PSB Portfolio Update October 2009

October 20, 2009

A Closer Look at GT Solar’s Balance Sheet

Instead of our usual market commentary, we’d like to address a question we received from a current subscriber.  The question is about GT Solar International (SOLR)… a recommendation from the October Issue.

Laurie S. asked how we could say that SOLR is “debt free” while its carrying current liabilities of over $550 million.

Great question Laurie… let me try to clear up the confusion.

When reporting that SOLR is “debt free”, we were referring to the company’s long-term debt position.  If you look at the most recent balance sheet, you’ll see SOLR has zero long-term debt.

In the financial world, it’s customary to use the term “debt free” when talking about a company’s long-term debt.  But, we can see how that term could be confusing.

We hope this clears up any misunderstanding.

Laurie’s question also raises an interesting point about SOLR’s current liabilities.

At first blush, $550 million in current liabilities might appear to be problematic.  However, upon closer examination, you’ll see they don’t present much risk at all.

About $37 million of this total is accounts payable.

These are short-term debts owed to suppliers and banks.  Accounts payable have been declining over the past few quarters.  This means the company is paying down its outstanding liabilities.  A clear sign of financial strength.

Customer deposits account for another $144 million.

SOLR requires a deposit of 20% to 40% of the contract value at the time an order is placed.  When the contract is completed, SOLR will recognize these amounts as revenue on the income statement.  These deposits pose no risk to the company as they are completely non-refundable.

The remaining $368 million represents deferred revenue.

These amounts have been billed per contractual terms but not yet recognized as revenue. They will be recognized as revenue, however, as the contracts are completed.

As you can see, nearly the entire $550 million in current liabilities is either non-refundable customer deposits or deferred revenue.  Since these amounts are eventually moved to the revenue line as contracts are completed, they pose very little risk to the company.

Thanks for sending us your question Laurie.  We hope our analysis satisfies your concerns about SOLR’s balance sheet.

If you have any questions about a PSB recommendation, please feel free to send them to Robert Morris at customerservice@hyperionfinancial.com.  While we can’t answer each one individually, we will try to address them in future Portfolio Updates.

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 (HGSI) – Hold

HGSI is attempting to break out of its two-month base formation.  And, some big news items could send the shares rocketing higher.

First, the company will announce results from the second Phase III BENLYSTA trial on November 2nd.  Remember, BENLYSTA is the company’s potential blockbuster drug for treating Lupus.  Results from the first Phase III trial prompted a nearly eightfold gain in the shares this summer.

If the results from the second trial mirror the first, we could see the shares soar on the news.

Second, HGSI and partner Novartis (NVS) announced they’ll seek U.S. and European regulatory approval for their Chronic Hepatitis C drug this quarter.  The drug is just as effective as current treatments but with half the doses.  The potential market is huge as some 170 million people worldwide suffer from the disease.

HGSI received a $75 million milestone payment from Novartis for completing the Phase III trial.  So far, HGSI has received $207.5 million in milestone payments from Novartis.  And, they could earn another $300 million depending on regulatory approval and reaching sales goals.

As you can see, exciting things are happening at HGSI.

We’re expecting these catalysts to propel the stock higher in the weeks and months ahead.  Continue holding HGSI for bigger gains.

. . . . Hi Tech Pharmacal (HITK) – Hold

HITK is up a solid 25% since our last update.  The stock’s moving higher on heavy volume after reporting blowout first quarter earnings.  (See our last Update for a full earnings recap.)

Analysts covering the stock are also providing a boost.

They’ve raised their earnings estimates for the current quarter, FY 2009 and FY 2010. And, not by just a little bit either.  The estimate for this quarter is now double what it was thirty days ago.  And, the estimates for FY 2009 and FY 2010 are up 60% and 67% respectively.

As a result, the shares jumped to a new high of $25.40.  That gave us an amazing 391% gain.  If HITK continues to beat estimates, the stock should move even higher.

Continue holding HITK for bigger gains ahead.

. . . . Gulf Resources (GRUS) – Hold

GRUS is yet another PSB pick skyrocketing higher on big news.  The stock soared to anew high of $9.40.  That gave us an amazing 343% gain in just three months time!

What’s driving the stock higher?

The company is preparing to uplist their shares to NASDAQ.  This is great for us.  By jumping to a major exchange, GRUS will increase its visibility.  More importantly, they’ll attract more institutional investors.

Remember, institutional buying can drive a penny stock to the moon.

The first step to listing on NASDAQ is boosting the stock price to meet minimum listing requirements.  GRUS did this through a 1 for 4 reverse stock split.  (They also changed their ticker symbol from GFRE to GRUS.)

We’ve adjusted our buy price to $2.12 in the performance table to reflect the split.Although we’re sitting on a nice four-bagger, we think the company’s fundamentals will drive the stock even higher.   Especially as it hits institutional investors’ radar screens.

Continue holding GRUS for greater gains to come.

. . . . ChinaCast Education (CAST) – Hold

CAST is moving higher by leaps and bounds.  The stock’s up nearly 20% since our last update.  In fact, it traded up to a new high of $8.61 giving us a sweet 206% gain.

What’s behind this big upward move?

First, the company completed its acquisition of the Lijiang College of Guangxi Normal University for $53.7 million.  The acquisition should add $21.8 million in revenue and $8.1 million in adjusted net income before taxes for the 2009-10 academic year.

Second, CAST formed a potentially lucrative joint venture with the China University of Petroleum (CUP).  This provides CAST the opportunity to offer e-learning services to CUP’s 40,000 distance learning students.

And, CAST can now begin building its own nationwide network of distance learning centers.  These centers will provide adult continuing education, vocational training, and international education programs using CUP’s coveted distance learning license.

As you can see, big things are happening at CAST.  The company is continuing to grow its student base and expand its service offerings.  These efforts should continue driving revenue, earnings, and the stock price higher.

Hang on tight to your shares of CAST for bigger gains ahead.

. . . . China Biologic Products (CBPO) – Hold

CBPO is rocketing higher on very heavy volume.  The stock hit a new high of $9.70.  Good for an eye-popping 162% gain.

The stock’s jumping for a couple of reasons.

First, it’s on the short list of Chinese stocks that may uplist soon to a major exchange. Again, uplisting usually draws in more institutional investors which drive the share price higher.

In addition, the company’s production facility just received re-certification from the Chinese government.  This is important as they can’t manufacture their products without it.  This new certification is good for another five years.

Although CBPO is showing a huge gain, we think it’s heading higher from here.  See our write up in the August Issue for our detailed analysis.

Continue holding CBPO for greater gains ahead.

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

After several months of sideways trading, CPBY is going parabolic.  The stock shot up to a new high of $7.68.  That gave us an awesome 152% gain.

Here’s why the stock’s soaring.

CPBY signed over $30 million in new contracts during the third quarter.  A new company record.  And, a big 14% increase over the second quarter’s total.

This is clear evidence CPBY’s markets are rebounding.

In fact, the company’s CEO said, “the increased bidding and spending activities from our local governmental customers… indicate that the economic recovery has re-enabled many previously delayed government projects to move forward…”  Remember, it was a slow-down in these markets that caused CPBY to drop back in May.

The stock is also getting a boost from the analysts covering it.

Rodman & Renshaw initiated coverage with a Market Outperform rating.  Sounds like a “buy” recommendation to us.  And, one of the analysts has raised their full year earnings estimates for both 2009 and 2010.

Despite the big run up in share price, we think CPBY’s poised to head even higher.  With a PEG ratio of just 0.55, the stock is trading at a 45% discount to its long term growth rate.

Continue holding CPBY for bigger profits.

. . . . Overhill Farms (OFI) – Hold

OFI is trending higher on some good news.

The company has forged an alliance with J.R. Simplot to boost sales in its foodservice division.  Under the deal, Simplot will leverage its long-established relationships with leading foodservice chains to boost sales of OFI’s products.

OFI’s CEO says the relationship with Simplot will “accelerate the growth of [OFI’s] increasingly important foodservice business.”

OFI moved up nicely on the news.  It set a new high of $6.54 to give us a solid 70% gain.  Continue holding OFI for bigger gains to come.

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

CPHI is trending higher on some very big news.  The stock jumped from the OTCBB to the NYSE AMEX exchange.  The shares are now trading under the ticker symbol CPHI.

The stock popped on the news to a new high of $3.59.  This gave us a solid 57% gain.  Not bad for our first month in the trade.  With the stock trading above our buy up to price, we’re now moving it to a Hold.

. . . . Ceva (CEVA) – Hold

CEVA is making a nice upward move of late.  The stock traded up to a new high of $11.04.  That’s good for a gain of 41%.  Investors are snapping up shares of CEVA in anticipation of a recovery in the semiconductor industry.

CEVA is due to report third quarter 2009 earnings on October 28, 2009.  Look for the stock to trend higher going into the announcement.  Continue holding CEVA for greater gains.

. . . . Electronic Game Card (EGMI) – Hold

EGMI is soaring!  The stock rocketed to a new high of $2.24 on extremely heavy volume.  That gives us a solid 36% return.

To say the recent rally is impressive would be an understatement.  The shares are up more than 72% so far this month.  And, they’ve notched a higher close in nine of the last ten trading sessions.

Why’s the stock jumping all of a sudden?

It all stems from a new business partnership.  EGMI is partnering with China LotSynergy to market the Electronic GameCard in China.  This is a huge opportunity for EGMI.

China’s lottery market is still in the early stages of development.  Last year, it generated just $15.5 billion in revenue.  (Small compared to annual U.S. lottery revenue of $60 billion.)  But, China’s potential market is massive and growing very fast at 15% a year.

The partnership is a good one for EGMI.

China LotSynergy is a leader in lottery technology in the Chinese market.  And, they have extensive local expertise and established contracts.  (EGMI could have new sales in China very quickly!)

You can see why the stock is popping.  With EGMI now trading above our buy up to price, we’re moving it to a Hold.

. . . . Tianyin Pharmaceuticals (TPI) – Buy up to $4.27

TPI is moving higher in a solid uptrend.  The stock hit a new high of $4.37 to give us a nice 30% gain.  Pretty good for our first month and a half in the trade.

The shares are rising on record 2009 earnings.

Revenue rose 28% to $42.9 million.  Net income jumped 32% to $7.9 million.  And, earnings per share rose 2.1% to $0.32.  (The smaller increase in EPS was due to a 30% increase in the number of shares outstanding.)

The outlook for 2010 is for even stronger growth.

Management is forecasting revenue of at least $59 million and net income of at least $10.5 million.  That’s powerful year over year growth of 38% and 33% respectively.

Remember, there are several huge growth drivers for TPI.

Demand for TCM products is set to soar as China rolls out universal health care to its 1.3 billion citizens.  TPI has 39 products on the market, 4 on the essential drug list, and 17 awaiting government approval.  Plus, their new production facility triples production capacity and supports annual revenue of $100 million.

All in all, 2010 is shaping up to be a blow out year for TPI.  If you haven’t already, grab your shares of TPI now.  We don’t expect it to trade under our buy up to price much longer.

. . . . Trailer Bridge (TRBR) – Buy up to $6.63

We’re off to a solid start with this September recommendation.  TRBR quickly moved up to a new high of $6.17.  This gave us a smart 16% gain right out of the gate.  See the full write up on TRBR in our October issue for all the reasons why we think its heading higher.  TRBR remains a buy at $6.63 or less.

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

SOLR is also jumping out to a fast start.  The stock quickly set a new high of $5.97. That’s good for a nice 13% gain.  Not a bad two week return.

GC Research is helping to drive the stock higher.  They recently initiated coverage of SOLR with an “Overweight” rating.  Sounds like a buy recommendation to us.

And, we’re expecting more “Buy” ratings in coming months.

Here’s why.

Solar power companies are setting up for a nice rebound in 2010.  Credit Suisse says they expect strong demand from Europe, the U.S., and China to drive higher growth.

As business improves, we should see solar power companies investing more heavily in manufacturing equipment.  They’ll need more equipment to boost production capacity.

This bodes very well for SOLR.  Remember, they’re the largest supplier of solar power manufacturing equipment.

What’s more, with the stock so badly misvalued, the upside potential is huge.  Buy SOLR all the way up to $6.60.

. . . . Questcor (QCOR) – Buy up to $6.50

Good news out of QCOR.

They’ve resubmitted their application to the FDA for approval of Acthar to treat infantile spasms.  Remember, the FDA requested additional information from QCOR in May.  This caused the stock to drop significantly.

This filing could be just the thing to get QCOR moving higher.

If QCOR succeeds in getting approval, they’ll be able to actively market Acthar to treat infantile spasm.  This could be huge for QCOR as there is no currently approved treatment in the U.S. for this disease.  We expect the stock to soar if Acthar gets FDA approval.

QCOR remains a buy at $6.50 or less.

Action To Take

• Move China Pharma Holdings (CPHI) from Buy to Hold
• Move Electronic Game Card (EGMI) from Buy to Hold

Category: PSB Portfolio Updates