PSB Portfolio Update September 2009

September 15, 2009

China’s Growth Train Right On Track

August was a scary month for the Chinese stock market.  Many investors were concerned that China’s economic recovery is stalling out.  These jittery folks sent the market tumbling into a “bear market” like decline.

As you can see, the mighty Shanghai Composite index dropped 23% during the month.

The China bears were out in force.  They were spreading fear and panic across the globe. Their message… the Chinese economic recovery is nothing but smoke and mirrors.

But, it looks like the panic was all for naught.

The market’s recovering nicely off the August low.  The index broke through resistance at the 3,000 level.  And, it’s now down just 13% from the peak earlier in the month.

What’s behind the sudden shift in attitude?

The Chinese government has reassured investors they’re committed to the economic recovery.  They signaled they’re going to continue the massive government spending that’s boosting growth.  They also hinted they’re not going to restrict bank lending as many bears had feared.

You see, in early August an official said the government was concerned about inflation. The bears took this to mean two things.  The government was about to dial back the spending and shut down the low interest bank loans.

But, this just isn’t the case.

China’s Prime Minister recently said, “China’s economic rebound is unstable, unbalanced, and not yet solid.  We cannot and will not change the direction of our policies when the conditions aren’t appropriate.”

This is a clear signal the government will continue the stimulus spending and loose monetary policies driving the recovery.

And, it looks like these policies are having great success.

The Chinese economy grew at a 7.9% annual pace in the second quarter.  Up from just a 6% annual rate in the first quarter.

More importantly, the growth rate is accelerating.  Economists are now predicting the economy will grow at 8.3% this year and then jump to 10.5% next year.

This is great news for us.  Our Chinese stocks should head higher as they benefit from the ongoing economic recovery.

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

. . . . Hi Tech Pharmacal (HITK) – Sell Half / Hold Half

In case you missed it, we put out a sell half alert on HITK yesterday.

The stock’s soaring on blowout first quarter earnings.  In fact, it traded right through our $22 price target.  HITK hit a new high of $22.65 for a whopping 338% gain!  We think now’s a good time to take some of these hefty profits off the table.

With that said, we think HITK could still move up significantly in the months ahead.  Red hot revenue and earnings growth should continue driving the stock higher.

Here’s a quick recap of their fantastic first quarter results.

Revenue rocketed 175% higher to over $43 million.  That’s almost triple the revenue reported in last year’s first quarter.  Surging sales of new generic drugs are driving this phenomenal growth.

If you can believe it, HITK’s earnings are even more impressive.

Net income grew nearly six-fold to $8.7 million.  Earnings per share jumped an amazing 461% to $0.73.  And, they beat estimates by 170%.  (Now that’s an upside surprise!)

The company should sustain their high growth rate going forward.

They currently have 12 products awaiting FDA approval.  These products are targeting brand and generic sales of over half a billion dollars.  In addition, HITK has 20 products in active development targeting brand sales of over $2 billion.

The future looks very bright indeed.

Continue holding half your shares to capture any further upside.

. . . . Gulf Resources (GFRE) – Hold

GFRE is breaking out to the upside!

The stock powered through resistance at $1.50 on heavier than average volume.  Our technical indicators are showing momentum is building.  This could be the beginning of another strong upward move.

GFRE traded up to a new high of $1.63.  That’s an amazing 207% gain in a little more than two months time.  Terrific results to say the least.

However, we think the shares have more room to run.  Continue holding GFRE for greater gains.

. . . . DRI, Corp. (TBUS) – Hold

TBUS is stair stepping its way higher and higher.  Since our last update, the stock set anew high at $2.42.  Good for a gain of 103%.

While a double in three months is fantastic, the stock still has plenty of upside.  With the shares now trading above our buy up to price, we’re moving TBUS to a Hold.

. . . . China Biologic Products (CBPO) – Buy up to $4.26

CBPO is moving higher in a solid uptrend.  The stock jumped to a new high of $6.10. Nothing like a 65% gain in less than a month.

The stock’s pulling back some right now.  That’s not unusual following such a strong upward move.  We see this is as nothing more than a healthy price correction.  It should set the stage for the next leg higher.

With the stock trading well above our buy up to price, we’re moving CBPO to a Hold.  Hang on to this one for greater gains.

. . . . Great Lakes Dredge & Dock (GLDD) – Buy up to $6.50

GLDD is working its way higher in a nice uptrend.  The stock hit a new high of $7.05. That’s good for a solid 36% gain.

We think the shares will continue moving higher.  Stimulus funds are providing a healthy bid market in the U.S.  And, GLDD should win a large portion of these projects going forward.

With the stock trading above our buy up to price, we’re moving GLDD to a Hold.

. . . . China Pharma Holdings (CPHI) – Buy up to $3.08

We’re off to a flying start with CPHI.  The stock quickly ran up to a new high of $2.95. That’s a sweet 29% gain.  Better grab your shares now if you haven’t already.  The stock could easily pop up out of our buy range.

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

TPI jumped nicely out of the gate.  The stock raced to a new high of $4.30 for a gain of 28%.  Not bad for our first two weeks in the trade.

And, the stock could be heading higher soon.

TPI just received great news from the Chinese government.  Four of their generic drugs are included in the new Essential Drug List.  Sales of these products should rise significantly.  Remember, drugs on this list get higher reimbursement percentages.

Management certainly thinks sales are going to jump.

They’re expecting revenue from these four products will double to $12 million during fiscal year 2010.  This new data should push already robust fiscal year revenue and earnings estimates even higher.

And, you know what that means.  Higher stock prices ahead.  TPI remains a buy at $4.27 or less.

. . . . Ceva (CEVA) – Hold

CEVA is poised for a major breakout.  After a mid-summer swoon, the stock’s moved up 20% in the past month.  It’s now challenging resistance around $9.82.

Strong second quarter results helped turn things around.

Net income surged 235% to $2.3 million.  Earnings per share soared 300% to $0.12.  And, earnings beat analysts’ estimates by a hefty 33%.

Although revenue declined 10% due to a drop off in licensing, royalty revenue jumped 30%.  Remember, higher margin royalties are CEVA’s growth driver of the future.

Chip stocks are gearing up for a big second half rally.

Intel and Texas Instruments (the top two chip makers) got the ball rolling in July.  They each posted better than expected second quarter results.  What’s more, both raised their revenue and earnings forecasts for the year.

What’s behind the more optimistic outlook?

Two important trends.  First, industry watchers are expecting a big rebound in consumer demand for personal electronics.  And second, electronics manufacturers are boosting orders to replace their depleted chip inventories.

Solid earnings and improving expectations are driving CEVA higher.

The stock hit a new high last week of $9.89 for a gain of 26%.  If it breaks through resistance decisively, we’ll be off to the races.  With the stock now trading above our buy up to price, we’re moving CEVA to a Hold.

. . . . American Software (AMSWA) – Hold

Strong first quarter results indicate business is improving at AMSWA.

The company reported their 34th straight quarter of profitability.  An impressive achievement given the recession’s heavy impact on the retail sector.

Net income soared 155% to $2 million.  Earnings per share rocketed 166% higher to $0.08. And, they beat analysts’ estimates by 60%.

While revenue declined 7%, the company saw a big 51% pop in licensing revenue.  This is important because it means AMSWA is signing up new customers.  (Remember, each new customer is a potential recurring annual revenue stream.)

Also during the quarter, AMSWA completed its acquisition of Logility’s remaining publicly held shares.  Management expects significant cost savings from operating as a single company going forward.

Since we last updated AMSWA, the stock has hit a new high of $6.72.  That’s a solid 49% gain in six months time.  We think it will keep going higher as the economy improves.  With the stock trading above our buy up to price, we’re moving it to a Hold.

. . . . Alliance One International (AOI) – Hold

AOI’s moving higher in a strong uptrend.  It’s now notched eight straight higher closes. Since our last update, the stock’s jumped nearly 31%.  As the shares are now trading above our buy up to price, we’re moving AOI to a Hold.

Action To Take

• Move DRI Corp. (TBUS) from Buy to Hold
• Move China Biologic Products (CBPO) from Buy to Hold
• Move Great Lakes Dredge & Dock (GLDD) from Buy to Hold
• Move Ceva (CEVA) from Buy to Hold
• Move American Software (AMSWA) from Buy to Hold
• Move Alliance One International (AOI) from Buy to Hold

Category: PSB Portfolio Updates