PSB Portfolio Update October 2010

| October 19, 2010

October 19, 2010

It’s October… Should We Be Worried?

We’re more than halfway through October and no market crash.  So far so good.  Not that I’m expecting a crash.  I just tend to worry a little more during this fine autumn month.

And with good reason…

In case you’re not aware, October is famous for devastating market plunges.

The Great Crash of 1929 started in late October.  On Black Monday (Oct. 28th) and Black Tuesday (Oct. 29th), the Dow plunged more than 20%.  When all was said and done, the market fell a mind-boggling 90% from its 1929 peak.

Another example is the crash of 1987.  On Black Monday (Oct. 19th), the Dow tanked a hair-raising 22%.  It was the largest one-day percentage decline in market history. Amazingly, the Dow actually finished 1987 with a slight gain.

These two are the most famous October crashes.  But there have been other market meltdowns in October.  Who can forget the famous 550 point Dow drop in 1997?  And of course we all remember how the market decline of 2008 accelerated in October.

All together, these events feed the legend of October being the month of catastrophic market crashes.

The funny thing is October’s really not as ominous as you might think…

The famous market crashes give October a bad rap.  The truth of the matter is October has more often marked the end of bear markets.  According to Stock Trader’s Almanac, October marked the end of bear markets 11 times since the end of World War II.

And from January 1950 through April 2008, October has more often seen the Dow post a gain than a loss.  Over these 58 years, the Dow has finished October with a gain 34 times. Another way of saying it is the Dow has posted a gain in October 59% of the time.

Clearly, October is not as bad for the markets as most believe.

The truly bad month for the market is September.  Over the same 58 year time frame, the Dow has finished September with a loss 36 times.  That works out to 62% of the time.

So, what will October bring this year?

It’s hard to say…

On the one hand, the market’s been surging higher for over a month and a half.  This remarkable rally could be getting long in the tooth.  Maybe the time is right for a decline.

On the other hand, we have a couple of major catalysts driving the market higher.

Quantitative easing from the Fed appears to be a foregone conclusion.  Remember, quantitative easing drove the market on its record run from March 2009 to May 2010.

And let’s not forget about the November mid-term elections.  Historically, the mid-term elections have been a major bullish force on the markets.  According to the Wall Street Journal, “the Dow has gained an average of 17.1% in the year following a mid-term election.”

Given the strength of the recent rally and the major bullish catalysts, I’m betting October will be a positive month for the market.  Of course, we’ll just have to wait and see how it turns out.

Now, let’s take a look at 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.

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

TGB has had a spectacular run.  The shares have been trending higher for three straight months.  And last week the stock set a new 52-week high of $7.23.

But now the shares are dropping sharply.

It looks like the huge short-term rally in copper prices has hit a wall.  The U.S. Dollar is showing signs of stabilizing after a four month decline.  If the dollar starts moving meaningfully higher, copper prices will start moving lower in a hurry.

For a copper miner like TGB, falling copper prices usually mean a falling share price.

What’s more, the company just announced a stock offering.  It’s a great way for the company to raise money they need.  But stock offerings also typically put a ceiling on a stock’s price… at least temporarily.

We still like TGB’s longer-term fundamentals a lot.  But in this volatile market we like profits a whole lot more.  Let’s exit our position in TGB now and capture our gains of 48% or more!

We’ll be keeping TGB on our radar screen.  If an opportunity presents itself, we just might take another bite of this delicious apple.

. . . . Kulicke & Soffa (NASDAQ: KLIC) – Sell

Last month we threw up a yellow flag on KLIC.  In auto racing, a yellow flag means slow down due to a hazard on the track.  And a hazard is exactly what we encountered with KLIC.

The company warned about a major customer delaying orders.  Founder and CEO, C. Scott Kulicke, announced his retirement.  And analysts had downgraded the stock and lowered estimates.

Since then, we’ve received more specific guidance from the company.  And it isn’t good. New CEO Bruno Guilmart announced “December quarter revenue will be significantly below the September level.”

Clearly, the fundamental situation at KLIC is worsening.  It might be just a short-term setback.  But it could also be the beginning of a longer-term slowdown at this company.

Sometimes in trading discretion is the better part of valor.

Right now we can exit our position with just a slight loss.  We think this is the prudent move given the ominous outlook.  Let’s sell our shares now and conserve capital for better opportunities.

As a side note, we’d like to point out we think the problems at KLIC are company specific. We still believe the chip equipment sector offers terrific growth potential going forward.

And we’re maintaining our exposure to the sector through Ultra Clean Technologies(UCTT), PLX Technology (PLXT), FSI International (FSII), Mindspeed Technologies (MSPD), SMART Modular Technologies (SMOD), and Nova Measuring Instruments (NVMI).

. . . . LJ International (NASDAQ: JADE) – Hold

There’s no other way to say it… JADE’s a juggernaut!

The rally in place since mid-July went to a whole new level in October.  The shares blew through the old 52-week high of $3.97 on very heavy volume.  And they didn’t stop climbing until they hit a high of $5.05.

Best of all, it gave us a whopping 90% gain!

Investors are clearly piling into the stock in anticipation of blowout third quarter earnings. Remember, management’s forecasting a 30% jump in revenue and a 200% surge in earnings.

JADE is scheduled to report earnings on November 4th.  Hang on to your shares for greater gains.

. . . . Group (NASDAQ: WWWW) – Hold

The strong upward move in shares shows no signs of letting up.  The shares hit another new high of $6.34 giving us a superb 39% gain.

And they’re not done yet.

Strong earnings growth and takeover speculation should keep driving the shares higher. Continue holding for greater gains.

. . . . Mindspeed Technologies (NASDAQ: MSPD) – Hold

Last month we told you about the buying frenzy in MSPD.  Exploding investor enthusiasm for upcoming earnings sent the shares surging higher.  Well, the rally continued after our update, driving MSPD to a high of $9.40.

That gave us a hefty 33% gain!

Since then, analysts have raised estimates for the quarter and fiscal year 2010 (ending in September).  We might be in store for a fifth straight upside surprise.  And you know what that would mean…

Staggeringly higher stock prices ahead!

MSPD is expected to report earnings on Monday, November 1st.  Hang on tight for a potential rally on the news.

. . . . SMART Modular Technologies (NASDAQ: SMOD) – Hold

We were looking for strong fiscal year 2009 earnings from SMOD.  And the company didn’t disappoint.  They reported another blowout quarter and handily beat estimates for the year.

Here’s a quick recap of the fiscal year numbers…

Revenue jumped 59% to $703.1 million.  Net income increased more than five-fold to $56.4 million.  And earnings soared a whopping 412% to $0.87 per share.

A fantastic year any way you slice it.

Best of all, revenue and earnings demolished analysts’ estimates.  They were looking for revenue of $689 million and earnings of $0.75 per share.  Now that’s what I call a super upside surprise!

What’s more, the company’s looking for more strong growth going forward…

For the first quarter of fiscal year 2011, management’s expecting revenue between $210 and $230 million.  That’s anywhere from 70% to 87% higher year over year.  And management’s forecasting earnings of $0.23 to $0.25 per share.  We’re talking monster year over year gains of 188% to 213%!

As you might imagine, the shares are rocking and rolling…

They traded up to a recent high of $7.75.  At that level, we were sitting on a solid 26% gain.  Given the strong growth outlook and the stock’s low P/E ratio, I fully expect SMOD to move even higher.

Nevertheless, with the shares trading well above our buy up to price, we’re moving them from Buy to Hold.  If you already own SMOD, hang on for bigger gains to come.

. . . . PLX Technology (NASDAQ: PLXT) – Buy up to $4.54

PLXT is quietly gearing up for a potential rally.  The shares have been moving steadily higher since the end of September.  They recently hit a high of $4.18 giving us a slight 6% gain.

It looks like investors are anticipating strong quarterly results…

The company’s going to report third quarter numbers next Monday, October 25th. Remember, PLXT’s CEO is expecting “a robust third quarter… driven by storage and supported with continued strength in the enterprise-based PCI Express business.”

He’s even predicting a revenue surge of 39% to 49%!

If PLXT can post an upside surprise, the shares should take off. Back in January, the shares were trading right around where they are now.  The company beat estimates, and the shares went on a three month rally.

When all was said and done, the shares had soared an astonishing 68%!

If you haven’t bought your shares of PLXT yet, you still have a chance.  They’re trading just under our buy up to price.  Go ahead and grab PLXT up to $4.54 per share.

. . . . Ultra Clean Technologies (NASDAQ: UCTT) – Buy up to $9.90

This October pick is up a little bit so far.  And it could be poised for a nice upward move. Here’s why…

UCTT is going to report third quarter results next Monday, October 25th.

We’re expecting a whopping 191% increase in revenue to $120 million.  And earnings are expected to swing from a loss of $0.19 a year ago to a hefty $0.31 per share profit. Terrific growth by any measure!

And here’s the best part…

Last quarter, UCTT beat analysts’ estimates by 25%.  It was the fourth straight quarterly upside surprise.  Another earnings beat this time around should get the shares surging higher once again.

Take a look at what’s happened so far this year…

In February, UCTT reported an upside surprise of 200%, and the shares rocketed 38% higher.  Then in April, a 31% earnings beat sent the shares up 27%.  And after the most recent upside surprise, the shares vaulted 21% higher.

Grab your shares now if you haven’t already.  You don’t want to miss out on a potential rally around the earnings release.  UCTT is a good buy up to $9.00 a share.

. . . . China Valves Technology (NASDAQ: CVVT) –Buy up to $8.80

CVVT’s off to a slow start.  But I think it’s a blessing in disguise.  Everyone’s getting a great opportunity to buy CVVT at good prices.

Remember, we’re expecting terrific growth going forward.

Revenues are forecast to rocket 75% higher in 2010 and 17% in 2011.  Even better, earnings are expected to soar 55% this year and 16% next year.

And these strong estimates may turn out to be too low.

You see the company just promoted General Manager Jianbao Wang to CEO.  Mr. Wang has been spearheading the effort to grow CVVT through acquisitions.  His promotion is a clear signal the company’s going to continue this vigorous growth strategy.

However, despite CVVT’s stunning growth outlook, the shares are dramatically undervalued.

At a recent price of $7.87, the stock’s trading at just 6.3x the 2010 estimate and 5.5x the 2011 estimate.  These are tantalizingly low valuations for such a fast growing company.

No doubt about it, CVVT shares offer huge upside potential…

Our price target for the shares is $14.40.  We calculated our target using a conservative P/E of 10x the 2011 estimate of $1.44.  From the recent price of $7.87, you’re looking at a potential profit of 83%.

Not too shabby.

If you haven’t yet, grab your shares of CVVT now.  They’re a good buy up to $8.80 a share.

. . . . ZST Digital Networks (AMEX: TGB) – Hold

ZSTN has rebounded nicely from last month’s pullback.  The shares are up a solid 26% in just over three weeks’ time.

Of course, we’re not surprised.

We’ve talked about several major positive catalysts over the past few months. Outstanding second quarter earnings, a new share buyback program, and increased guidance… in horse racing you’d call this a Trifecta!

And this stock is just getting started…

Even after the recent rally, ZSTN is trading at just 4.2x the 2010 estimate.  That’s an astonishingly low P/E for a company expected to grow earnings 39% this year.

We’re convinced ZSTN is headed for a much higher valuation.

With the shares now trading above our buy up to price, we’re moving it from Buy to Hold.  From these levels, the stock has 79% upside to our price target of $12.00.  Hang on tight for bigger gains to come.

. . . . Winner Medical Group (NASDAQ: WWIN) – Hold

WWIN’s on fire!

The shares are surging higher in a solid new uptrend.  Since the end of September, WWIN is up a stunning 34%.  It looks like investors are starting to recognize this company’s amazing growth potential.

The catalyst sparking the recent rally was a terrific business decision.

Management announced they’re slowing down the pace of opening PurCotton retail stores in China.  Instead, they’ve opened a PurCotton Business-to-Consumer online store.

This is a great idea…

An online store is a much more cost-effective way to sell products.  It costs a lot less to set up an online store than it does brick and mortar stores.  And a single online store can sell products not only throughout China but the entire world.

Investors love the idea as well…

Ever since the announcement, investors have been driving WWIN higher and higher.  They recognize this shift in strategy will have an immediate positive effect on the company’s bottom line.

WWIN is now trading just below our buy up to price. Given the huge recent gains,we’re moving WWIN from Buy to Hold.  If you already own the shares, hang on for bigger profits.

. . . . Tianyin Pharmaceuticals (AMEX: TPI) – Hold

TPI is making a strong upward move.

Since the end of September, the Chinese drug maker is up an impressive 35%.  All it took to set the shares off was record fiscal 2010 results.

Here’s a quick recap…

Revenue jumped 49% to $63.9 million.  Net income increased a hefty 51.9% to $12 million. And earnings popped 25% to $0.40 per share.  A terrific year by any measure.

What’s more, the outlook for fiscal year 2011 is for more robust growth.

Management’s expecting a revenue explosion of 77% to a whopping $113 million.  And they’re forecasting another year of 50% growth in net income to $18 million.

Clearly, TPI is firing on all cylinders.

They’re continuing to penetrate existing markets with their 56 products.  The company may get a boost from one or more of the 10 products awaiting regulatory approval.  And they expect to begin generating revenue from their new macrolide antibiotics product this year.

All signs point to a higher share price for TPI over the next year.  However, given the recent rally, we’re keeping TPI at a Hold for now.  If you already own the shares, hang on tight for greater gains ahead.

Action To Take

  • Sell Taseko Mines (AMEX: TGB)
  • Sell Kulicke & Soffa (NASDAQ: KLIC)
  • Move SMART Modular Technologies (NASDAQ: SMOD) from Buy to Hold
  • Move Winner Medical Group (NASDAQ: WWIN) from Buy to Hold
  • Move ZST Digital Networks (NASDAQ: ZSTN) from Buy to Hold

Category: PSB Portfolio Updates

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