PSB Portfolio Update November 2009

| November 17, 2009

November 17, 2009

Is The Economic Recovery For Real?

This is the big question weighing on investors’ minds.  And, for good reason.  Without real economic recovery, it’s difficult to justify stock prices rising higher from here.

The major market indices have rallied long and hard from the March lows.  The Russell 2000 is up nearly 76%.  The NASDAQ Composite is close behind with a 74% gain.  And, the large cap S&P 500 and Dow Jones Industrials are up 65% and 59% respectively.

A pretty amazing run under any circumstances.  It’s even more impressive considering it occurred during a massive global economic recession and severe credit crisis.

The problem is stocks were run up on the widespread belief the economy is recovering.  Hope and optimism about the future spurred investors to buy beaten down stocks hand over fist.

But, now we’re at a point where the rubber meets the road.

Investors are no longer satisfied with promises of recovery.  They want to see signs of real recovery now.  That’s why so much attention is being focused on GDP numbers, manufacturing activity, retail sales, home prices, and a battery of other economic data.

Many of the above statistics are showing signs of recovery.  But, the one investors are most focused on right now is troubling… unemployment.  Despite some “green shoots” in other areas, unemployment keeps rising.

When unemployment rose through the psychologically important 10% level, investors started selling stocks.  The selling went on for a few weeks, but now investors are buying again.

They’ve sent the major market indices to new highs for the year.  The market clearly wants to go higher still.  But, eventually, investors will come back to the same question… Is the economic recovery for real?

We believe the recovery is for real.

And, we believe the government will see it through to the end.  Remember, next year is the mid-term elections.  No way will the Democrats change their stimulative policies if it means risking seats in Congress.

Nevertheless, the higher the market goes the greater the risk of a major correction.  All it takes is some really bad economic number to send the market spiraling downward.

We’ll be keeping a close eye on all the economic data as it comes out.  You’ll be the first to know if our bullish outlook changes.  We’ll also be looking for more opportunities to book profits.

Now, let’s take a look at the 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.

Position Updates

. . . . Human Genome Sciences (NasdaqGM: HGSI) – Hold

HGSI is soaring once again!  The final clinical trial results for BENLYSTA are out.  And, as we expected, they confirmed the good results reported in July.

BENLYSTA is now one step closer to becoming the first new drug for lupus in 50 years. HGSI will apply for FDA approval in early 2010.  And, we could see sales by the end of next year.

The shares jumped 35% on the news.  Then last week they climbed to a new high of $29.48.  That gave us a whopping 924% gain.  Continue holding HGSI for bigger gains.

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

CPHI is moving higher on strong third quarter earnings.

Revenue jumped 23% to $15.5 million.  Net income surged 67% to $7.2 million (a portion of this was due to a reduction in bad debt expense).  And, earnings per share soared 70% to $0.17.

Management reaffirmed its guidance of 20% top line growth for full year 2009. Increased marketing efforts, expansion of distribution channels, and a number of newly launched products will help achieve the revenue goal.

Continue holding CPHI for greater gains.

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

GFRE surged to a new high of $10.47 going into earnings.  That’s a whopping 394% gain!

And, earnings didn’t disappoint.

Revenue rose nearly 58% to $27.7 million.  Net income soared 123% to $8.3 million. And, earnings per share rocketed 80% higher to $0.27.

Business is booming for two main reasons.

First, bromine prices are rising.  They popped 9% during the quarter to $1,833 per metric ton.  Second, demand for the company’s bromine and environmentally friendly chemicals is surging.

The outlook for the rest of 2009 is very good.

Due to strong demand for bromine, GFRE has raised contract prices through the end of the year.  We should see the effects of this price increase in fourth quarter results.

And, management has increased guidance for the year as a result.

They now expect revenue of $100 to $105 million (up from $98 to $103 million).  Net income is projected to come in between $29 and $31 million (up from $27 to $29 million).  And, earnings per share are expected to be $0.92 to $0.98 (up from $0.85 to $0.92).

All in all things are looking great at GFRE.

Yesterday we issued a sell alert for half your position in GFRE.  Let’s lock in our huge short-term profits!  Nothing like quadrupling your money in just four months!

Congratulations to all on a fantastic trade.  Hang on to your remaining shares for bigger gains to come.

. . . . ChinaCast Education (NasdaqGM: CAST) – Hold

After a quick pullback, CAST is climbing higher in a strong uptrend.  Solid third quarter results are behind the rally.

Revenue rose 14% to $12.2 million.  Net income surged 39% to $4.5 million.  Earnings per share popped 20% to $0.12.  And, they beat the consensus estimate by 20%.

CAST is seeing strong demand for its services.  Both on-campus and e-learning enrollments are up for the 2009 academic year which began in September.

What’s more, management is continuing to grow the company through sound acquisitions.  During the quarter, CAST closed on the acquisition of its second university, adding some 9,000 students to on-campus enrollments.

The outlook for the remainder of 2009 is very good.

Management expects to achieve the high end of their full year guidance.  Revenue is forecasted to be $49 to $51 million.  Net income is projected to come in at $14 to $16 million.

That’s year over year growth of 21% and 120% respectively.

However, the stock’s trading at just 15 times this year’s estimate of $0.44.  That’s a 50% discount to the company’s long term growth rate of 30%.  In our opinion, CAST still has big upside potential.

Yesterday we issued a sell alert for half your position in CAST.  We believe the time is now to lock in gains of 169%.  Continue holding your remaining shares for further gains.

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

After a brief pullback, CPBY is starting to move higher.

Third quarter results were outstanding… and management raised guidance for this year and next.  Here’s a quick recap.

Revenue surged 32% to $28.7 million.  Net income from continuing operations jumped nearly 27% to $9.5 million.  Earnings per share popped 17% to $0.20.  And, CPBY beat the consensus estimate by a penny.

Business is booming.

$30.1 million in new contracts signed during the quarter set a new record for total value.  Project backlog increased to $36.1 million.  Repeat business from existing customers is strong.  And, sales to provinces outside Guangdong (their home province) rose sharply.

As a result, management upped their guidance for FY 2009 and FY 2010.

For FY 2009, they’re expecting revenue of $96 to $100 million (up from $94 to $98 million).  And, the forecast for net income is $28.5 to $30 million (up from $26.8 to $28 million).

Guidance for FY 2010 includes revenue of $133 to $138 million and net income of $33.5 to $37.5 million.  That’s projected revenue and earnings growth of approximately 38% and 17.5% to 25% respectively.

Yesterday we put out a sell alert for half your shares of CPBY.  We felt it was time to lock in our profits of 113%.  Continue holding your remaining shares for bigger gains to come.

. . . . MFA Financial (NYSE: MFA) – Hold

MFA set a new 52-week high of $8.39 in September.  That gave us a nice 70% gain on our position.  The stock then pulled back a bit going into earnings.

Remember, we’re not concerned about pullbacks because we continue to collect a robust dividend.  MFA paid another quarterly dividend of 25 cents per share in October.  Even if the stock flat lines (which we don’t think it will), we stand to earn 18% annually from the dividend alone.

Although earnings missed consensus estimates by a penny, MFA reported a strong quarter.

Net income surged 35% to $64.8 million.  Earnings per share increased 4% to $0.25. And, book value per share rose 8.3% to $7.57.

Some investors are concerned mortgage investment REITs like MFA will decline as the Federal Reserve stops buying mortgage backed securities (MBS).  There’s no question Fed buying of MBS’s has helped push valuations higher.

However, MFA is positioning itself well for the Fed’s inevitable exit from the market.

They haven’t bought more expensive and lower yielding Agency MBS in 2009.  Instead, they’re buying deeply discounted Non-agency residential MBS.  Because of the huge discounts, MFA’s return on these assets will increase even if prepayment rates trend up.

MFA is also reducing leverage.  This makes future earnings less sensitive to changes in interest rates.  When interest rates start moving higher, MFA’s portfolio will suffer less of an impact.

Now that investors have had time to digest MFA’s earnings report, they’re starting to push the stock higher again.  The shares are up 3% in the past week.  Continue holding MFA for greater gains.

. . . . Ceva (NasdaqGM: CEVA) – Hold

CEVA is showing strong performance of late.  The shares traded up to a new high of $12.05 giving us a nice 54% gain.

Driving the stock are solid third quarter results.

Although revenue declined 5% to $9.7 million, the company showed strong profit growth.  Net income jumped 34% to a record high of $2.4 million.  And, earnings per share surged 33% to a new record of $0.12.

Better still, CEVA beat the consensus estimate by a whopping 71%!

Strong demand for the company’s DSPs and other technologies is driving robust profit growth.  During the quarter, CEVA signed six new license agreements.  And, market share in handsets expanded to a record 23%.

In light of the economic recession, the outlook for full year 2009 is very good.

Revenue is forecast to decline slightly to a range of $37.7 to $38.7 million.  But, earnings per share are expected to be $0.38 to $0.40.  That’s projected year over year growth of 19% to 25%.

Continue holding CEVA for better gains.

. . . . China Security & Surveillance Technology (NYSE: CSR) – Buy up to $6.60

CSR reported huge increases in revenue and earnings for the third quarter.  Normally, great results like these would send the stock soaring.  But, not this time.

The shares dropped because CSR’s numbers missed analysts’ overly aggressive estimates.  It also didn’t help when management’s newly issued guidance for FY 2009 and FY 2010 came in below consensus estimates.

Here’s a quick recap…

Revenue jumped 34% to $159 million.  Net income soared 140% to $22 million.  And, earnings per share more than doubled to $0.41.  These are blowout numbers under most circumstances.

The problem here is analysts’ estimates were way too high.

They were expecting revenue of $177.5 million and earnings per share of $0.58. Because these estimates were so far off, CSR’s fantastic quarter was seen as coming up short.

You’d think these analysts would have learned their lesson.  But, their revised estimates are still well above management’s guidance.

For full year 2009, the company projects earnings per share of $0.95 to $0.98. Consensus analysts’ estimates, however, are for earnings per share of $1.41.  That’s 44% above the high end of guidance.

For full year 2010, management projects earnings per share of $1.15 to $1.20.  Again, the consensus estimate is much higher at $1.72.

The question now is what do we do, if anything?

We think CSR is a screaming buy.

The stock trades for less than book value. At 6.2, the company’s P/E is well below the industry average of 16.  And, with a PEG ratio of 0.25, the stock’s trading at a 75% discount to its long term projected growth rate.

By these measures, the stock’s badly misvalued by the market.

But, that’s only half the story.

The key is CSR is growing rapidly.  All three business segments are experiencing strong organic growth.  Demand from both government and corporate customers is robust. And, the company’s market share continues expanding.

For all of these reasons, CSR remains a buy up to $6.60.

. . . . Electronic Game Card (OTCBB: EGMI) – Buy up to $2.06

EGMI is climbing on solid third quarter earnings.

Revenue increased a hefty 38% to $4.2 million.  Net income soared 71% to $2.9 million.  And, earnings per share popped 33% to $0.04.

In addition to all this good news, there is a bit of bad news.

The company’s Executive Chairman, Lord Leonard Steinberg passed away a couple of weeks ago.  Lord Steinberg’s commitment and leadership will definitely be missed.  But, we have every confidence in Joint Chairmen of the Board, Kevin Donovan and Eugene Christensen.

EGMI has moved back below our buy up to price.  For those who missed it the first time around, here’s your chance to get in.  We’re moving EGMI to a buy at $2.06 or less.

. . . . Trailer Bridge (NasdaqGM: TRBR) – Buy up to $5.50

TRBR trended lower heading into third quarter earnings.  Comments from competitor Horizon Lines weighed on the stock.  They expect a slow recovery for the industry.

We view the pullback as a good buying opportunity.

The shares are trading at just 10 times next year’s earnings estimate.  That’s a 60% discount to the shipping industry’s average P/E of 16.6.

In fact, the shares are already climbing higher thanks to upbeat earnings.

Revenue increased 8.7% from the second quarter to $30.3 million.  Net income skyrocketed to $1.7 million from $34,000.  And, earnings per share surged from breakeven a year ago to $0.14.

Better still, TRBR beat analysts’ estimates by a whopping 40%!

Looks like business is improving nicely at TRBR.  If you haven’t yet, pick up your shares of TRBR at a nice discount.  The shares remain a buy, but we’re lowering our buy up to price to $5.50.

. . . . Great Lakes Dredge & Dock (NasdaqGM: GLDD) – Hold

GLDD is trending higher on solid third quarter earnings.

Although revenue declined nearly 2% to $140 million, net income jumped 21% to $1.7 million.  Earnings per share surged 50% to $0.03.  And, they beat estimates by a penny.

The U.S. dredging market continues growing thanks to stimulus funding and a strong underlying market.  Delays in foreign projects caused the slight decline in overall revenue.  However, revenue should increase next quarter as GLDD moved two of its large hydraulic dredges from the Middle East to the U.S.

Dredging project backlog continues growing.  At $401 million, it’s now larger than last year’s backlog at this time.  The company’s also seeing a pickup in beach nourishment projects.  This is a very good sign as this segment is not receiving any stimulus funds.

The outlook for the remainder of 2009 is very good.

GLDD’s CEO said, “With our dredges now repositioned to take advantage of opportunities in the domestic market, we are looking forward to closing the 2009 fiscal year with strong performance in the fourth quarter.”

He also said, “We are particularly encouraged that the market for beach nourishment work is recovering to complement the growth in demand we have been witnessing for maintenance projects.”

Given these growth catalysts, we recommend you continue holding GLDD for greater gains.

. . . . Tianyin Pharmaceutical (AMEX: TPI) – Buy up to $4.27

We’re scratching our heads on this one.  The company reported huge quarterly earnings and raised guidance for the year.  But the stock is moving slightly lower.

Revenue soared more than 40% to $13.4 million.  Net income jumped more than 22% to $2.2 million.  And, earnings per share increased 14% to 8 cents.

More importantly, these increases were produced by organic growth!

TPI saw a big surge in demand for its products during the quarter.  As we expected, stimulus spending and healthcare reform are clearly starting to boost demand.

Given these growth drivers, management raised guidance for fiscal year 2010.

They now expect revenue to jump 48% to $63.3 million.  And, they project net income to surge 43% to $11.3 million.  Previous guidance was for $59 million in revenue and $10.5 million in net income.

We see the recent pullback as an excellent buying opportunity.

The shares are trading at just 7 times this year’s estimate.  That’s a pretty low multiple for a company projecting earnings growth of 43%.  Buy TPI at $4.27 or less.

. . . . L&L International Holdings (OTCBB: LLFH) – Buy up to $6.81

This pick from the November Issue is roughly flat since we recommended it.  But, it appears poised to make a big upward move.

China’s economic growth is beginning to accelerate.  Demand for power generation is rising fast.  And, industrial production levels are increasing sharply.

As a result, demand for coal in China is surging.

To meet rising demand, China’s coal miners are scrambling to ramp up production.  Raw coal output in October jumped 21.1% from a year earlier.  It was the second highest monthly output on record.

This is great for LLFH.

Surging demand combined with low coal supply is driving coal and coke prices higher. This should translate to higher revenue and earnings for LLFH in coming quarters.

If you haven’t yet, grab your shares of LLFH now.  The shares are a buy up to $6.81.

. . . . Smith Micro Software (NasdaqGS: SMSI) – Buy up to $9.08

Our second pick from the November Issue is off to a lackluster start.  It’s a victim of unfortunate timing.  Management blindsided us by cutting their 2009 revenue outlook the day after our Issue was released.

The stock dropped on the news but found support at $7… just above our stop loss level of $6.93.  The influx of new buyers is encouraging.

Clearly, they’re just as impressed as we are by the company’s third quarter earnings.

SMSI posted net income of $2 million compared to a loss of $1.6 million a year ago. And, earnings per share of $0.20 beat analysts’ estimates by a penny.

Management now expects revenue of $105 to $110 million for the year.  That’s down slightly from prior guidance of $110 to $115 million.   Management cited uncertainty and limited visibility due to “the continuing negative economic environment.”

Sounds to us like they’re sandbagging.

We think management’s trying to jawbone estimates down.  Lower estimates will make it easier to produce upside surprises in coming quarters.

Look at the drop in SMSMI as an opportunity to buy shares at a nice discount.  The stock’s now trading at just 10 times next year’s estimate.  And, its PEG ratio is a mere 0.54.

SMSI remains a buy, but we’re lowering our buy up to price to $9.08.

. . . . GT Solar International (NasdaqGS: SOLR) – Buy up to $6.60

SOLR dropped on weaker than expected second quarter earnings.  Like many solar companies, the company’s been hit by the credit crisis.

Net income fell to $9.4 million.  And, earnings per share of 6 cents missed analysts’ estimates by a mere penny.

Nevertheless, business is starting pick up.

Revenue of $104.2 million beat analysts’ projections of $101.8 million.  The company received $30.7 million in new orders.  And, order backlog increased to over $1 billion.

Management’s certainly optimistic.

They’re standing by their earlier outlook for the year.  They project revenue of $450 million to $550 million. And more importantly, they see earnings per share of $0.45 to $0.60.

We see this pullback as an opportunity to pick up shares on the cheap.

SOLR is trading at just 9 times this year’s estimate.  And, their PEG ratio is a paltry 0.19.  That’s an 80% discount to the company’s long term projected growth rate.  Buy SOLR up to $6.60.

Action To Take

  • Move Electronic Game Card (EGMI) from Hold to Buy

   In case you missed the Sell Alert yesterday…

  • Sell CECO Environmental (CECE)
  • Sell GigaMedia (GIGM)
  • Sell ERT (ERES)
  • Sell Alliance One (AOI)
  • Sell Questcor Pharmaceutical (QCOR)
  • Sell Half of Gulf Resources (GFRE)
  • Sell Half of ChinaCast Education (CAST)
  • Sell Half of China Biologic Products (CBPO)
  • Sell Half of China Information Security Technology (CPBY)

Category: PSB Portfolio Updates

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