PSB Portfolio Update March 2010

March 16, 2010

The Bull Market Continues…

In our last update, we questioned whether a five-day rally in the Russell 2000 was a resumption of the bull market.  The answer hinged on whether the index could break through resistance around 650.

Well, we have our answer.

After a brief pause around 650, the Russell 2000 Index charged through resistance on rising volume.  It continued moving higher in a solid uptrend.  The index didn’t stop rising until it set a new 52-week high of nearly 679.

That’s a strong 9% gain since our last update.

The index has now recovered all of the losses sustained since October 2008!

As we expected, investors shrugged off concerns about China and Europe.  They’ve been focusing on good economic numbers instead.  These numbers provide further evidence the U.S. economy is recovering.

Here are a couple of important examples.

First, retail sales rose unexpectedly in February.  They increased 0.3% over January (the biggest rise in three months).  And, they jumped 4.1% over the prior year’s figure.

The news renewed hopes the consumer can lead an economic recovery despite high unemployment levels.

Second, employers shed fewer jobs in February than analysts expected.  The unemployment rate held steady at 9.7%, but it didn’t increase as many had feared.

The trend of shrinking job losses has investors anticipating the transition to payroll gains. We might even see new hirings begin as early as this spring.

These stronger than expected economic numbers have clearly propelled the market through a major resistance level.  For now, the bull market continues.  But, it will take more good economic news to keep the market moving higher.

Let’s see how our positions are doing…

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

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

We’re sad to say it’s time to sell our remaining shares of HITK.  The stock has been one of our best performers.  But, a number of signs indicate the time is now to book our profits.

First, the company reported very strong third quarter earnings, but the shares did not soar to a new high.  (That ends a streak spanning the prior three quarters.)  A decline in sequential quarterly growth is most likely to blame.

Another indicator is earnings estimates for 2011.  They’re lower than the estimates for 2010.  Declining earnings should put a damper on the shares going forward.

Finally, analysts have decreased their projected five year earnings growth rate from 25% to 10%.  This lower growth rate pushes the company’s PEG ratio up to 1.27.  In other words, the shares are trading at a 27% premium to the long term growth rate.

Given the prospect of declining revenue and earnings, I don’t see the shares maintaining a premium valuation much longer.  We’ve already captured gains of 306% on half our position.  Let’s sell our remaining shares now for a hefty 364% gain!

Congratulations on an extremely profitable trade!

. . . . ChinaCast Education (NASDAQ: CAST) – Sell

It’s time to sell our remaining shares of CAST.  We’re sad to see them go.  But, we want to lock in our hefty profits on this position.

We still believe CAST is a quality company with great long-term growth potential.  But, at recent prices, the stock is overvalued.

The technicals also indicate now is a good time to sell.

The shares have been trading in a sideways range since September 2009.  And, now they’re approaching the top end of this range.

Let’s take advantage of this upward move and lock in profits of 172%!  Congratulations to everyone on a fantastic trade!

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

CPBY recently reported great results for full year 2009.  Unfortunately, their guidance for 2010 projects anemic earnings growth of just 4.5%.  It looks like the shares are probably dead money for a while.  Let’s sell our remaining shares now and lock in our profits of 73%!

. . . . Overhill Farms (AMEX: OFI) – Sell

We still like OFI, but the company has some big challenges ahead.  They need to replace the lost HJ Heinz business.  And, they need to continue generating strong revenue gains in the food service business.

If OFI doesn’t overcome these obstacles, their revenue and earnings are going to suffer.

Right now, we have an opportunity to exit this position with a nice gain.  OFI shares have recovered most of the drop they sustained at the end of 2009.

Let’s go ahead and cash in our profits of 56%!

We see much better opportunities for growing our capital elsewhere.  No sense hanging on to a stock with limited upside potential.  Congratulations on another nice winner!

. . . . DRI (NASDAQ: TBUS) – Sell

DRI has rallied nicely off the lows.  But the stock failed to break through strong resistance around $2.00 a share.  This doesn’t bode well for the stock near term.

Another ominous sign is 2010 earnings estimates are still dropping.  I hoped to see them level off by now.  This is problematic because stocks usually trend sideways or down when earnings estimates fall.

Given these negative signals, we think now is a good time to exit this position with a gain. Go ahead and sell TBUS for gains of up to 50%.

Congratulations on a great eight month return!

. . . . Great Lakes Dock & Dredge (NASDAQ: GLDD) – Sell

GLDD reported strong year over year growth for 2009.  But, revenue and earnings missed analysts’ estimates.  Unfortunately, the shares dropped significantly on the news.

What’s behind the negative surprise?

The company’s demolition business is suffering as the construction industry wallows in recession.  And, the earnings from dredging and beach maintenance were not big enough to offset the earnings decline in demolition.

Making matters worse, analysts have slashed their earnings estimates for 2010 and 2011.

This is not a good sign.  Stocks rarely outperform after analysts cut their earnings estimates.  While we still like GLDD’s business, we think it’s best to conserve capital for better growth opportunities.  Go ahead and sell GLDD now.

. . . . Electronic Game Card (Pink Sheets: EGMI) – Sell

We issued a sell recommendation on EGMI in our March 2010 issue.  It looks like the company may have to restate its financials for several prior years.  And, that’s usually never a good thing for a stock.

We’re not going to wait around to see what happens.

You may have noticed a number of law firms are filing class action lawsuits against EGMI. They’re alleging EGMI and some of their executives violated federal securities laws.  You may want to contact one or more of these firms (as well as your own attorney) to find out if you should participate.

If you haven’t sold your shares yet, we recommend exiting EGMI and conserving your capital.

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

Like a volcano, CHGS erupted from a month long sideways pattern on extremely heavy volume.  The shares soared to a new high of $4.35, giving us a phenomenal 93% gain.

Not too shabby for our first two months in the trade.

What’s behind this impressive rally?

The shares uplisted from the OTCBB to the AMEX exchange.  This should be a familiar situation for most of you.  We’ve seen a number of our penny stocks uplist to a major exchange and then soar in price.

By listing on a major exchange, CHGS will gain greater visibility with institutional investors. Remember, institutional buying can drive a stock’s price to the moon very quickly.

The shares have pulled back a bit after the huge spike.  This is normal trading activity after a sharp upward move.  We fully expect the stock to trade higher over the next year.

With the shares now trading above our buy up to price, we’re moving CHGS from Buy to Hold.

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

LLEN is on fire.  The shares recently soared to a new high of $10.35.  That gave us a sensational 90% gain.  Not a bad return in just four months’ time.

The shares began moving higher in a hurry after uplisting to NASDAQ.  A bullish analyst report then sent the shares even higher.  And, the shares really jumped after the company reaffirmed guidance for fiscal year 2010 (ending April 2010).

Here’s a quick recap.

The company expects revenue to surge 164% to $108 million.  And, they’re forecasting earnings to more than double to $0.94 per share.

We think there’s a good chance LLEN will hit our price target of $11.28 in the next few weeks.  And, if LLEN delivers on its growth forecasts and provides strong guidance for FY 2011, we think they’ll move even higher.  Continue holding LLEN for bigger gains.

. . . . Health Grades (NASDAQ: HGRD) – Hold

Our prediction last month for a breakout in HGRD was spot on.  The company reported strong earnings growth as we expected.  And, the shares are off and running.

Here’s a quick summary of the company’s full year 2009 results.

Revenue surged 32% to $52.5 million.  Operating margins expanded from 17% to 20%.  Net income soared 51% to $7.1 million.  And, earnings increased a whopping 64% to $0.23 a share.  (A great year by any measure!)

Each of these results beat guidance and analysts’ estimates.  What’s more, the consensus 2011 estimate has increased from $0.34 to $0.37 a share.

HGRD traded up to a new high of $6.03 on the news.  That gave us an impressive 39% gain.

And, they’re not done yet.

With the economy recovering, HGRD should begin seeing an uptick in their Provider Services business.  Any improvement could drive upside earnings surprises in coming quarters.  Continue holding HGRD for greater gains.

. . . . Kulicke & Soffa (NASDAQ: KLIC) – Buy up to $7.95

KLIC is off to a good start.  The shares jumped to a new high of $7.67.  That gave usa nice 17% gain in just our first week.  Of course, we’re expecting much bigger gains ahead as the chip equipment recovery gains momentum.  Don’t waste any time establishing your position.  These shares could easily move out of our buy range in the blink of an eye.

. . . . Winner Medical Group (AMEX: WWIN) – Buy up to $8.55

WWIN is continuing higher in a solid uptrend.  The shares are showing good strength as they climb along the upward sloping 50-day moving average.  We could see a nice pop in the shares this week.  The company is presenting at the annual Roth Capital Growth Conference.  WWIN is a good buy at $8.55 or less.

. . . . SkyPeople Fruit Juice (AMEX: SPU) – Hold

SPU is continuing to trade sideways in a relatively narrow range.  However, the shares recently spiked to a new high of $8.10.  That gave us a nice 51% gain.

I see a very positive sign in the upward sloping 50-day moving average.

It recently crossed the 120-day moving average to the upside.  Remember, a bullish crossover often precedes a new upward trend.

With the shares now trading above our buy up to price, we’re moving SPU from Buy to Hold.

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

As we predicted, TGB moved higher with rising copper prices.  The shares are up almost 13% since our last update.

What’s behind the move?

Copper prices have accelerated higher since the earthquake in Chile.  Commodity traders are concerned the earthquake will cut into supply creating a shortage of the metal.

Also, recent reports show China’s demand for copper remains strong.  Chinese copper imports increased 10% in February.  Strong demand from the world’s largest copper importer should provide support for copper prices.

We expect TGB to continue trending higher along the 50-day moving average.  With the shares now trading above our buy up to price, we’re moving TGB from Buy to Hold.

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

CMFO broke out of a two month sideways pattern recently.  The shares jumped on heavy volume.  Investors scooped up CMFO after a brokerage firm initiated coverage with a Buy rating.  This could be the start of a new upward trend.  We’ll have to see how it develops. The shares remain a buy up to $7.50.

. . . . OMNOVA Solutions (NYSE: OMN) – Hold

It looks like OMN has broken out of the downtrend it’s been in since mid-October.  The shares are up 33% from the low set in early February.  And, they’ve broken through the upper trendline.

The shares are rising as the company heads into earnings on March 24th.

Everyone should have had a chance to pick up these shares by now.  Given the sharp rise in share price, we’re moving OMN from a Buy to a Hold.

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

CPHI has been consolidating since hitting a new high in January 2010.  This is normal trading activity after a strong upward move.  The shares now appear nearly finished with forming a symmetrical triangle pattern.

This is a very good sign…

You see, symmetrical triangles are most often “continuation” patterns.  In other words, shares typically resume the trend immediately preceding formation of the pattern.

If that holds true here, we should see CPHI break out soon to continue its prior upward trend.

In other good news, CPHI reported strong full year 2009 results.

Revenue jumped 21% to $61.7 million.  Net income increased 13% to $20.2 million.  And, earnings increased 9% to $0.48.

Best of all, the company’s numbers exceeded guidance and analysts’ estimates.

For 2010, analysts are expecting even stronger growth.

They’re forecasting revenue to increase 20% to $74.5 million.  And, they see earnings jumping 15% to $0.55 per share.

We’re sticking to our profit target of $5.00 or 9x the 2010 estimate.  That gives usabout 41% upside from the stock’s recent price.  Continue holding CPHI for further gains.

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

GFRE reported strong full year 2009 results.  Revenue beat management’s guidance and net income hit the upper end of the range.  Higher than expected bromine prices in the fourth quarter helped boost results.

Here’s a quick summary of the results…

Revenue jumped 26% to $110.3 million.  Net income surged nearly 37% to $30.6 million. And, earnings increased 11% to $1.00 per share.  (A very good year indeed.)

We’re expecting more strong growth in 2010.

The company’s increasing bromine and crude salt production capacity.  They see more opportunities to acquire unlicensed bromine producers.  And, they’re continuing to roll out new, higher margin environmentally friendly chemicals.

Analysts are forecasting stronger growth for 2010 as well.

They’re expecting revenue to rise 41% to over $156 million.  And, they’re projecting earnings to jump 38% to $1.38 per share.

We’re going to wait for more specific guidance from management before setting a new price target.  However, we fully expect the shares to move significantly higher this year. Continue holding GFRE for greater gains.

Action To Take

• Sell Hi Tech Pharmacal (NASDAQ: HITK)
• Sell ChinaCast Education (NASDAQ: CAST)
• Sell China Information Security Technology (NASDAQ: CPBY)
• Sell Overhill Farms (AMEX: OFI)
• Sell DRI (NASDAQ: TBUS)
• Sell Great Lakes Dock & Dredge (NASDAQ: GLDD)
• Sell Electronic Game Card (Pink Sheets: EGMI)
• Move China Gengsheng Minerals (OTCBB: CHGS) from Buy to Hold
• Move SkyPeople Fruit Juice (AMEX: SPU) from Buy to Hold
• Move Taseko Mines (AMEX: TGB) from Buy to Hold
• Move OMNOVA Solutions (NYSE: OMN) from Buy to Hold

Category: PSB Portfolio Updates