Following the short term trading strategy outlined in an earlier GeoInvesting article, the team initiated several trades this past week sparked by the release of a slew of earnings reports. As always, we may sell any of these positions after further due diligence or news developments. Some of these short term trades are stocks that we believe may have a shot at earning a longer term position in our portfolios after further due diligence is completed.
Bioanalytical Systems (NASDAQ:BASI)
A pharmaceutical development company providing contract research services and monitoring instruments to the world’s leading drug development companies and medical research organizations.
On February 7, 2011, we initiated a short-term trading position in BASI @ $2.70.
The company posted strong fiscal 2011 first quarter EPS of $0.06 compared to a loss in the comparable 2010 period. Unfortunately, the stock traded down from our initial entry point. Upon closer inspection, we observed that BASI has had a problem reporting consistent EPS and revenue growth. Comments in the earnings press release were generally positive, but lacked commentary on future sales and profit outlook. However, the fiscal 2010 year end release did indicate that the company may be able to report consistent 2011 profitability:
Anthony Chilton, Chief Executive Officer, stated, “The past fiscal year was one of significant challenges for us. Though we experienced lower demand for our products and services, significant project delays and pricing concessions for our services in the first half of the current year primarily due to the general economic conditions, we continue to believe in the fundamentals of the CRO market. We experienced a stronger demand in the second half of the current year for our products and services and expect to see slow but continued improvement in the new year.
For fiscal 2011, we remain focused on maximizing cash flow as well as on sales execution, operational performance and building strategic partnerships with pharmaceutical and biotechnology companies.”
For this reason we will give this trade a little time to play out, but the fundamentals do not warrant giving serious consideration to BASI as a long term trade. Trailing EPS are negative and 2011 forward fully taxed EPS, using the first quarter as a guide, comes out to $0.15 deeming this stock to be fairly valued.
An independent designer, manufacturer and marketer of ATE interface solutions and temperature management products, which are used by semiconductor manufacturers to perform final testing of integrated circuits (ICs) and wafers.
On January 27, 2011, we initiated a trade in INTT @ $4.05.
We have been in this stock in the recent past, when we lost money on the trade. The stock had reported decent 2010 third quarter earnings, but offered less than stellar fourth guidance. (Recall, that EPS consistency had been a concern we had with this stock). As luck would have it, on January 10, 2011 INTT slightly upped its fourth quarter guidance, but offered upbeat commentary about its industry. Thus, we jumped back in this stock for round 2. In general, the semiconductor sector is attempting to find direction amidst a choppy economic recovery. Investors will attempt to find stocks that will serve up EPS surprises. We have also seen a trend of semiconductor stocks with sub-par earnings announcement excel on future optimism. Two GeoSpeicials we got faked out of were ISSI and TER. TER is up 57% since its removal!!
Pdf Solutions (NASDAQ:PDFS)
We analyze our customers’ integrated circuit (“IC”) design and manufacturing processes to identify, quantify, and correct the issues that cause yield loss to improve our customers’ profitability by improving time-to-market, increasing yield and reducing total design and manufacturing costs.
On February 11, 2011 we initiated a short-trading position in PDFS at $ 6.35.
After further research over the weekend we are coding PDFS as a GeoSpecial
– PDFS has a GPR of 8, one of the best we have come across.
– Has exposure to Asia
– On October 19, 2010 the Board of Directors authorized an extension of and an increase in the stock repurchase program. Pursuant to such action taken by the Board of Directors, the stock repurchase program has been extended for two more years until October 29, 2012, and the aggregate amount available for repurchase under the stock repurchase plan, as amended, has been increased to $10.0 million of the Company’s common stock.
– Company will benefit from smart phone trend
Subject to the current general economic environment, demand for consumer electronics and communications devices continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering cost per transistor. As a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power.
As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that as volume production of deep submicron ICs continues to grow, the difficulties of integrating IC designs with their respective processes and ramping new manufacturing processes will create a greater need for products and services that address the yield loss and escalating cost issues the semiconductor industry is facing today and will face in the future.
Short-term price target based on a P/E on 15 on analyst 2011 EPS expectations of $0.60: $9.00
We would have coded the stock as a GeoBargain if our short-term valuation target would have been higher. However, we believe that there is a good chance that analyst estimates will be exceeded due to industry dynamics. We also believe there is an outside chance that the stock could reach $12.00 using a P/E multiple of 20 on 2011 EPS estimates.
The company delivers solutions for LTE and WiMAX, interworking gateways, packet processing, network connectivity, and security for key applications for the Communications, Aerospace-Defense, and Enterprise markets.
On February 11, 2011 we initiated a short-term trade in INPH @ 2.89
Our impetus for this trade was motivated by
– last Friday’s release of INPH 2010 fourth quarter results, when it reported positive EPS of $0.06, its first profitable quarter after five straight quarterly losses.
– A stock that was selling at less than 2x book of $1.53.
– A technical break out from what we call a flat line formation.
INPH closed out Friday’s session at $4.10. We plan on selling INPH, as the company did not provide a 2011 outlook, making it hard to value shares, which are overvalued on a trailing basis with negative trailing EPS. We may plan to interview the company to construct a financial model for 2011.
Mad Catz Interactive (NYSE AMEX:MCZ)
Mad Catz is a leading global provider of innovative products for the interactive entertainment industry. Mad Catz develops and markets accessories for videogame systems and PCs
On February 10, 2011 we nibbled on shares of MCZ @ 1.46
MCZ reported an explosive fiscal 2011 third quarter that saw sales increase 90.6% to $93 million and EPS rise 61.1% to $0.15. We have been following this stock for a few years, observing that EPS consistency has been a problem. In fact this can be a common problem in MCZ market sector. We do not expect the next few quarters to match the third quarter’s financial performance, which is typically the company’s strongest spurred by holiday spending. However, the company has indicated that it will finish its March fiscal year on a very positive note:
Commenting on the results, Darren Richardson, President and Chief Executive Officer of Mad Catz, said, “We are very pleased with the record results for the fiscal 2011 third quarter and fiscal 2011 year-to-date periods. As we continue to execute on our initiatives to re-position Mad Catz as a provider of premium products that enhance the gaming experience, we remain focused on further leveraging our manufacturing and distribution capabilities and aligning ourselves with key titles. Our line of Rock Band 3 peripherals and Call of Duty: Black Ops products, both of which met with strong consumer demand, are great examples of this alignment with the industry’s biggest franchises. In addition, we enjoyed great success with Tritton Technologies, our gaming audio line acquired in early fiscal 2011. These, along with our highly acclaimed Cyborg pro gaming mice, provide us with the strongest product portfolio in Mad Catz’ history. In addition, our strategy to focus on premium products has resulted in three consecutive years of year-over-year growth in third quarter and nine month net sales, gross profit, earnings, EPS and EBITDA results.
“Reflecting the excellent fiscal third quarter retail sell-in of our range of products, we ended the quarter with $9.9 million of cash, $51.2 million of accounts receivable, $32.5 million of inventories and accounts payable of $55.3 million, including the outstanding balance under our bank loan. We expect significant improvements in our fiscal 2011 year-end balance sheet, including a positive cash position net of bank borrowings, and believe our strengthened balance sheet will allow us the financial flexibility to further grow sales, earnings and free cash flow while pursuing other means to enhance shareholder value.”
Mr. Richardson concluded, “Looking ahead, we continue to actively build and roll out a diversified pipeline of exciting products, such as the recently announced audio headset partnership with Microsoft, the Marvel vs. Capcom Arcade FightSticks for the Xbox 360 and PS3, and the range of accessories for Gears of War 3. Building on what was a great holiday quarter, we are confident in our positioning for the fourth quarter of fiscal 2011 and fiscal 2012 as a whole.”
We will interview MCZ and code the stock as GeoSpecial with a short-term target of $4.25
Pro-Dex specializes in bringing speed to market in the development and manufacture of technology-based solutions that incorporate miniature rotary drive systems, embedded motion control and fractional horsepower DC motors, serving the medical, dental, semi-conductor, scientific research and aerospace markets.
On February 11, 2011 we initiated a short-term trading position in PDEX @ $2.54
– The company reported strong fiscal 2011 financial bottom line results translating into adjusted EPS of $0.12 vs. $0.02 in the prior year period.
– PDEX has reported 4 straight quarter of above average EPS growth
– Trades below its book value per share
Unfortunately, there are two issues that may hold shares at bay and cause us to close this trade.
– Legal problems
On June 23, 2008, the Orange County Water District (“OCWD”) filed a complaint in the Superior Court of the State of California in the County of Orange concerning remediation of alleged ground water contamination in the Orange County Groundwater South Basin; Orange County Water District v. Sabic Innovative Plastics U.S. LLC, et al., Case No. 00078246. The South Basin underlies parts of Santa Ana, California and adjacent cities. The complaint identifies 17 named defendants, including Pro-Dex, and also designates 400 unnamed Doe defendants.
Overall, the OCWD complaint remains vague, the OCWD is in an early stage of its remedial activities in the South Basin, the lawsuit is in the middle stage of discovery, one of our insurers has committed to pay most defense costs and has reserved rights under one three-year set of policies and is continuing to consider extending coverage to us under other past policies, Pro-Dex and OCWD are engaged in settlement negotiations, and any recovery the OCWD may gain through trial of the lawsuit is likely to be allocated among several defendants. Therefore, our liabilities, as well as our costs of defending, monitoring and concluding our involvement in this case are uncertain, and those costs cannot now be estimated.
– Potential loss of customer:
Based on the foregoing, it is possible that revenue otherwise attributable to this Customer could begin to decline during the second half of calendar year 2011. However, the Customer is not obligated either to abide by the timetables it has communicated to us or to update us as to the status of its product development efforts. Accordingly, we are unable to know or predict the status of the Customer’s initiatives on an ongoing basis. The Customer could accelerate, delay or terminate its transition to its own products at any time and without notice to us, which could have a material impact on our revenues. The identity of the Customer is protected by a confidentiality agreement.
We have implemented the initial steps of a strategic plan, the objective of which is to identify and capture additional revenue opportunities. There can be no assurance, however, as to either the timing or success of achieving this objective, and it would be our intent to reduce operating costs, if and as necessary, to minimize the impact of a revenue reduction, should it occur. In the event that the Customer’s future purchases are reduced beyond the realization of such opportunities or cost reductions, the Company is likely to experience a material and adverse impact on its business.
– Revenue growth has been stagnant for the past 3 years.
If not for the legal and customer loss issues, we would have coded PDEX as a GeoSpecial.
Neurocrine Biosciences (NASDAQ:NBIX)
NBIX is a biopharmaceutical company focused on neurological and endocrine diseases and disorders.
We recently initiated a short-term trading position in NBIX @ $8.06
The company reported 2010 fourth quarter EPS of $0.05 vs. an estimate of $0.04 and a loss in the 2009 comparable period. We took a closer look at the story over the weekend and realized that fourth quarter operating income was actually a loss. However, the company provided 2011 EPS guidance of $0.62 to $0.71, well above analysts estimates of $0.37. The biotech industry is one we shy away from, unless we find a company that is profitable. We still need to determine if a good chunk of the 2011 guidance will be the result of one time royalty payments, making this story less attractive. If this is not the case we feel the stock can approach $9.75. Stay tuned for an update.
Cambrex (NYSE: CBM)
On February 11, 2011 we initiated a short-term trading position in shares of CBM @ 6.30
The company reported 2010 fourth quarter EPS of $0.18, reversing a year ago loss and exceeding analyst estimates of $0.10. At first glance, EPS is expected to grow another 25% to $0.40 in 2011.However, upon closer inspection, adjusted EPS growth will be flat. We will look to close out this trade soon.
In other news we added TAL to the GeoSpecial list @34.89 with a price target of $43.65. See more including caveats.
We also added to our positions in our social net working portfolio consisting of QPSA STVI and GLUU. QPSA traded down to as low as $9 upon its earnings release after a sharp run up going into earrings, reaching a recent high of $15.45. We deemed this pull back as a gift and issued an alert on February 10, 2011 commenting that we added to our core position. We will sell these extra shares soon.
We have also created a mock cloud computing portfolio which includes MGIC (a previous successful position), PLUS, SBAY, IICN, NEI, ATSX, NLST, VMW,
GeoSpecials NANO, LB and GeoBargain ASYS reported strong earnings last week.GeoSpecial FRD reported strong earnings after the bell on Friday.