Your Radar Report is here early this week due to the holiday — Happy Thanksgiving! I’m going to wrap up the September quarter earnings reports this week, where we can be thankful that most of our stocks hit or beat their numbers and reported that business looks good through the end of the year. I’ll also talk about the critical condition of the stock market, which has not been able to rally up decisively. We can be thankful for the bull market year to date, and while it isn’t clear yet that the usual holiday present of a nice yearend rally is in the cards, I suspect that after a bit more work at lower levels the rally will begin.
Finally, we’ll take a quick look at the dollar, where we can be thankful that Asia and Europe have sent us lots of stuff in return for green paper that is going to turn out to be worthless. The Fed sure fooled them! Let’s mix in a little hope with our thankfulness, and hope that Asia and Europe forgive us and don’t hold it against us. Otherwise, the next half century could be pretty tough. But first, let’s get back to the good news: Earnings.
Biotech MegaShift
Dendreon (DNDN) reported last Thursday, and I thought that the conference call was uneventful, although the message board types were anguished because management did not announce the European marketing partner (I didn’t think they would), did not lay out their clinical program for 2008 (I didn’t expect that until the January call) and didn’t tighten the date range for the IMPACT trial data peek from “second half of 2008.” I was hoping that they would tighten the range now that the trial is fully enrolled, as they know exactly when the 400th patient was treated and they know exactly how long they have to wait before observing survival statistics. Management did say that the demographics of the patients in the IMPACT study aren’t substantially different than what we saw in the 9901 study, ending a recent rumor that the IMPACT patients are sicker and therefore less likely to respond.
DNDN management also was criticized for saying that they didn’t know what they were going to do with Neuvenge, their breast cancer treatment. That would be an important criticism except for one thing: They didn’t say it. It is the type of false accusation that people put on message boards to influence stocks. What they said was: “The IND for Neuvenge is active and we’ve already completed two Phase I clinical studies in Neuvenge, both in the breast cancer setting and also in the ovarian and colorectal cancer setting. So, what we are evaluating right now is exactly what disease state we take Neuvenge into and what would those clinical trials look like. And certainly that will be the topic of discussions with the FDA, but internally we haven’t fully decided where we are going to take Neuvenge from a disease setting as of now. Once we conclude on that, we’ll share that with you.”
Another such lie is that a major brokerage firm is about to downgrade DNDN — no major brokerage firm is recommending the stock. In fact, if you are a contrarian, here are the latest recommendations of DNDN by firm:
| Date | Research Firm | Action | From | To |
| Oct 11 | Wachovia | Initiated | NA | Mkt Perform |
| Oct 1 | JMP Securities | Downgrade | Mkt Perform | Underperform |
| Jul 12 | JMP Securities | Downgrade | Mkt Perform | Underperform |
| May 10 | Banc of America | Downgrade | Neutral | Sell |
| May 3 | AG Edwards | Initiated | NA | Hold |
| May 3 | Next Generation | Upgrade | Neutral | Buy |
| Nov 10-06 | McAdams,Wright | Downgrade | Buy | Hold |
Finally, DNDN management confirmed that there will be several milestones over the next year in addition to the interim results from the IMPACT study, including more publications on Provenge and some new programs, plus a decision on the next study for Neuvenge. They also said that they are laying out a strategy for European approval of Provenge in an effort parallel to the process of selecting a European partner.
One interesting data point coming up is a new SEC regulation on short sellers, requiring that all Failures to Deliver (illegal naked short selling) be located and closed out by December 4. This will put upward pressure on all the “threshold” stocks with heavy naked short interest, like Dendreon and Telkonet (TKO). Although Dendreon dropped under $6 yesterday, presumably based on the false accusation that they don’t know what to do with Neuvenge, DNDN remains a buy while it is under $8 for my $40 target after Provenge is approved.
Rochester Medical (ROCM) also reported earnings last Thursday, and I included the numbers in that Radar Report: the company had $8.4 million in sales and 10 cents a share pro forma during their fourth quarter. On the conference call, management said that they will continue to invest in growing their sales force, because they have a large new opportunity in hospitals. The change in Medicare reimbursement policy I told you about some time ago, where as of next October Medicare will no longer reimburse a hospital for treating a hospital-caused infection, is starting to have a big impact. Management said they are finding that the infection control clinicians not only have a lot more influence now in each hospital, but they are very interested in looking for new technologies that are going to help them do their job better.
In addition to the pressure from Medicare, about 18 states have passed legislation requiring state hospitals to report infection rates for a number of different types of infections. This information will be made available to the public and also reviewed by the legislature.
Management also talked about completing another acquisition, probably of a distribution or sales-force type company. Their most recent purchase in the UK is working out very well. ROCM remains a Top Buy up to $23 for my $40 target.
New Economy MegaShift
CNet (CNET) is acquiring FindArticles.com from LookSmart for $20.5 million. That’s less than half of what they just sold WebShots, their photo-sharing site, for. FindArticles.com has a database of 11 million articles going back to 1998 from newspapers, magazines, journals and similar publications. The difference between WebShots and FindArticles is that it is easy to offer advertising with FindArticles, even if it only Google Adsense. That’s very hard to do with WebShots, because the computer can’t tell what the photograph content is. So CNet will be able to use FindArticles to more effectively advertise and attract users — smart move. CNET is a buy up to $9 for my $17 target.
New Energy Technology MegaShift
Oil futures were fibrillating around $95 a barrel recently, with periodic rumors that OPEC may discuss boosting production, further pressuring prices down, while cold weather, Chinese demand and inadequate refinery capacity in the U.S. pressuring prices up. Iran is pointing out that the weak dollar is hurting OPEC’s real income, and is also trying to start a bandwagon to price oil in a basket of currencies, presumably to include the dollar, euro and yen. Today, oil hit $98.30 as the dollar slid to a new record low against the euro, following the Fed statement today that the economy looks like it is getting softer.
$3 a gallon has been a number that gets consumers’ attention, but all summer long that meant $3 a gallon of gasoline. Now, it means $3 a gallon of home heating oil — that’s what the Northeast will be paying this year, and it’s going to clobber family budgets, especially if the cold winter forecasts are accurate, for a change. Heating oil is about 90 cents a gallon higher than last year.
Connacher Oil & Gas (CLL.TO) completed their Pod One production facility on time in mid-August, began injecting steam into the wells drilled at Pod One in mid-September, and was injecting all 15 well pairs by early October. And in late October they began selling their bitumen product. Needless to say, the company has seen wonderful growth lately. Now, in good South American banana republic style, the Government of Alberta decided to implement a new royalty schedule effective in January 2009 that increases their royalties when oil is over $55 a barrel. However, with oil prices where they are, Connacher’s tar sands investment will be spectacularly profitable even under the increased royalty schedule. Yesterday, they said that they will sell up to $600 million of 10.25% notes to pay off $175 million in debt and fund the development of Pod Two.
The company reported $102.0 million in revenues and seven cents a share for the September quarter, and is on track to become a major tar sands oil producer. Their Steam-Assisted Gravity Drainage technology gives them a substantial environmental and cost advantage relative to other tar sands companies. They now have full 3D seismic coverage of their lease holdings, and will drill about 120 core holes in the coming winter drilling season, almost doubling their current core hole inventory. They can then pick the most likely areas for Pods Three and higher, or expansion areas to feed Pods One and Two. CLL.TO is a Top Buy up to $4.50 for my $9 target.
Energy Conversion Devices (ENER) reported $47.0 million in sales for their September first quarter, well above the $42.7 million consensus expectation, due to strong solar sales. Overall, revenues grew 31% from the June quarter and 73% from last year. Solar revenues hit $41.9 million, or 89% of the total, growing 33% sequentially and 76% year-over-year. They lost six cents a share pro forma, compared to estimates for a seven-cent loss. It was a very good quarter, and management said they expect ENER to turn profitable in the June fourth quarter and stay that way. They also gave more detailed responses on the conference call than has been the case in the past, and it was obvious that all of us appreciated it.
Management reiterated prior revenue guidance for the June 2008 fiscal year of $220 million to $245 million, with UniSolar contributing $205 million to $225 million of that. For the December quarter they guided to $50 million to $55 million in sales. December-quarter solar gross profit margins will remain sub par due to the startup costs of the first Greenville facility, and they will continue to take a couple of million in restructuring costs each quarter. But the restructuring is saving money, and gross margin will improve as production accelerates. That’s how they expect to be profitable by the June quarter. The company will have 148 megawatts of nameplate capacity by the end of June 2008, 178 megawatts by the end of December 2008 and at least 300 megawatts by the end of December 2010.
The new CEO has made some difficult decisions, and so far he’s been right. On the conference call, he revealed that ENER and Chevron have some differences regarding operations and funding at Cobasys, and Chevron initiated an arbitration proceeding. He believes that Cobasys should be self-funding at this point, with revenues from sales and other customer support sufficient to fund operations and capital expansion. The CEO said: “We intend to work with Chevron to achieve this goal by the end of this calendar year, if we are unsuccessful, then Cobasys may be at risk as a going concern.” I think this was posturing to get the message to Chevron that Energy Conversion Devices is not going to be an endless deep pocket for what is already a successful technology. ENER remains a buy while it is under $30 for my $55 target as the restructuring improves their bottom line.
Energy Focus (EFOI) reported $5.7 million in sales for the September quarter, down from last year due to weakness in their pool-lighting operation thanks to the housing downturn. They still beat the $5.1 million consensus estimate, but their 28 cents per share pro-forma loss was much worse than the two cents expected. A lot of the extra expenses were in restructuring charges and unplanned severance pay.
In January they will launch five new LED products that include technology developed with Navy funding for shipboard applications.. These products will have operating efficiencies of about double the present products. The company also plans to hold a special 2008-outlook call before the fourth-quarter earnings conference call, after the new COO and CFO can get their hands around the 2008 budget. EFOI is right around my $6 buy limit, and I think the $15 target is reasonable for next year.
Gasco (GSX) did only $4 million in sales and lost three cents a share before an impairment charge. They were expected to report $6.6 million and lose one cent, but the strange situation in the Rockies makes it impossible to predict what they will show. Don asked: “What do we do about GSX? It seems to do nothing but go down, off 56% from where I got in. Is there anything that is going to move this stock in the short term? I am thinking we should cut our losses and move to something more promising.”
Don, Gasco’s results are still heavily impacted by a lack of pipeline capacity in the Rockies. Companies have found a lot of gas, but the pipelines won’t be expanded until the March quarter. Gasco has 36 projects that are ready for completion, but they have essentially had to shut down until the pipeline capacity is there. During the quarter, gas hit a ridiculous all-time low of 15 cents an Mcf one day, and closed on September 30 at 35 cents. Given that they will not sell gas at distressed prices, their revenues will fall far short of covering their expenses. But they are continuing to drill and are essentially stockpiling natural gas, so the big question is: When will gas prices improve, and when will gathering capacity improve? Spot prices already are up to $5 an Mcf (from 15 cents!) and I think the lows are behind them.
Regarding prices, about 18% of natural gas usage can be switched to petroleum products. So, when natural gas is cheap relative to oil, demand improves and drives up the price of gas — normally. Thus, natural gas follows the price of crude oil — normally. It doesn’t work the other way around because the oil market is much, much larger than the natural gas market. So in times like these, when gas is cheap relative to oil, all the switches that can be made have been made. Normally, the right thing to do is to buy natural gas stocks when gas is cheap relative to oil. Right now, the ratio of natural gas to oil prices is near an all-time low.
Regarding volume, the new Rocky Mountain pipeline will open in February or March. So I expect gas prices to rise with cold winter weather, and to rise more than oil due to the low starting ratio of gas-to-oil prices. Then I expect volume to accelerate beginning in the spring. So I think the worst is over for Connacher, with some price-driven improvement in the December quarter, and then volume-driven improvements starting in the March quarter. That’s why GSX is a buy up to $4.50 for my $9 target as natural gas follows oil skyward and the new pipeline opens up.
Lighting Science Group (LSGP) filed their 10-Q, showing September quarter sales of $452,000, up sharply from last year’s $126,000, and a gross profit of 28%. After all expenses they lost four cents a share. In the filing, management said the Board of Directors has approved a 1-for-20 reverse stock split, which will be submitted to shareholders. I am certain this will be approved. As I said last week, the only way reverse splits work is if the company has a plan in place to get Wall Street coverage and find institutional buyers, who won’t buy a 50 cent stock. Without that, history tells us the reverse split does not help current shareholders. Wall Street isn’t going to buy a $5 or $6 stock either, so this reverse split is really pointless.
I still believe that in a year or two the combined company will be in a great position, as more and more jurisdictions are banning incandescent lights, and there are very few ways to participate in the white LED revolution. But I can’t advise you to hold through an ill-advised reverse split, so let’s sell LSGP until after the split happens and the dust settles. Then we will buy back in, and look for a post-split target of $20.
Plug Power (PLUG) won a Wal-Mart order for fuel-cell powered forklifts, and New World Investor subscriber Norman asked: “Plug Power mentioned a sale to Wal-Mart which markedly moved the stock but PLUG did not elaborate. What is your take on this?”
This order was an important win because forklifts have been a crummy platform for electric motors due to the beating the batteries take. But gasoline or diesel-powered forklifts are so polluting that they can’t be used indoors. Natural gas is not quite as bad, although even it cannot be used inside a freezer. In the early days of solar energy, we could go to Safeway and buy a “dead” battery from a forklift that spent its life in a freezer, put the battery on a pallet where it would not be subjected to vibration and sub-freezing temperatures, and it would perform well for years. Incidentally, these are not 12 volt car batteries — each one weighs 750 pounds or more.
Plug Power bought Cellex Power Products to get into the fuel cell-powered forklift business because it is a great application. Of course, the Wal-Mart order is about the best reference sale a company could ask for, especially since this was Plug Power’s largest GenDrive order to date. During their trials, Wal-Mart ran 12 fuel-cell powered forklifts for four months in a big Ohio food distribution center, with 18,000 cumulative working orders and 2,100 indoor refuelings. Wal-Mart gets to save money and present themselves as an environmentally responsible company. PLUG is a buy up to $5 for a $10 target.
US Geothermal (UGTH) drew a question from John: “I noted that a west coast brokerage put out a recommendation on UGTH. They postulated a market value of just under $5 based on the worth of 65 megawatts of power produced and over $6 (I think) based on 200+ megawatts. Yet, the present installation is rated at 10 MW, but now quoted at 13 megawatts. (I spoke to the COO at the Money Show who noted the excellent reputation of the Israeli-made generator — which he said typically over produced on the specs — and the performance guarantees/penalties in their contract). Is it likely that there will be a ‘bubble’ premium over the actual power revenue potential, as this firm is merely ‘doing what anyone could do’ rather than rocket science?”
John, the value in UGTH lies in their Raft River property and the fact that they can actually produce power now, rather than sell dreams. Raft River is capable of 200 megawatts on its own, and I’m sure a functioning geothermal company will find it much easier to partner, acquire or finance its way to a much larger size. So anyone can’t do what UGTH can do, which is develop Raft River. I think that the stock will sell on its potential, not just current electricity production, so in my book UGTH remains a buy up to $4 for my $6 first target.
Nanotechnology & Materials MegaShift
Integral Technologies (ITKG) filed their 10-Q for the September quarter, showing no revenues, a loss of $350,000 and cash of $1.9 million. Management said that they are focusing all of their resources on researching, developing and commercializing their ElectriPlast technology. ElectriPlast is an electrically-conductive resin-based material that can be molded into any shape or size like plastic and rubber, but is non-corrosive and as electrically conductive as if it were metal. It can be used for shielding, lighting circuitry, switch actuators, resistors, medical devices, thermal management, cable connector bodies and so on. The company has filed for 117 U.S. patents, of which 27 have been issued, three have been allowed and are pending issuance and 87 have been filed and are pending approval. I’m reducing the ITKG buy limit to $2 to reflect the current market, while keeping the target at $4.
Security MegaShift
American Science & Engineering (ASEI) reported a quarter that missed the consensus, and the CEO said: “No apologies here. It’s a lumpy business.” The shareholders took the lumps, as the stock plunged below my $59 buy limit.
But it is a lumpy business, and Wall Street’s seeming expectation that it will somehow magically smooth out is hard to understand. ASEI did $37.6 million in sales, below the low end of the $38.3 million to $47.0 million range, and well below the average of $42.9 million. Earnings also missed, coming in at 48 cents a share, also below the range of 50 cents to 72 cents and average of 62 cents). The problem was the usual suspects: They didn’t deliver enough of the high-margin Z-Backscatter vansdue to one order that slipprd, so revenues were light, profit margins were light, they kept spending on R&D as they always do, they kept booking orders as they always do, and — oh, yes — they increased the backlog to a record $122 million.
So as I said a couple of issues ago: “The way to deal with this is to understand that the smoothed results for this company will be up and to the right for many, many years to come, until terrorism ceases to be a problem.” Buy ASEI only on dips back under my $59 buy limit, which would be caused by quarterly results below the average consensus, and otherwise hold for my $93 target.
Video iPod MegaShift
Burst.com (BRST) had an eventful early November. The stock closed at $1.50 on November 1 and $1.44 on November 7. It usually trades 25,000 to 50,000 shares a day. On November 8, it traded 3.3 million shares, opening at $1.45, hitting 23 cents intraday, and closing at 43 cents. The next day it traded 2.2 million shares, ranging from 52 cents to 79 cents, and closing at 73 cents. Since then it has drifted down to 60 cents or so while averaging over 100,000 shares traded a day.
On November 8, Judge Marilyn Hall Patel of the U. S. District Court for Northern California invalidated as obvious or anticipated 14 claims in the patents in the suit between Apple Computer and Burst.com, while leaving 22 claims that the court did not invalidate as obvious or anticipated. So Apple won some and lost some on their motion for summary judgment, and I have no doubt that they are violating the remaining 22 claims, some of which affect the Macintosh as well as the iPod and iTunes products. So as a result of the rulings, the price of BRST dropped by more than half, but the court case will go forward. The trial is scheduled for February, and I still think that Apple will lose — or settle. However, I also think that the trial will be delayed to deal with Apple’s newest filings.
Apple has filed three more motions for summary judgment, two of which are to declare Burst’s patents invalid. With Burst winning both the Markman construction phase and the 22 claims that are not obvious or anticipated, they now have to win, at least in part, on at least one of the two new invalidity motions. Apple’s third motion is to limit damages to the period since Burst sued, which would dramatically reduce the amount of money Apple would owe Burst. I don’t give Apple much chance of winning that one. I think the odds are pretty high that Burst will win enough claims for the lawsuit to proceed, with the main question being whether there will be enough exposure for Apple to bring them to the table for a big settlement.
To Del, Mike and other subscribers who wondered what to do now about BRST — I am sticking to my recommendation, while changing the buy limits to reflect the current price of the stock. Buy BRST under $1 for at least a $2 target. I’ll raise the target price to $3 after we see how Apple does in this next round.
WiMAX MegaShift
Sprint Nextel and Clearwire canceled their plan to combine the high-speed wireless networks they are each building. Clearwire will continue on alone. Sprint is still spending some money on WiMAX, and I believe that as soon as the new management completes their strategic review, they will have no choice but to continue the build-out. So there will be two nationwide WiMAX networks instead of one, unless they renew the agreement to combine, which is very possible.
But Wall Street assumed that this was a body blow for WiMAX and clobbered all the stocks. You have to be very U.S.-centric to think that way, since 85% of the WiMAX market is outside of the U.S. But the Street has never let logic get in the way of a commission on a trade. Even though some WiMAX stocks have been beaten down lately, all of my WiMAX MegaShift recommendations remain unchanged:
- Buy Airspan (AIRN) up to $5 for a $10 target.
- Alvarion (ALVR) is a Top Buy while it is back under $11 for an $18 target.
- Proxim (PRXM) is the most speculative, but can be bought up to $4 for a $7 target.
- TowerStream (TWER) is both the safest and cheapest of these four, and is a Top Buy up to $6 for a $16 target.
Market Outlook
The Federal Reserve economic outlook notes released today said that it expects slower GDP growth next year due to the housing slump and the credit crunch, but it thinks that inflation will remain moderate. In other words: “We are going to cut rates!”
That announcement tanked the dollar and sent oil and other commodity prices skyward. It could have driven a big stock market rally based on the expectation for lower rates, but instead it may have cemented the break below 1440. The market headed down at first, then rallied back to test 1440 from underneath. If it doesn’t break through quickly, this will be the “kiss goodbye” before another drop.
I did not re-recommend buying puts because there is a very good chance that this decline will stop at the major target at 1410 (the August 16 close) on the S&P 500, perhaps as soon as tomorrow. The day after Thanksgiving used to be a favorite to turn the market around, but the practice of holding half-day sessions has made it irrelevant. There is a possibility that the market will bottom out on Friday or Monday and start a move back up.
If this happens at the 1410 level, the market can stage a humungous rally into next March. That’s what I think will happen, but as I always say, the market does not care what I think. If 1410 is broken over the next couple of weeks, we’ll probably see a sideways to down market into next March that stops at 1326. It isn’t the most likely course, but it could happen. If I see a clear break of 1410, I will send you a Flash Alert when there is a graceful opportunity to buy protective puts again. From 1326, I would expect the next and last major move up in this whole bull cycle to 1800 or higher. I’ll keep monitoring the situation, so stay tuned.
Dollar Death Watch
What can one say? The Fed is in trap where they have to sacrifice something, and they’ve decided the dollar is it. The only difference between now and when I started talking about this a year ago is that now everyone knows it. When OPEC is whining about the weak dollar hurting their oil revenue, and the Chinese are muttering about shifting dollar reserves into euros or yen, you know that pretty much everyone except the see-no-evil American consumer knows what is going on. But as long as Helicopter Ben can fool the voters, you can bet the dollar will keep getting nailed.
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