The Fed didn’t say anything new on Wednesday, when they kept the short-term interest rate at 5.25%. And the sigh-of-relief rally pushed the S&P 500 over my 1510 “energy level.” But that the market was quite overbought and due for a correction at least back to test the 1495 breakout level, which happened all at once today — and it looks like the test failed. While it is possible that the market will bounce back and hold 1495 tomorrow, which would indicate a very strong underlying trend, I still think the S&P is headed back to a test of 1440. It is important to remember that even if that happens, it will not upset the longer-term pattern that is now lined up to go well over 1600 on the next upleg, and possibly to 1800 by the end of the year.

I know moves like this are hard to contemplate, but when markets break into new high ground — as the Dow Jones Industrial Average has already done, and the S&P 500 will do when it closes over 1528, or touches 1553 on an intraday basis — they can go parabolic. That could even be starting right now from the 1491 level, but it would be healthier to see the correction down to 1440 first and then work our way back up. And it’s also important to remember that the trouble with all parabolic markets is that they are followed by collapses. But for now, there’s little to do but ride through the tests and enjoy the run when it resumes.

If we do get a significant pullback, I will have a couple of new stocks to recommend for you. Otherwise, it’s just a question of watching our MegaShifts play out and taking advantage of situations with good results and better outlooks that haven’t moved much yet. That pretty much describes our first earnings reporter this week — BioCryst (BCRX). So let’s start there.

Avian Flu MegaShift

Recent scientific publications showed that the H5N1 avian flu virus is very, very close to a mutation that would make it easily transmittable from human to human. Researchers studying the mutations that led to the Spanish Flu virus were able to identify the “mutational distance” to be covered to get to easy human-to-human transmission, and it is much shorter than previously estimated.

I’m writing this in an office that I am currently sharing with four wild ducklings — the mom duck and the other four ducklings disappeared a couple of days ago, most likely into a fox or coyote. But my four-year-old duck rescuer has little interest in hearing about bird flu, and like the Centers for Disease Control, my main line of defense is to hope it doesn’t happen here. At least I’m no less prepared than they are.

Despite the Center for Disease Control’s lack of preparation for an avian flu breakout, there is a company out there that’s not sitting on its hands when it comes to fighting this deadly disease. BioCryst (BCRX) reported $9.2 million in revenues, up dramatically from last years $771,000, as they begin to recognize revenues from the $102.6 million federal contract that they won in January to develop peramivir for potential use in national stockpiles to treat infected citizens. They lost $8.8 million or 30 cents a share, compared to consensus estimates for $7.1 million in sales and a 27-cent loss. They have $42.8 million in cash, plus the rest of the $102.6 million contract. On the conference call, management said that the contract will carry peramivir all the way through clinical trials to a New Drug Application, with no dilution to current shareholders. Neat!

Last week, BioCryst reported positive results in a mouse study, in which 40% to 60% of mice infected with H5N1 survived after one or two injections of peramivir. All the mice that received two shots the day they were infected, plus one a day for the next seven days, survived.

Due to the mild flu season in North America, the company will continue the Phase II trials for intramuscular peramivir in South America, Southeast Asia and Australia/New Zealand. Assuming all goes on schedule, they’ll be able to start Phase III trials for the intramuscular version in the fourth quarter of this year. BCRX pointed out that a single shot of peramivir quickly enters the patient’s systemic circulation, quickly achieves high concentrations in the plasma, and blankets the virus. That kicks the flu virus hard, and should make peramivir an attractive therapeutic option.

BCRX will also move the Phase II intravenous trials for hospitalized flu patients to South America and Southeast Asia. Right now, there is no specific therapy for hospitalized flu patients, and in just the U.S. we average over 200,000 patients hospitalized every year due to flu and its complications, with approximately 36,000 deaths per year. The company has designed these clinical trials in careful consultation with the FDA, as this is a serious unmet need.

The Fodosine program in cutaneous T-cell lymphoma is also progressing, as the FDA has now given comments on the company’s draft version of an application for a Special Protocol Assessment (SPA). BioCryst is about to respond and thinks the pivotal Phase IIb trial can begin in the September quarter. As you may remember, under an SPA if you hit statistical significance, you get approval without any Dendreon-like surprises.

Everything is lining up for a great year for BCRX, which remains a Top Buy up to $19 for my $30 target.

Crucell (CRXL) reported their first quarter of completely consolidated results from the acquisitions that they made last year, primarily Berna Biotech. They did $42.5 million, up 169% from the parent-only number last year. They lost 39 cents a share and used $22.5 million in cash, leaving them with $190.2 million. Based on their results, they raised their guidance for this year’s sales to $297 million to $303 million, and said again that they will be cash flow breakeven on operations this year. Their vaccine business is seasonal, with strength expected in the second half of the year, but it did well in the first quarter based on new products like the 5-in-1 shot that they are selling to developing countries.

(I personally am opposed to giving these multiple vaccines to children with barely developed immune systems and am particularly galled at the fact that one “children’s vaccine” is against hepatitis B, a sexually-transmitted disease. Hepatitis B vaccine has disastrous after-effects in too many children, including mental retardation and death, yet it is pushed on new parents in both developed and developing countries.)

The PER C6 technology — the reason we bought CRXL because it replaces chicken eggs with human cell line production of vaccines — was licensed during the quarter to AbGenomics Corporation, Pfizer Animal Health, Biotecnol SA and the Taiwanese Development Center for Biotechnology. Crucell also got a grant of $2.3 million from the European Commission to advance development of a pandemic influenza vaccine.

On the conference call, management reminded analysts that they now have numerous programs in influenza, both seasonal and avian. They are working in malaria, tuberculosis (one of their biggest programs) and are almost ready to come out with news on yellow fever. They also have two monoclonal antibodies against rabies in the clinic in the United States and India. And there are many more earlier-stage programs.

In spite of my personal reservations about the 5-in-1 vaccine, the company is finding a ready market for it and otherwise has handled the integration of all the acquisitions very well. CRXL remains a buy under $28, where it is now, for my $50 target.

Biotech MegaShift

Affymetrix (AFFX) has one main competitor, and David asked: “You often mention Illumina (ILMN) in conjunction with Affymetrix. Is there enough opportunity for both of them to thrive, and why not recommend it?”

David, Affymetrix has a market capitalization of $1.76 billion, which is a bit less than Illumina at $1.81 billion. Affymetrix will do about $375 million in sales this year, and Illumina about $317 million. I have not factored into these numbers the likely outcome of the lawsuit between the two companies, which is that ILMN will have to pay a 15% royalty to AFFX on a big chunk of its sales. So, AFFX has a price/sales ratio of 4.7X, less than ILMN’s 5.7X. The two stocks are closer on forward P/E ratios, as I expect AFFX to earn 40 cents a share this year, for a P/E of 64.7X, while ILMN will earn about 55 cents for a P/E of 61.3X. Affymetrix is in turnaround mode and growing earnings faster than ILMN right now and also seems to have the momentum in new products. Once we get a little more clarity on the settlement of the lawsuit, I may well recommend ILMN. But for now, I think AFFX is a better investment, and I recommend that you continue to buy AFFX under $27 for my $40 target.

I sent you a Flash Alert on Dendreon (DNDN) yesterday after news of the tragic and unnecessary FDA “approvable” letter hit the stock. There is not much to add today. The key to near-term performance will be whether the company gets clarification from the FDA that an interim analysis of the data of the ongoing Phase III trial, due in mid-2008, will be enough for approval, or whether the company has to wait until 2010 for the study to complete. It will be a month or two before we hear about that.

Once the company knows the ground rules, they can decide if they want to or need to find partners for the drug right away, or if they want to wait. At this point, one or two big partnerships would move the stock up nicely, and also be good for the company as it would let them avoid layoffs and restart their head-and-neck and breast cancer programs. I think that is the direction they will go, regardless of what the FDA says.

To me, Dendreon seems to have good managers. They got all the way to an FDA ruling for a billion-dollar drug on their own nickel, even though it was very tough. They gambled on approval, which would have been a huge win for the shareholders, and lost. Now they are likely to do the next most logical thing, which is to accept the loss and partner the drug. They may have to give away half the revenues, but that still makes it $500 million to them and gives them a chance to get cracking on their next two-billion-dollar opportunities. Buy DNDN under $7; I have not changed the ultimate $40 target.

eResearch (ERES) reported just after the close last Thursday, and I got the numbers into that issue: $21.1 million in sales and five cents a share pro forma. They met the consensus, which was at the top of their $19-million to $21-million guidance range, and guided for $23 million to $25 million and six cents to seven cents pro forma in the current quarter, compared to Wall Street expectations for $24.1 million and six cents. Orders hit $29.7 million during the quarter, far above current revenues, and the backlog now stands at $101.5 million, or about four quarters of business. For the full year, they reiterated guidance for revenues between $95 million and $103 million, and pro forma earnings of 29 cents to 34 cents, a tad above Wall Street’s expectations for $101 million in sales and 28 cents.

With revenues finally accelerating to match the growth in backlog, I was especially interested in the conference call. The new management is streamlining internal operations and very focused on increasing orders by going into new overseas territories, moving their consulting services into a formal consulting group that bids for projects even outside of regular ERES contracts and offering a backend processing service to smaller companies that may want to come into the business. ERES remains the largest provider of outsourced cardiac safety services, and they said that the new international guidelines are finally having a substantial effect on the number of clinical trials scheduling a cardiac safety component. ERES remains a Top Buy all the way up to $16 for my $30 target.

Content on Demand MegaShift

Harmonic (HLIT) did not get mentioned directly on Cisco’s conference call, but Cisco CEO, John Chambers again said that video is driving network demand. He added that the growth of traffic generated by video will lead consumers to drive more Internet traffic this year than businesses for the first time ever. It is insights like this that make me thing Harmonic is going to have an excellent year, in spite of the disappointing gross profit margin in the March quarter. HLIT is a Top Buy up to $10 for my $16 target.

Intel (INTC) held their Spring Analyst Meeting and laid out their plans for the year. Many of you have asked me if the disappointing response to Windows Vista changes my outlook for PC sales growth this year, and the answer is “no” for several reasons:

• Even though Dell and others have reoffered Windows XP machines, Microsoft’s first quarter shows there are early buyers for Vista;
• The issues that are holding corporations back from beginning upgrades are easily solved things like missing printer drivers, or incompatibility with some online websites and some non-Microsoft application software;
• I’m only looking for 10% PC growth this year;
• New PCs are such a good deal on price/performance, whether running XP or Vista, that the vast base of Windows 2000 machines is being upgraded now.

Intel confirmed that their emphasis is shifting from cost-cutting to get lean for the market share wars with Advanced Micro Devices (AMD) towards using processing technology and a high R&D output of new processors to regain their share of the market. They will be introducing many dual-core and quad-core processors for desktops, laptops and servers, mostly designed for their new 45-nanometer manufacturing process (even if they start on the 65-nanometer lines). This is their slide on the road map for Core microprocessors, which will completely replace the Pentium and Celeron lines by the end of this year:

From the Intel Spring Analyst Meeting presentation archived on their Investor Relations website, which can be accessed here.

As you can see in the picture above, Intel’s plan is to take the new Core microarchitecture from 2006, shrink it to 45 nanometers in 2007, then introduce a new microarchitecure on that same processing technology in 2008, shrink that in 2009, then introduce a newer microarchitecture in 2010, and so on. They won’t change both the architecture and the processing size in the same year, to minimize the kinds of production problems that they had in 2004 and 2005.

They also are going to try to start an explosion in hand-held electronic devices that can do Web browsing. Intel calls it the Ultra-Mobile PC (UMPC), but it looks to me like a high-end cell phone with a powerful Web browser built in. Their first UMPC chip is code-named McCaslin, and it is in the new Apple TV. The chip that is destined for hand-held devices is code-named Menlow, and will be out in about a year. McCaslin runs Windows, but Menlow runs Windows and Linux. Linux uses less code storage than Windows to do more. Menlow will be considerably smaller and faster than McCaslin. It will use the new high-K metal material that I talked about in the original Intel LEAP recommendation in the February 8 Radar Report. I still think this will turn out to be one of the most important advances in semiconductor processing ever.

Although Intel is shifting emphasis away from cost-cutting, that effort continues and there will be more layoffs and consolidations during the year. The company presented a summary slide titled: “Good Progress, More to Do” that showed R&D down $250 million or 5% from 2006 to 2007, selling and administrative down $1 billion or 16%, and capital spending down $250 million or 5%, even though they will open two 45 nanometer factories this year and two more next year. To quote a slide: “Result: Bottom line growth exceeds top line growth for 2007/2008.”

Intel also sees a rapidly-developing overseas market of people who are about to buy their first personal computer — 130 million of them, according to their market research. The same research tells them that the majority of these will buy notebooks, not desktops, although they will be purchased at lower price points than we are used to seeing. They’ve even designed a $300 “Classmate PC” laptop with a Celeron processor, a two-gigabyte flash drive and a 7″ screen. The forthcoming Silverthorne chip for UMPC and handheld Web browsing was described as having “2003/2004 mainstream mobile performance.” That sounds like a Celeron replacement product for cheap notebooks headed for emerging markets.

We’ll also see a lot of chips for notebooks in the developed countries. Intel said that the current installed base in the U.S. is “less than half a notebook per household.” They intend to change that with the Santa Rosa microprocessor that just became the fourth generation of Centrino chips when it was introduced last week. It has the new processor architecture, built-in Wi-Fi in the latest version (802.11n), integrated graphics and the new turbo memory feature for much faster data handling. The next laptop platform in 2008 will have a 45 nanometer, dual-core processor with both 802.11n Wi-Fi and WiMAX. It looks like they have delayed their WiMAX laptop program from the end of 2007 to 2008, to match the delay in deploying networks, but they continue to emphasize WiMAX as the inevitable wireless standard. They pointed out that when they launched Centrino in 2003, the attach rate of Wi-Fi was 15%, and it is now more than 95%. They also pointed out they do not plan to support 3G cellular data standards in Centrino.
I am convinced that Intel now has a processing technology lead of at least a year over AMD, and that our LEAPs are going to be a terrific investment. The Intel 2009 $22.50 LEAP call (VNLAX) is a Top Buy under $3.50 — and it is just barely there — for my $12.50 target at the January 2009 expiration, or sooner.

Silicon Image (SIMG) reported last Thursday just before the Radar Report went out, and I gave you the numbers: $69.1 million in sales, up 17% form the prior year, and seven cents a share pro forma. The consensus was looking for $69 million and five cents. The company guided for $75 million to $79 million in sales in the current quarter, compared to Wall Street expectations for $79 million and eight cents.

On the conference call, they said their orders were strong, with a book-to-bill (orders-to-shipments) ratio well above 1.0, giving them increased visibility into the second and third quarters. New business from high definition camcorders and even high-end digital still cameras will boost revenues. However, due to the slow sales of Sony’s PS-3 game console, SIMG revised the full-year outlook down by $15 million, from a range of $340 million to $360 million down to $325 million to $345 million.

That caused the stock to drop 50 cents, but the company has a new $100-million stock buyback program that kicked in this week. My read on SIMG is that they are innovating at the high end of the HDMI standard, HDMI 1.3, and really have a lock on this year’s holiday season shipments of digital TVs and other expensive consumer electronics products. At the same time, they are working to bring quality video to cell phones, which would be a gigantic market for them in terms of units. They probably will exceed the high end of their revenue forecast for this year, hitting $350 million (the midpoint of their previous guidance) and do 40 cents to 42 cents a share. That’s after an extra $3 million tax burden this year that won’t repeat. SIMG remains a Top Buy up to $13 for my $20 target.

Telkonet (TKO) had a great question from Todd: “Mike, you have consistently talked about a strategic partner for TKO over the past year. With contract wins, management letters to shareholders pumping the company and revenue forecasts showing growth in income, something has to be scaring off a partner from pulling the trigger. If this was real, wouldn’t they have come to the table? Please identify the quantifiable risk here. If you liked it at $5, why are you not recommending the kitchen sink at $2.30?”

I’ve talked to management about this, and I think the best way to put it is that they want a big strategic partner to put in a lot of money at the highest possible price. I don’t think they want a lot of money to come in at, say, $3, when they think they can get the stock back to $5 just by executing on their current business, and then do a deal at maybe $7 a share. So the company has less incentive to do a deal with the stock depressed, and any potential partner has a tough time paying a huge premium like 100%. And as for the “kitchen sink” — TKO has been a Top Buy for a long time.

Ronald asked: “Is Motorola now major competition for TKO?”

No, although they could be some day. TKO is pioneering the in-facility broadband-over-power line industry, and I don’t think you’ll see serious competition from a major company until the industry is much larger. As far as I know, Motorola was not a bidder on the big EDS/TKO contract with the Army and Air Force, and that surely is the biggest BPL contract yet. TKO remains a Top Buy up to $5 for my $15 target.

New Energy Technology MegaShift

Energy Conversion Devices (ENER) had preannounced a disappointing March third quarter and a restructuring plan, with the former knocking the stock down but the latter failing to lift the stock back up, which is usually what happens when companies slash costs. After the close on Tuesday, they reported slightly better revenues than the preannouncement and guided a lot better for the current quarter. The stock lifted in aftermarket trading and held the gain yesterday, but today ENER slid under my buy limit, down $1.91 for the day.

For the March quarter, they did $27.4 million in sales, essentially flat with the $27 million that they reported last year, and they lost 17 cents a share, flat with last year but worse than the consensus expectations for an eight-cent loss. For the June fourth quarter, they guided for $33 million to $37 million in sales, well above the recently-reduced Street expectations for $32.2 million.

On the conference call, management said that they will double the sales staff at United Ovonic Solar by the end of 2008 to take advantage of the wave of interest and government funding in solar power. Their recently-announced restructuring plan is on track. I heard nothing to cause today’s sell-off, and ENER is an immediate buy on this dip under $35 for my $55 target.

Holly Corp. (HOC) reported record March first-quarter results, thanks to expanding refining margins industry-wide. Revenues rose 17% to a record $925.9 million and they hit $1.20 a share. And they said that the second quarter started strong. While I expect product prices to fall somewhat once the refiners catch up their gasoline inventories for the summer driving season, the first named storm in the Atlantic just appeared — weeks before hurricane season officially starts — so if we have a season like 2004 and 2005, gas prices will once again be on the rise. If everything went right for Holly, they could earn $5 a share this year and sell for 15X earnings. But we live in a world where everything rarely goes right, and I’ve already raised my target for HOC once to $65. We’re essentially there, so let’s give them a big round of applause and sell HOC over $65, which will be a 64% gain in just under a year.

Infinity Energy Resources (IFNY) drew two subscriber questions, the first from Michael: “Is it likely that the various offers the company has received for its assets will be opened and disclosed before the May 15 annual meeting so that shareholder action can be taken on any offers if necessary, or do you think the offers will be first disclosed at that time? Or is the meeting likely unrelated to any potential monetization of assets?”

There couldn’t be any shareholder action because it didn’t get in the proxy material. But I’m sure Infinity would love to at least make some of the smaller announcements, such as selling the “non-core” assets that they’ve talked about.

Robert asked: “Any chance that the anonymous seller of oil and gas properties in Texas to Linn Energy (LINE) is IFNY?”

Probably not, Robert. That was a $90 million deal, which would be very material for IFNY and there would be a requirement to disclose it. Also, I don’t think the Texas counties Linn mentioned are the ones where IFNY is active. But major announcements are coming soon, and IFNY is a very timely Top Buy up to $5 for my $10 target.

Ocean Power Technologies (OPTT) and their reverse split drew a question from Jack: “What do you mean: the reverse split was done for cultural reasons?”

Stocks in London typically start trading around $1 a share, while in the U.S. they start around $10 a share. So this 1-for-10 split was to get the stock price up to a level that would look “serious” to U.S. institutions. If they had listed an American Depository Receipt instead, they could have made one ADR equal 10 London shares, and the stock would be at $25 today instead of $17.25. OPTT is a buy up to $20 for my $40 target.

Rentech (RTK) reported March second-quarter results this morning. They hit $16.9 million in sales compared to $25,000 last year, as the fertilizer plant contributed this year. They lost 12 cents a share compared to 11 cents last year, but they had a lot more shares outstanding this year. The dollar loss was $17.2 million compared to $12.5 million. Backing out stock option expenses, this year’s loss was $16.0 million or 11 cents pro forma.

The consensus expectation was for a 10-cent loss on $24.3 million in sales. They only had half a quarter of fertilizer sales, and will have a full quarter in the June period. Sales should be good due to the record acreage going into corn production this year for ethanol, so the demand for ammonia fertilizer will remain strong through the planting season.

The company is on track to convert the REMC facility in East Dubuque and build the first production Fischer-Tropsch facility (PDU) in Commerce City, Colorado. The Air Force put out a Request for Quote for 200,000 gallons of jet fuel produced by the Fischer-Tropsch process, and I expect RTK to win that.

Rentech is excited about the various coal-to-liquid bills that have been introduced in Congress, and they think something will pass to give tax credits and possibly financing for CTL plants. Rentech has a lot on its plate this year — advancing the various projects with coal companies, getting REMC and PDU underway, and probably signing either strategic agreements or technology licensing agreements with some of the many interested parties. RTK remains a buy up to $5 for my $11 target.

WiMAX MegaShift

Airspan (AIRN) reported after the close today, and I’ll be on the conference call shortly. Wall Street was looking for $27.4 million in sales and a loss of nine cents a share, and AIRN was a bit short with $26.7 million and a loss of 10 cents. Before the conference call, management reaffirmed guidance for the June quarter of $27 million to $30 million in sales, but the consensus estimate was up to $31 million in sales and a loss of four cents a share. They also said that they still expect $75 million in WiMAX revenues this year, but are seeing softness in their traditional non-WiMAX products as customers decide what to do next. None of this is very surprising. I’ll send you a Flash Alert if I hear anything important on the conference call, which I don’t expect. AIRN remains a buy up to $5 for my $10 target.

Alvarion (ALVR) mentioned a few things on the conference call that will prove to be important. First, today the real money on WiMAX is still being spent in developing countries, where ALVR has years of experience, partners and customers in over 80 countries. Second, ALVR tends to work with smaller, newer WiMAX-specialist operators in larger, more developed countries, and these are often acquired by the established carriers when the big dogs decide to go into WiMAX. This happened recently in Spain, giving ALVR top-supplier status to the biggest telecom company in that country. Third, in the U.S. they are winning business from some majors against Motorola, including a big win at EarthLink to provide the backhaul equipment connecting Earthlink’s municipal Wi-Fi deployments around the country. They took this business away from the established supplier, Motorola. ALVR remains a Top Buy while it is under $9, with an $18 target.

MobilePro (MOBL) drew thee critical questions, the first from Mike: “I purchased MOBL when you first recommended the stock selling at $0.30 per share. I bought a ton of it in my one IRA. I continue to hold it. Did we miss the mark on this stock or is there some hope that the current management team will successful bring MOBL back from a true penny stock?”

Herb asked: “I notice that Jay Wright , Chief Executive Officer of MOBL just bought 300,000 shares. Do you have anything new to offer on MOBL?”

And Donald followed up with: “When they announced that they were investigating “strategic alternatives”, did that mark the beginning of the end?”

As you know, the problem with MOBL is not their operations, it is their financing — the “death spiral” convertible deal they did with Cornell Capital. Management recently said: “We will, therefore, actively pursue a process with the goal of maximizing the value of our assets, eliminating our debt and returning value to our equity holders.”

That’s great news — especially the part about “eliminating our debt.” They are going to sell pieces of the business to raise enough money to get rid of Cornell Capital, which is being investigated by the SEC and has its own problems. My hope is that they can settle the debt on better terms than are currently written.

The big question is what they hold on to. If it is the municipal Wi-Fi business, we will have a pure play unencumbered by Cornell Capital, and a really good chance of seeing the stock recover. If it is some other part of the business, I will have to re-evaluate whether it makes sense to continue holding it. I will not abandon you on this stock, even if they sell their Wi-Fi operations. As long as there is a chance of recovery, I will continue to follow it. For now, MOBL remains a hold.

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