits ahead.

. . . . Aurizon Mines (AMEX: AZK) – Buy up to $7.90

AZK is seeing a nice turnaround.

After hitting a rough patch, the shares are up 23% off the June lows.  And the trend could continue in our favor.

Here’s why…

Gold prices are reaching record highs.

The price of gold surpassed $1,600 an ounce for the first time ever.  Fears of debt defaults in Europe and the US are causing investors to flee into safe haven investments like gold.

Of course, higher gold prices can only benefit AZK.  What’s more, the company’s increasing their estimates of gold content in their mines.

More gold and higher gold prices should lead to higher share prices ahead.  If you haven’t yet, buy AZK shares now before they climb out of our buy range.

. . . . Telecommunication Systems (NASDAQ: TSYS) – Buy up to $5.24

TSYS is on a nice run.  The shares have climbed 23% from their June lows and look to be headed higher.

So what’s going on?

Despite the challenging economy, TSYS is pulling in a nice chunk of revenue.

The company has received over $70 million in new orders.  Those orders include over $60 million in satellite systems for the US Army and another $10 million in equipment for the Japanese space program.

Plus, the company has received $15 million in funding from the US military to develop integrated communication systems.

With business on the upswing, we think TSYS shares could make a big move higher.  Grab your shares now if you haven’t yet done so.

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

Our semiconductor equipment manufacturers have been declining lately.

The selling began right after the Japanese tsunami and nuclear crisis.  Investors worried chip equipment companies could have a slower quarter due to supply shortages from Japanese electronic components suppliers.

Then, in early July, our stocks appeared to have put in a bottom and begun a new uptrend.  However, the legs were cut out from that rally by a weaker than expected third quarter outlook at leading chip equipment maker, Novellus Systems (NASDAQ: NVLS).

But now, our chip equipment stocks are much more attractive than they were just a few weeks ago.  This temporary decline in share price should prove to be another great buying opportunity.

Analysts have slashed their estimates for the entire industry, following the conservative guidance of NVLS executives.  While the downward revisions are cause for concern, we think they’re a blessing in disguise.

Lower analyst expectations set our companies up to post upside surprises in coming quarters.  Remember, nothing drive stock prices higher like positive earnings surprises.

With UCTT, FSII, and MSPD now trading in our buy range, we’re moving them from Hold to Buy.  Go ahead and buy these quality companies while they’re trading at nice discounts to their projected growth.

While NVMI has pulled back as well, it’s still well above our buy up to price.  So, we’re keeping NVMI at a Hold.  Hang on tight to these shares, they have tremendous upside potential going forward.

. . . . Information Services Group (NASDAQ: III) – Buy up to $2.28

III is also feeling the fallout from the Japanese tsunami, earthquake, and nuclear meltdown.  The shares have been moving lower on concerns disruptions in Japan will lead to a global halt in outsourcing contracts.

And according to XMG Global, the industry has indeed experienced a slowdown in new outsourcing contracts.  However, the market researcher was quick to point out the slowdown is likely just temporary.

The Japanese crisis may actually create more opportunities as Japanese firms look to offshore outsourcing as a means to reduce business risk.  In fact, they’re forecasting the global outsourcing industry will grow by an impressive 9.2% in 2011 to a whopping $464 billion.

What’s more, III recently confirmed more companies than last year are implementing cloud computing strategies.  At the company’s annual Americas’ conference, a survey found the number of clients moving into the cloud increased from 24% last year to 39% this year.

Remember, the migration to cloud computing is a huge potential source of outsourcing business.  As more companies decide to set up shop in the cloud, III should see a big uptick in demand for their services.

Given the recent decline in III shares, we’re moving them from Hold to Buy.  Go ahead and grab these potentially high-flying shares up to $2.28.

Action To Take

  • Move Ultra Clean Holdings (NASDAQ: UCTT) from Hold to Buy
  • Move FSI International (NASDAQ: FSII) from Hold to Buy
  • Move Mindspeed Technologies (NASDAQ: MSPD) from Hold to Buy
  • Move Information Services Group (NASDAQ: III) from Hold to Buy

Category: PSB Portfolio Updates

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