I spend almost all my investment time thinking about the New World that we live in, which is based on rapidly-changing technologies. But my focus isn’t limited to just the impact of computers and the Internet, although that is my professional background and I have been online since 1969, with an online service provider starting in the 1980s. You see, the New World is also about biotech and the vast changes in medicine that are coming, the transformation of new energy technologies to extend or replace the use of oil, the nanotechnology revolution that is just over the horizon, and a score of other coming trends that we can’t even imagine. Most people have virtually no idea about how dramatically their lives will change with the new technologies currently being developed or yet to be discovered. For example, based on the incredible things happening in biotech, did you know that the first person to live to be 150 is alive today, and about 50 years old right now? (And, I hope, a subscriber to New World Investor.) The average female baby born in the U.S. in 2007 will live to see 2107. So, people who are going to live that long have to radically rethink the arc of their lives and how they are going to use the new technologies for profit and pleasure.
Yet, all this exists in a world with other, non-technology forces, and I have to spend some time researching and analyzing them, and then reporting my conclusions to you here. I have also spent an awful lot of time in my 37-year professional career trying to understand how the capital markets really work, right down to the nitty-gritty of proper statistical methods. I started with an efficient capital markets/random walk bias, but I realized early on that we operate in a market that is far from rational — the last price of a stock is often set by the most optimistic, possibly wild-eyed buyer transacting with the most pessimistic, possibly clinically depressed seller. Why anyone thinks that the price of that transaction represents a meaningful estimate of a stock’s future value is beyond me.
What all these musings, research and analysis come down to is this weekly letter to you, in which I try to get the big picture right, explain what I think is happening with the macroeconomic forces that could impact us, and then translate all the technology changes that are coming into stock recommendations that can have a dramatic positive effect on your finances. Sometimes that works wonderfully well, and sometimes I either misjudge the technology (too early, usually) or the ability of a management to take advantage of their opportunity. I am always trying to increase my batting average, and I’ll never be satisfied with less than 1.000.
So, what has the focus of my big picture research been recently? Well, as you know, I’ve been hammering for several months on the Fed’s unannounced but obvious decision to steadily erode the value of the dollar, what that means for the markets and our stocks, and the real possibility of a parabolic upswing in the broad market. I’ve talked about the real factor driving energy prices: Demand from Asia, especially China. I’ve even said that U.S. real estate is a great buy right now, as the falling dollar will push up the value of all real assets. And I’ve said that you should get out of all fixed income, because the falling dollar will eventually push up interest rates and clobber the value of bonds. Incidentally, foreign central banks sold off U.S. debt at a record rate in August, after being big buyers in the first few months of the year.
With the Fed backed into a corner on an embarrassing rate cut at next week’s meeting, the dollar is hitting all-time lows, oil is hitting all-time highs within 24 hours of OPEC saying that they would increase production, and gold has been on a rocket ride. None of this should come as a surprise to you — we’ve been talking about it for months. While the wave theorists and technicians have been calling for a dramatic decline or crash in the stock market, the VIX Fear & Greed Index has stayed remarkably high. That shows the stored-up energy potential for a parabolic move of hundreds of points to the upside in the S&P 500, as it drops back to the mid- to low-teens. Yes, it could be a bull trap, there could be a terrorist event or a hurricane that smashes the Gulf Coast oil facilities, and the market could take yet another scary, fast drop. But I hope by now that you realize that in a bull market, these only rebuild energy for another slingshot move up, and you are not letting them mess with your emotions.
The key levels on the upside now are to look for a breakout over 1482 for the S&P, which we may have gotten today. If the S&P stays over 1482 tomorrow as a weekly close, it should lead to a run to 1530, then over the all-time high of 1555, then on to 1607, 1710 or higher by March 2008. No market moves in a straight line, of course. Periods of consolidation or quick declines are needed to rebuild bearish energy that can be tapped to fuel the next upleg.
On the downside, it would be nice to see 1452 hold as support, but even a drop back to 1440 or even 1395 should not concern you. I would only get worried if the very long-term support at 1310 failed to hold, as that might mean that the character of the market really had changed. As for those who say that the market has to decline to discount the higher possibility of a recession, I say look at the S&P adjusted for the value of the dollar. It has already had a dramatic decline.
As for the Fed, on August 15 the esteemed St. Louis Fed President William Poole made the first comments from an actual Fed official after the multibillion dollar cash injections began. He said that the market turbulence fueled by the sub-prime loan default fallout doesn’t threaten U.S. economic growth, and that only a “calamity” could justify cutting rates now. He added: “The issue to me is whether it spread into business fixed investment or consumption. I don’t see evidence that that is taking place. No one has called up and said the sky is falling.”
He concluded quite forcefully: “It’s premature to say this upset in the market is changing the course of the economy in any fundamental way. I don’t see any impact as of yet on the real economy or on the inflation rate. Obviously, there could be an impact, but we have to rely on some real evidence. If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don’t have the intelligence they need to have a policy actually based on solid evidence.”
Less than 48 hours later, the Bernanke Fed cut the discount rate.
This week, Mr. Poole said that he will retire from the St. Louis Fed next March.
The market will do whatever it wants to do in response to a 50-basis-point (half a percentage point) Fed cut next week, but I feel very good about the future for our stocks, including almost all of the problem children. Remember, as I said above, there are incredible things happening in the New World that we live in. New technologies are being developed that are going to shape the way live in the next 50 to 100 to 1,000 years. And these new developments should provide you with some nice profits if you’re invested in the right companies. So, in this issue, I take a look at the stocks in all of our MegaShifts and repeat the core reason that we hold every stock, in addition to covering some of the recent news.
Avian Flu MegaShift
BioCryst (BCRX) has numerous milestones coming in the near term, including the start of the Phase II intravenous trial of peramivir against the avian flu and the Phase III intramuscular trial against seasonal flu. Peramivir is the next big antiviral for bird flu. BCRX remains a Top Buy all the way up to $19 for my $30 target, and it may be the most undervalued stock on my buy list.
Crucell (CRXL) owns the next-generation human cell-based vaccine production technology, which will replace the current chicken egg-based production. They have licensed their technology to over 70 companies, most recently Merck, for upfront payments and royalties. Some of the licenses are even for avian flu programs. CRXL is an excellent buy at these levels and up to $28 for my $50 target.
Biotech MegaShift
Affymetrix (AFFX) is the leader in gene chips and is about to settle a patent lawsuit by extracting royalties from its main competitor, Illumina. Gene chips are moving from DNA research to clinical lab diagnosis, and eventually they will be used at the point of care in most doctors’ offices and clinics around the world. AFFX is a buy up to $27 for a $40 target.
Amgen (AMGN) is one of the largest biotech companies out there, with a well-established pipeline of drugs. I recommended this stock because AMGN has a lot of drugs in trials and the ability to get these drugs approved and on the shelves. They had their date with the FDA to discuss red blood cell stimulating drugs in kidney dialysis patients. Exactly as I expected, the FDA made absolutely no change to the use of Epogen and Aranesp, Amgen’s leading products for this treatment. The January 2009 $70 LEAP call (VAMAN) has 17 months to work out, with a buy limit all the way up at $12.50, and a $25 target price when AMGN stock hits $95.
Biogen Idec (BIIB) has successfully reintroduced Tysabri, and the LEAP option that I recommended in February 2006 at $5.95 is closing in on its $23 target. With four months left to expiration, I recommend that you hold the January 2008 $45 calls (IDK AI) for my $23 target. When that triggers, we’ll walk away with a nice 287% gain.
CombinatoRx (CRXX) follows a lower-risk drug development strategy by combining already-approved drugs into new, patentable therapies. Their intellectual property surrounding their automated search for and analysis of potential combinations is unique and undervalued. They have several Phase II studies underway, and I expect them to partner the successful ones to progress into Phase III trials. CRXX is a buy under $7.50 for a $16 target this time next year.
Dendreon (DNDN) has the first personalized prostate cancer vaccine recommended for approval by an FDA Advisory Committee. They have powered an interim peek at the current clinical data, scheduled for mid-2008, to let them file for approval under a Special Protocol Assessment with the FDA. As you know, I expect the vaccine to be approved, and it will just be the first of many billion dollar drugs using Dendreon’s technology. Buy under $8 for a $40 target after Provenge is approved.
eResearch (ERES) has more than half the market for the cardiac safety impact trials now required by the FDA for virtually every new drug. Revenues are accelerating with about a one-year lag from when the orders rolled in. ERES is a Top Buy up to $16 for my $30 target.
Geron (GERN) is the technology leader in both anti-telomerase drugs, the only potential silver bullet against cancer, and stem cell research. They are in clinical trials with both technologies, and they have a huge amount of intellectual property that they can license or use in joint ventures. GERN is a buy up to $9 for my $18 target.
Isolagen (ILE) is a cosmetic medicine leader, an area that will see rapid growth as the baby boomers age. Their lead product, the Isolagen Process, corrects and reduces the normal effects of aging, such as wrinkles. This is a product that will definitely be in demand as people live longer. ILE recently restarted their clinical trial to reduce wrinkles and creases, and I expect it to conclude successfully later this year, with data available around the end of the year. Buy ILE under $4.50 for a $9 first target.
Millennium Pharmaceuticals (MLNM) has a broad portfolio of drugs in various stages of clinical trials for cancer, heart disease and multiple sclerosis. That’s the reason why I’m recommending the stock. But it’s also important to note that with its vast pipeline of drugs and great relationship with larger biotech companies, like Johnson & Johnson, Millennium is also a takeover target. Buy MLNM while it is under $12 for my $23 target.
QLT (QLTI) has the original macular degeneration drug, Visudyne. Sales are currently depressed by the introduction of new drugs, like Lucentis, that have a completely different mechanism of action. I expect more and more use of a combination of drugs including Visudyne to treat this disease, especially as some independent clinical data is published. Buy QLTI up to $8 for a $16 target.
Rochester Medical (ROCM) has the best urinary catheters on the market, including a unique drug-eluting catheter to fight infections. Medicare will stop reimbursing hospitals for fighting infections that the hospitals cause, so I expect a rapid conversion to Rochester’s products. In addition, a settlement with the other two defendants in their antitrust suit could come any day. ROCM is a Top Buy up to $23 for my $40 target, and vies with BioCryst for the title of cheapest high-quality stock of all my recommendations.
Sequenom (SQNM) is the second gene chip stock to buy after Affymetrix. It has its own genetic platform called MassARRAY. They also develop and sell specific tests to run on their equipment, in addition to selling the hardware and chips to research labs and biotech companies. The company will host a live audio webcast with a slide presentation for an analyst and investor briefing event after the close on September 24. Buy a full position under $4.50 for an $8 target this time next year.
SXC Health Solutions (SXCI) is a pharmacy benefit manager with some new ideas about how to save health care providers’ customers money. The U.S. wastes about 25% of its health care budget pushing paper around, and SXC’s systems are part of the solution. As baby boomers continue to age, the demand for prescriptions is going to rise, so health care facilities are going to need a more efficient and cost-effective way to manage their drug programs. Buy SXCI under $23 for a move up to $30 by the end of 2007 and my target of $46 by the end of 2008.
ViroPharma (VPHM) is doing a great job of milking Vancocin for revenues and profits before generics come into the market. They will use their cash hoard to in-license products or acquire companies to make ViroPharma a big specialty pharma company, which is exactly what we expected when we bought the stock. Buy VPHM up to $12 for my $25 target.
China MegaShift
I missed the window to get back into a number of these stocks at reasonable prices, and even though their government has taken steps to open the Hong Kong market to Mainland investment, I don’t think the underlying valuations are compelling. So for now, we’ll steer clear, with the exception of a wireless service provider.
UTStarcom (UTSI) is a deep value and is straightening out its operations. Handsets and Internet Protocol Television are big, growing markets in Asia and India. But UTSI needs to change Chief Executive Officers before Wall Street will take them seriously. It is more likely that a Taiwan or Mainland China company will acquire UTSI. They will hold a conference call after the close on Monday to discuss their new corporate strategy, including their key focus areas going forward, and new cost reduction goals. I am moving the stock to a Hold until we get some indication that the board is ready to replace the CEO.
Content on Demand
Akamai Technologies (AKAM) is the leader in delivering Internet content rapidly around the world, with over 25,000 servers in nearly 3,000 loactions in over 70 countries. Companies use them to be sure that their web pages open quickly, so fickle surfers don’t get bored and click away. The company is growing 30% a year, and will continue at this pace as more and more people demand to get their music, videos, games and pictures smoothly and quickly. AKAM is a buy on any dip under $30 for a $60 target in 12 months.
Comcast (CMCSA) is leveraging all the new content technologies to create the best consumer service wrapping everything together. At the end of the day, I think this market will come down to Comcast, Time Warner, Verizon and AT&T — or the merged version of some of those companies. They will all be in telephony, Internet access, broadcast TV and audio/video on demand. And they will all offer fixed and mobile (wireless) services. Comcast and Verizon are the best dogs in this fight, and Comcast’s stock is cheaper. Buy CMCSA under $28 for my $62 target.
Harmonic (HLIT) announced half a dozen contracts wins at the IBC 2007 broadcaster’s conference in Amsterdam last week, including a DirecTV deal that was big enough to cause HLIT to raise guidance for the second half of the year. DirecTV bought high-definition encoders, video stream processors, multiplexers to put more than one video stream on a channel and system management software. I believe that this was a 100% win for Harmonic — they beat out everyone else for all of the business. The same is true of a win with PT Indonesia Telemedia, which delivers video over both satellite and cable. They bought a half a dozen different products from Harmonic for their next generation system. Manthan Broadband of India, a cable system with 800,000 subscribers, also bought multiple products for their next generation upgrade. In the DirecTV and Sky Perfect (Japan satellite TV) contracts, Harmonic appears to have bumped Tandberg TV. That’s confirmation of my position that Harmonic’s new MPEG-4 video encoder is by far the best product in its class.
Another contract with Israel’s Yes TV, a satellite service with half a million subscribers, was for Rhozet’s Carbon Coder — the product that Harmonic recently acquired that I discussed in last week’s Radar Report — which delivers Internet TV over cable or satellite. All of the satellite and cable companies will be buying that one. SeaMobile Enterprises bought video encoders, schedulers to insert commercials and video storage systems that will let them deliver broadcast and on-demand programming to 300 cruise ships through their Wave Entertainment Network.
In addition to the new contracts, Harmonic announced a number of new products. One of the biggest is that Rhozet now supports Adobe Flash as a video standard that can be quickly translated to and from other video formats with no loss of quality. They also announced a leading edge encoder that supports 1080 progressive line coding for 60 frames per second video. At the other end of the scale, they put out a low-cost standard-definition MPEG4 encoder. They also combined a number of products into the MediaPrism Suite to create and manage video on demand.
Analysts are looking for 12 cents a share in the September quarter, 13 cents in the December quarter, and 40 cents for the year. I think Harmonic will blow away the September quarter with 14 cents or 15 cents (or better, based on all these contract announcements), and then guide for 17 cents or more in December. As I’ve been saying for months, they could do as much as 50 cents a share this year, and 65 cents to 70 cents in 2008. Wall Street is way too low. This is the stuff big stock moves are made of, so I am raising the buy limit another dollar to $11 and raising the target price by $2 to $18.
Intel (INTC) raised their September-quarter sales guidance “as a result of stronger than expected worldwide demand for its computing products,” which means that the PC business is stronger than they or Wall Street expected. I am not surprised. Market researcher IDC raised their estimate this morning to 12.6% growth this year. Intel now thinks that they will report $9.4 billion to $9.8 billion, up from their previous guidance for $9.0 billion to $9.6 billion. They will probably beat the high end of their guidance by $50 million to $100 million. The consensus was at $9.4 billion before the announcement, and it has now moved up to $9.6 billion, so there is still room for a good upside surprise.
Higher revenues should mean better operating margins in a well-run company, and Intel also raised gross profit margin guidance to “the upper half of the previous range of 52%, plus or minus a couple of points.” So, Wall Street raised the consensus estimate from 28 cents to 30 cents a share, and they are still low by a couple of cents.
If you didn’t buy the LEAP calls when I was pounding the table on them a few weeks ago when they slipped under $5, I am raising the buy limit on Intel’s January 2009 LEAP calls with a $22.50 strike price (VNLAX) to $6. I’m keeping the target price at $12.50 at expiration, better than a double from current levels.
Motorola (MOT) is a turnaround story, based on new phone models reclaiming market share from Nokia. This was a faith-based investment, on my part, at the time we made it, based on the fact that I have followed this company seemingly forever, and I also knew CEO Ed Zander from his lengthy tenure at Sun Microsystems. But now we have some solid info, as MOT executives were all carrying the unannounced Q9 phones with an AT&T label at last Friday’s analyst meeting. The Q9 is a mass market smartphone for under $200. It was a great tease, and the company said that they will introduce new models next month. I’m expecting two major lines, each with models at various price points. Some will have GPS — see the SiRF write-up below. Management also said that they want to be “boring” by producing a broad line of successful phones targeting every niche from the low end to the high end of the market, rather than betting the farm on one product like the Razr. Sounds good to me. I suspect their market share has bottomed, so this is a very timely opportunity to buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target ($28 minus $17.50) in January 2009.
Silicon Image (SIMG) will benefit this holiday season from the sale of hundreds of consumer electronics products that use their HDMI chips to connect to each other. Holiday production starts now, with orders to the chipmakers at the very front of the process. As the HDMI leader, SIMG should do surprisingly well for the next few quarters. The stock is a Top Buy all the way up to $13 (more than a double from current levels) for a $20 target (almost a quadruple).
Telkonet (TKO) is the leader in in-building Broadband over Power Lines, but that hasn’t stopped the stock from sliding to a new 52-week low as investors fret over the current absentee CEO. I think the recent COO appointment is just the prelude to a face-saving resignation by the CEO, and then the stock can run.
Subscriber Ron asked: “Did Telkonet miss the boat on selling broadband over power lines by not going after the consumer? ‘Netgear is a major force in the consumer electronics market and a leader in offering high-performance products,’ said Jorge Blasco, CEO of DS2. ‘Our partnership with Netgear is proof positive that there is a growing consumer demand for Power line products. Moreover, DS2′s 200 Mbps Power line chipsets are providing simple, reliable broadband connectivity that offers the necessary bandwidth to connect the digital home. DS2 technology is proven and mature. Our technology is currently in use by several service providers and we are delighted to be working with Netgear to bring this technology directly to the consumer.’”
Ron, this may have been a boat that they didn’t especially want to catch. These chips go into a device that attaches to a PC and then plugs into the electrical outlet. Then you can put a similar device on your TV or media center and move digital content around your house over the electrical lines. This is not to connect to the Internet. It primarily is a substitute for Wi-Fi to cover dead spots inside a house. TKO is focused on making each electrical outlet a connection out to the Internet for voice, video and data. As a side benefit, you can move stuff around inside the house, just as with Netgear. To be fair, right now I think that the Netgear chip runs faster, but TKO has a roadmap to steadily increase their connection speeds.
TKO has delivered its power line networking solution to over 200 Department of Defense sites nationwide, with an additional 600 locations scheduled for deployment between now and through 2008. I believe the CEO will resign soon, and you surely want to own a full position in TKO the day that happens. Buy TKO up to $5 for my $15 target.
Zhone Technologies (ZHNE) is a leading supplier of DSL and other Internet access devices to both cable and telephone companies for resale or lease to their customers. Zhone has had a hard time getting new products growing before old products start declining, and I suspect that the company will be sold soon. As long as the venture capitalists that bought so much insider stock in the open market are sticking with the company, we should, too. They will maximize shareholder value, whether in a buyout or by getting operations on track. Hold ZHNE.
New Energy Technology MegaShift
After a long meeting, undoubtedly involving significant arm-twisting by the Saudis, OPEC announced a surprise increase in their production quotas of 500,000 barrels a day above their real current production. “Our message to the consumer is that we care,” said Abdalla Salem El-Badri, OPEC’s secretary general. Golly, now I feel so much better about dealing with a cartel that’s been picking my pocket for so many years.
Usually these increases are based on existing quotas, which are meaningless because more than half of them cheat and pump excess oil. Recently, they’ve been pumping an extra million barrels a day. So this was a big, real increase, and it brought oil prices down.
For 20 minutes.
Then — zip! Right back up to a new intraday record over $80 a barrel. If you heard an overweight woman singing in Arabic, you heard right. OPEC no longer has control of oil prices, and if they can’t control prices, they are finished. What good is a cartel that can’t control prices? Bye-bye OPEC, hello Ma Kai.
Ma Kai is the minister in charge of the National Development and Reform Commission in China, which controls Chinese oil exploration and other oil matters. China’s very strong economic growth has not slowed down, and it is Chinese demand plus the weak U.S. dollar that is driving oil prices, not OPEC. So, what is Ma Kai going to do for the poor SUV drivers in the U.S.? So sorry, but China just decided to establish a large strategic oil reserve, and will be increasing government purchases to fill it. Gee, remember the good old days when regular gasoline was only $3.00 a gallon?
There’s nowhere to refine OPEC’s additional oil, anyway, and it is too late to get more oil into home heating tanks for the first round of winter deliveries. If your home heating oil supplier offers a fixed price, advance-pay contract, grab it. You can tell everyone you are long home heating oil, and they will think you are a big time commodities speculator.
Connacher Oil & Gas (CLL.TO) jumped yesterday after an oil stock newsletter recommended buying it. Their point was the one that I made in my original recommendation: We are buying Connacher’s proven and probable oil in the ground for $4 a barrel, even giving no value to Pod One’s 10,000 barrels a day production and the Montana heavy crude refinery. Plus, we get their 26% interest in Petrolifera Petroleum (PDP.TO), which has a $775 million market capitalization. Petrolifera is producing another 10,000 barrels a day, and exploring five million acres in two basins in Peru. If you subtract Connacher’s $200 million of Petrolifera from CLL.TO’s market cap, we’re buying Connacher’s oil in the ground for $3 a barrel. How the heck can we lose money doing that? This may be my only risk-free recommendation.
Last month, Marathon Oil bought Western Oil Sands for $9.46 per barrel of proven and probable reserves. Looking at the valuation metrics, Connacher is worth $9 to $16 a share in a buyout. CLL.TO remains a Top Buy up to $4.50 a share, and I am raising the target price by $2 to $9 to reflect the Western Oil Sands transaction.
Infinity Energy Resources (IFNY) drew many anguished emails after they filed an 8-K announcement that their bank line seems to have become adversarial. Gary said: “What on earth is going on with IFNY? Do you really think these guys know what the heck they are doing or are they just hyping and stalling? Very poor chart.” Quentin added: “I would appreciate your comments on IFNY given their (1) announced loan default, (2) cash flow situation and (3) lack of any updates on their asset sales.” And Rich got to the bottom line: “IFNY is down over 20% today, and down nearly 60% since the day I bought it off your Top Buy recommendation. Should we sell?”
Here’s what I know and what I think happened, but the CEO has not returned my phone calls, and they have not done a conference call. Both of those are bad signs, but — to address Rich’s question first — not so bad that we should think about selling the stock.
I’ve bolded some of the language in the 8-K that Infinity filed for an Entry into a Material Definitive Agreement that said:
“On August 31, 2007, Infinity Energy Resources, Inc. (the “Company”) entered into a Forbearance Agreement (the “Agreement”) under the loan agreement among the Company, Infinity Oil and Gas of Texas, Inc., and Infinity Oil & Gas of Wyoming, Inc. (each wholly owned subsidiaries of the Company and together, the “Guarantors”), and Amegy Bank N.A. (“Amegy”) dated January 9, 2007 (the “Loan Agreement”). The Agreement relates to the breach by the Company and Guarantors of: (i) the “Interest Coverage Ratio” set forth in Section 8(a) of the Loan Agreement for the period ended June 30, 2007; (ii) the “Funded Debt to EBITDA Ratio” set forth in Section 8(d) of the Loan Agreement and (iii) the requirement to deliver certain lien releases under Section 9 of the Loan Agreement (the “Existing Defaults”).
“Under the Agreement, effective as of August 10, 2007, the borrowing base under the Loan Agreement is reduced from $22,000,000 to $10,500,000, with a resulting borrowing base deficiency of $11,500,000. The borrowing base remains subject to periodic redetermination by Amegy as provided in the Loan Agreement. The borrowing base deficiency must be cured by the end of the Forbearance Period (as defined below) through the sale of assets, refinancing of the loan, or some other means of raising capital.
“Under the Agreement, Amegy agrees to forebear from exercising any remedies under the Loan Agreement and related loan documents and to waive the Existing Defaults through November 30, 2007 unless earlier terminated by Amegy due to a further default under the Agreement or the Loan Agreement (the “Forbearance Period”). If the Company has entered in a definitive sale agreement with respect to certain assets of the Company with proceeds sufficient to repay the borrowing base deficiency on or before November 30, 2007, Amegy may seek credit approval to extend the Forbearance Period through January 31, 2008.
“During the Forbearance Period, the default interest rate will be the stated rate under the Loan Agreement, plus six percent, currently 14.25 percent. Monthly cash general and administrative expenses have been further limited under the Agreement to $150,000, excluding approved broker fees.
“The Company has agreed to proceed with the sale and marketing of all assets of Infinity Oil & Gas of Wyoming, Inc. and to take certain actions in furtherance of such sale. In addition, if directed by Amegy, the Company has committed to proceed with the sale and marketing of the assets of Infinity Oil and Gas of Texas, Inc. The Company has also agreed to pay Amegy a forbearance/ waiver fee of $220,000, due on or before the earlier of the end of the Forbearance Period, the cure of the borrowing base deficiency or the refinance of the revolving note by another lender.
“While the Forbearance Agreement provides a temporary waiver of the Existing Defaults, it does not cover any potential future events of default. It is likely that the Company will be unable to maintain compliance with the financial covenants and ratios required under the Loan Agreement, and additional events of default are likely to occur. If the Company is unable to obtain waivers of future expected events of default and otherwise to maintain compliance with the terms of the Loan Agreement, Amegy would be entitled to declare an event of default, at which point the entire unpaid principal balance of the loan, together with all accrued but unpaid interest thereon, and all other amounts then owing to Amegy, would become immediately due and payable. If Amegy were to declare such acceleration, there is no assurance that the Company would be able to repay the amount due. In addition, because substantially all of the Company’s assets are collateral under the loan, if Amegy declares an event of default, it would be entitled to foreclose on and take possession of the Company’s assets.”
My first thought on reading this was: How did they get into this pickle? It is common to have financial ratio covenants in loan agreements, and it is common for those to slide into technical default if a company loses money in a quarter. But why is Amegy acting this way, forcing the company to sell the Wyoming assets on Amegy’s timetable, and putting the Texas assets on the table after the company had decided to keep them? I don’t know. I don’t think there is any real chance that Amegy would not get repaid.
Most likely, they felt that the company they loaned to was going to sell assets that the bank had counted on when they made the loan, but Infinity had no plans to pay down the debt. The bidding process closed after Infinity took down this loan. If that’s the case, it simply means that Infinity will have to sell Wyoming as they wanted to, do more joint ventures than they’d planned, and find another oil patch lender to take Amegy out.
I believe IFNY is a roaring buy right now, but until I can talk to the CEO or the company has a conference call, I have to move it to a hold. I am sure other investors are getting cold-shouldered also, or the company would do a conference call. So, other investors are also putting it on hold, or selling. The new management team has a crisis to get through for sure, but it appears to be a crisis manufactured by their lender for reasons that we can speculate about, but not confirm. Hold, do not sell, IFNY until I can get more information.
Energy Focus (EFOI) is riding the white light LED revolution by delivering the light over fiber optics for specialty lighting and remarkably colorful signs, like most of the Las Vegas Strip. They are the world’s leading supplier of this lighting, and all their technology is protected by 40 patents, with more pending. Instead of my original plan to buy a one-half position under $7, I’m taking the buy limit down $1 and recommending you buy a full position under $6 for my $15 target this time next year.
Energy Conversion Devices (ENER) is a leader in solar roofing, hybrid car batteries and new memory chip technology. New, cost-conscious management can make this collection of advanced technologies throw off a lot of cash. The stock has fallen since they reported June-quarter earnings, but the recent cost-cutting hasn’t begun to throw off the savings that are coming. I am reducing my buy limit to reflect the current market levels, but there’s no reason to cut the target price. Buy ENER under $30 for my $55 target.
FuelCell Energy (FCEL) is the leading manufacturer of stationary fuel cell power plants, with recent big contract wins in Connecticut and California. Like all the alternative energy stocks, it should benefit from higher oil prices. Buy FCEL under $11 for my $22 target.
Gasco Energy (GSX) has been squeezed by low natural gas prices in the Rocky Mountains, due to a lack of gathering and transportation capacity to get the gas to market. That infrastructure will be there by January. There is no slowdown in the development of Rocky Mountain oil shale, which will require huge amounts of natural gas in order to extract the oil from the rock. Gas prices are way low relative to oil, and I believe GSX is as cheap as it will ever get. One bad hurricane or one bad winter could double gas prices and triple GSX stock. Buy GSX up to $4.50 for a $9 target.
Lighting Science Group (LSGP) is a leading white LED company that will benefit from the forced conversion away from incandescent bulbs. They have some of the best technology in this area, with the first high-output, dimmable, Edison-based white-LED light bulb. Their immediate opportunity is a supplier relationship with Philips Solid State for parking garage lighting. LSGP is a Top Buy up to 50 cents a share, with targets of $1 in 2008, $2 in 2009, $3 in 2010, $4 in 2011 and $5 in 2012, when the California conversion deadline hits.
Ocean Power Technologies (OPTT) can generate power from ocean waves at the same cost as oil at $45 a barrel, or put another way, three to four cents per kilowatt hour. They’ve been winning major development contracts, and it is only a question of time until this technology takes off. Even some of the oil companies are getting on board. Chevron is in the process of licensing the Northern California coast for energy wave farms. Buy OPTT up to $20 for my $40 target.
Plug Power (PLUG) is the leader in standby or back-up fuel cell power systems. These types of systems are especially in demand in states like Florida that need durable and reliable energy sources for times — hurricane season — when the power grid is most likely to go out. PLUG is selling its GenCore systems worldwide, and they are well financed. Buy PLUG up to $5 for a $10 first target.
Rentech (RTK) is the clear leader in non-polluting coal-to-oil conversion. This technology can convert coal into gasoline, diesel or jet fuel for less than $45 a barrel. With their pilot plant opening soon, RTK should come back into the investor spotlight. RTK is a Top Buy up to $5 for my $11 first target.
U.S. Geothermal (UGTH) will flip the switch on their Raft River plant in the next few weeks. It will produce clean, cost-effective geothermal power from the amazing Idaho property that they took over from the Department of Energy. The plant will eventually be able to generate enough megawatts of power to provide electricity to the entire state of Idaho. UGTH is a Top Buy up to $3 for my $6 first target.
Important Note: I expect us to hold every one of the New Energy Technology stocks, including Infinity Energy, for many years, with ultimate target prices much, much higher than those listed here.
Robotics MegaShift
iRobot (IRBT) is the leading consumer robots company with several new product announcements imminent. They’re also an important supplier of robots to the military, which wants 30% of their future fighting force to be machines rather than soldiers. Buy IRBT on dips under $19 for my $30 target.
Security MegaShift
American Science & Engineering (ASEI) has the best X-ray and explosives detection systems in the post-9/11 world. Its CargoSearch systems scan motorized vehicles, containers, pallets and air cargo at border crossings, seaports, military bases, airport and railroads to check for illegal drugs and weapons entering the country. Also, their Z Backscatter systems are being used to detect car bombs, and the SmartCheck system will become the new standard for security checks in airports around the country. Buy ASEI if it dips under $59 for my $93 target.
Packeteer (PKTR) still has the best traffic optimization solutions for network administrators, and I think that they will get their operations straightened out in the next few months. If not, the company will be sold for a much higher price than it trades for today. Buy PKTR under $9 for my $20 target.
SiRF Technologies (SIRF) will have their GPS technology embedded in the two new Motorola phones coming in October. In 2007 there should be about eight follow-on phones that use the SiRF Global Positioning System (GPS) chips, including some using the GSM/EDGE standard to target China and others using the WCDMA/HSDPA standard to target Europe. Some of these phones will be very high-volume devices, and others will be expensive, high-feature models.
Wall Street is seeing SiRF’s domination of personal navigation devices, such as those made by Garmin and TomTom, under attack. What The Street is missing is that the market for GPS chips in cell phones is literally 100 times as large. SiRF has about 75% of the personal navigation device market, but the opportunity in cell phones is much, much larger. As long as the company can keep driving costs down to protect their margins as chip prices fall, Wall Street will be positively surprised by the results. The carriers want to sell smartphones with more features and extra revenue from additional services, so we can be sure that GPS will continue to spread rapidly into almost all handsets. SiRF is already in the new BlackBerry 8300, which is a big success.
On top of all this, the short interest in SiRF is up to 18% of the outstanding stock. That’s nuts. SIRF is a Top Buy under $22 with a $40 target.
Nanotech & Materials MegaShift
Integral Technologies (ITKG) is the leader in electrically-conductive plastics, with dozens of patents and many licensees and joint ventures. The key thing to remember about this technology is that these plastics offer the electrical conductivity of metal. They’ll be able to be used in vehicles, airplanes, cell phones and lap top computers. The stock round-tripped from my buy limit to my first target price and back. I think the next move up will be for keeps. Buy ITKG under $2.50 for my $4 target.
New World Economy MegaShift
Cnet Networks (CNET) is a great content producer during a time when content is king for Internet traffic. Its branded websites provide content on technology, business, video games, television, music, films, food, parenting, and much more. As more and more people move to the web to find information, companies like CNET are going to be the biggest benefactors. Accelerating PC sales not only helps Intel, but has a very positive halo effect for CNET as PC makers increase their advertising budgets. Buy CNET under $8 for a $17 target. This could turn into a multi-year hold, or it could be bought out at any time.
WiMAX MegaShift
Airspan (AIRN) is benefiting from the rapid spending growth in this Year of WiMAX. It provides the equipment needed for wireless high-speed network connections, and AIRN is especially strong in mobile WiMAX solutions. Buy AIRN up to $5 for my $10 target.
Alvarion (ALVR) also focuses on high-speed Internet connections, and AIRN is its biggest competitor. Alvarion is bigger than Airspan, and the stock has already done well for us. They also will be a big beneficiary of WiMAX spending, trials and orders this year. Buy ALVR on any market-related dips under $9 for my $18 target.
MobilePro (MOBL) builds and operates municipal Wi-Fi networks. But the company is currently sorting out their financing and operating challenges, and there is no point in selling the stock until we see how it will come out, unless you want the tax loss. Hold MOBL.
Proxim Wireless (PRXM) is the new name and symbol for Terabeam. They are a smaller WiMAX company than Airspan or Alvarion, but they make sense as part of a basket of WiMAX stocks, as they also provide high speed wireless equipment and services. They also have a point-to-point optical wireless technology that will be interesting. Buy PRXM up to $4 for my $7 first target.
TowerStream (TWER) uses WiMAX to create very cost-effective last mile broadband services for businesses that can be provisioned and changed faster than the phone company, at lower cost. They are “wirelessing” major cities with a very practical business model, and they are the clear leader in their field. TWER is a Top Buy up to $6 for my $16 target.
The End Is Nigh
As background to my rather philosophical introduction this week, I’ve been thinking about how fast life is changing. My older kids are likely to make it well into that 100- to 150-year-old range, which will soon be the norm. And when I mentioned that the average female baby born in the U.S. in 2007 will live to see 2107, I have a personal interest because we are expecting another little girl by the end of the year. So, I have to make it into triple digits, too. But the biggest event behind these ruminations was my mother’s death last Saturday. She went gently at the age of 89, held by my sister, as my brother and I scrambled to get to Des Moines. Like so many of her generation, she spent four years with infants and toddlers while my dad was away at war, and afterwards just kept working that hard her whole life. She earned her retirement.
Yet, she also went too young. Her mother lived to 95 and her slightly younger brother, a Rear Admiral and ex-Commandant of Kings Point, is driving, sailing and leading an active life. But 15 years ago Mom went on Coumadin, which is a killer, and I could not talk her out of it. Aside from giving people Lipitor without telling them that they need to take big doses of CoQ-10 to avoid muscle weakness and death, I think the warfarin rat poison with the sanitized name Coumadin has to be one of the worst things modern medicine does to people. And that’s why I’m also very interested in the better, life-saving medical technologies that are already being developed, or will be, in the upcoming years.
So, In Memoriam, Jane Austin (King) Murphy, March 22, 1918 to September 8, 2007. And don’t let any of your loved ones take Coumadin.
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