PSB Portfolio Update July 2012

July 19, 2012

It’s Rally Time!

Finally, it’s rally time!  And there are three reasons we’re seeing the equity markets move higher this week.

First, the latest round of earnings is coming in stronger than most analysts have forecast.  In fact, roughly 70% of the 99 S&P 500 companies that have reported results so far have beat expectations.  Given the fact most investors were pricing in a poor quarter, I’d say things are looking rather bullish at this point.

But earnings aren’t the only reason we’re seeing the markets rally…

Second, China’s recent release of economic indicators inspired new hope in the potential for global growth.  If you weren’t aware, China met its 7.6% GDP growth estimate on Friday.  In addition, their government is looking at further stimulus on multiple levels.

In addition to more possible RRR rate cuts, the government announced they’re building out infrastructure at a more aggressive rate in the second half of 2012.  The news was taken positively by investors as a signal that China will keep their economy moving forward.

Last, but certainly not least, Fed Chairman Ben Bernanke gave testimony to Congress over the past few days.  His comments seemed to add to the perception that the Fed may be considering QE3, if needed.  While not committing the Fed to immediately provide stimulus, the Chairman did indicate US central bankers “stand ready” to step in if needed.

Here’s the thing…

When we get stronger earnings combined with pro-stimulus activity from the two largest central banks in the world… there’s no choice but for the markets to rally.

We may be at the beginning of a significant move higher on the major stock averages.  If earnings continue to beat expectations at this rate, we could see new 52-week highs on all the major averages!

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.

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

Even as Commtouch announced a stock buyback last quarter, shares continue to fall. CTCH spent $2.5 million to repurchase shares.  Combined with single digit revenue growth of 7% in Q1, little seems to be helping the stock price.

Since we purchased this stock at the end of 2010, Commtouch never really took off.

Let’s go ahead and sell CTCH and put that capital to better use in our next trade.

. . . . Hawaiian Holdings (NASDAQ: HA) – HOLD

For the first time in 2012, HA has finally made a new high for us.  That’s quite a turnaround for us.  It’s also a result of excellent performance at Hawaiian Airlines.

Over the past three months, analyst estimates for 2012 earnings have risen by 30% from $1.16 to $1.51.  And some analysts see HA trading near $15 next year!

Continue holding this stock for much bigger gains ahead.

. . . . Aceto (NASDAQ: ACET) – HOLD

After posting a $0.20 per share profit for Q1, shares of ACET remained range bound under $9… that is until now.

Finally, our pharmaceutical trade is paying off and has crossed our buy up to price.  With the recent release of three new compounds, I fully expect we’ll see next quarter’s earnings beat estimates.

Let’s hold shares of ACET for more gains in the near future.

. . . . Callidus Software (NASDAQ: CALD) – SELL

While this company has shown great potential, the fact is the stock has not performed well for us.  CALD operates in a very competitive business effectiveness and cloud computing space.  And last quarter, the company lost $0.20 a share.

To make matters worse, there’s a roughly 18% short interest providing a further headwind for this stock.

I’m not confident we’re going to see a major turnaround for CALD next quarter and believe we’re better off selling our shares before earnings are released in early August.

Let’s conserve capital and sell shares of CALD.

. . . . Carriage Services (NYSE: CSV) – HOLD

Death may be an ugly business, but it’s been profitable for CSV.  Better still, we’ve seen our trade nearly double… moving closer and closer to our price target of $9.40.

Carriage recently announced it acquired Lawton Ritter Gray Funeral Home, Gray Funeral Home and Sunset Memorial Gardens in Lawton and Grandfield, OK.  So far this year, the company has made three acquisitions… all part of their plan to continue growing revenue and profits.

Continue holding CSV for more gains on the horizon.

Action To Take

• Sell Callidus Software (NASDAQ: CALD).
• Sell Commtouch Software (NASDAQ: CTCH).
• Move Aceto (NASDAQ: ACET) from a Buy to a Hold.

Category: PSB Portfolio Updates