On Tuesday, Apple Computer sent out invitations to an event next Tuesday, September 12, in San Francisco. The headline on the invitation said: “It’s Showtime!” I think this will be the long-awaited introduction of the second-generation video iPod. I expect two models — one with a bigger LCD screen and a second, high-end version with a retinal display. Steve Jobs and Apple need a “wow” factor to revitalize interest in the iPod line in advance of Microsoft’s introduction of their Zume MP-3 player. The retinal display — projecting wide-screen, high-definition feature films right into your eyes — would be a double “wow.”

Here’s how you can benefit as the Video iPod MegaShift comes back to center stage. First, there’s an excellent chance PortalPlayer (PLAY) will get the contract for the integrated audio/video chip. Samsung took the audio chip contract for the iPod nano away from PLAY on price, but the new video iPod will be more about technology than price. PLAY is currently trading just above my $11 buy limit. So I’m raising the buy limit to $12 to encourage you to buy PLAY or average down under $12 for my $20 target.

Second, in the December 15, 2005 Radar Report, I recommended Burst.com (BRST) as a buy under 85 cents a share, but the stock scooted away from us. Then in the January 12, 2006 issue, I raised the buy limit to $1, but the stock kept climbing, ultimately hitting $2.10.

Burst.com owns the patents on the video transmission methods that Apple will have to use to distribute a high volume of feature film digital files. BRST sued Apple, which countersued, and that’s what shot the stock skyward earlier this year. The lawsuit also delayed the introduction of this next-generation video iPod, which was first scheduled for the January Macworld Conference in San Francisco. But now BRST is back trading around $1, and I don’t think Apple would be making this introduction unless they are about to announce a settlement or even a buyout of Burst.com. Microsoft licensed the same technology for $60 million, and I think Apple would have to pay more than that. They might as well acquire the company and own the patent. So, today I’m recommending BRST again as a buy under $1.10 for a $2 target.

If you missed the original BRST write-up, here’s a brief excerpt from the December 15, 2005 Radar Report to give you a better idea of Burst.com’s business. And you can read the complete original recommendation online here:

“Burst.com, formerly named Instant Video Technologies, is a tiny Santa Rosa, California, company, with nearly 40 patents on delivering audio and video content over networks, including the Internet and corporate intranets. Their Burstware suite of software products lets customers transmit files faster than real time, by using available bandwidth to push more audio and video data to the end user than the software players like Windows Media Player or RealPlayer are demanding. The extra data are stored on the user’s machine and then played in the appropriate place. This insulates the user from network “noise” and interference, and virtually eliminates the buffering problem. The user gets high-quality full-motion video and CD-quality audio…”

Our third way to invest in this MegaShift is Microvision (MVIS), previously recommended in the July 21, 2005 Radar Report. Microvision would provide the retinal display, if Apple introduces that version of the video iPod now. Here’s brief look at my original recommendation on why MVIS could have shot at providing it retinal display for this version of the video iPod (for the complete original write-up, click here):

Steve Jobs doesn’t want the new video iPod to be background music, like the original iPod. He wants it to be an immersive experience, which is where Microvision comes in. How much more of an immersive experience can you get if MVIS’s retinal display is projecting the feature film directly to you eye? Plus, don’t forget that Steve Jobs loves beautiful displays. The original Macintosh display made the DOS green screen look like the 1950s. The Apple Cinema Displays are awesome. A retinal display would definitely be the next “wow” factor.

One wrinkle since my first recommendation is that the company issued warrants that trade under the symbol MVISW. They have an exercise price of $2.65 and expire in June 2011. At the current low price, I would rather own the stock, which is priced like an option that will never expire. The warrants have even more upside, though, and a small position might be appropriate for your very, very speculative money. I won’t make them a formal recommendation, as they will trade up and down with the stock. Buy MVIS under $1.50 for a $3 target.

Biotech MegaShift

eResearch (ERES) should show good order growth again in the September quarter and finally get more of that into the revenue column. As of late, ERES hasn’t been making headlines, which stirred up this question from a subscriber:

” I guess I’m a little confused about ERES and maybe you can help clear it up. I haven’t seen anything in several weeks regarding ERES. Yet, you still have it listed as a top 10 buy on your list with comments that talk about growing orders for the June Quarter. Just when is the June Quarter? Is it April May June, or is it June July and August?”

ERES did show growing orders for the June quarter (April, May and June), and I expect that to happen again in September. But the key to the stock is whether revenues will start to follow orders up — orders started growing nine months ago, and six to nine months is the usual lag for getting these programs underway and billable. Buy ERES up to $16 for a $30 target.

Content on Demand MegaShift

Comcast (CMCSA) said their video-on-demand service just passed three billion downloads since it was introduced in 2004, and now has 7,500 shows archived for its customers to watch when they want to. Their On Demand service set a new monthly record in July with 180 million downloads. I continue to think that they are doing an excellent job of leveraging the new technologies into their existing customer base, and CMCSA is a good hold for my $62 target.

Harmonic (HLIT) said that Telekom Austria, the telephone company, is launching Internet Protocol TV to their customers using Harmonic encoders and other equipment. Enabling phone companies around the world to compete with cable companies is a major focus for HLIT. This morning they announced a new MPEG-4 encoder that can seamlessly splice together standard definition and high definition video streams — it is the most advanced product of its type. HLIT continues to be a strong buy on any dips under $6 for my $12 target.

Telkonet (TKO) announced a private placement of 2.4 million shares for $6 million, or $2.50 a share. The investor also took five-year warrants for 1.56 million shares at $41.7 per share. This is expensive but necessary money — it is not the strategic investment that I am still expecting to happen. But that process is taking too long, and the company was running low on funds. This gives them the necessary breathing space to get that deal done, and start getting some cash flow from the recently-announced military deal with Electronic Data Systems. Buy TKO up to $5, and I still think my $15 target could happen if the strategic investor announcement has the impact I think it could have in the strong bull market that should kick off in just a few weeks.

New Economy MegaShift

Click Commerce (CKCM) is being taken over by Illinois Tool Works. I sent a Flash Alert about the transaction on Tuesday. If you haven’t sold CKCM already, you should go ahead and sell CKCM for a 14% gain in two months.

New Energy Technology MegaShift

Connacher Oil & Gas (T.CLL) closed their private offering, increasing the size slightly to 5.71 million shares at $5.25, which should net them around $29 million. Directors and officers bought almost 300,000 of the flow-through shares (tax benefits from drilling flow through to the shareholder). That’s a vote of confidence. Buy T.CLL up to $4.50 for my $7 target.

Fuel Cell Energy (FCEL) reported in-line earnings this morning, with revenues of $8.7 million and a 37-cent per share loss. The consensus was for $8.4 million and a 37-cent loss. They received $2.5 million in new funding from the Office of Naval Research, and orders for 750 kilowatts of generating capacity in California. They should shortly announce the signing of two major contracts that they’ve discussed before — one with the Department of Energy and one with the U.S. Navy, totaling $21.5 million. FCEL also said that they are on track to build their multi-megawatt generating plant for $3,200 to $3,500 per kilowatt.

FCEL burned $17 million in cash during the quarter and has $133 million still on the balance sheet. They are on plan, and FCEL is a buy up to $11 for my $22 target.

Holly Corp. (HOC) came down with the price of oil, and is a very timely buy under my $46 limit for a $60 target.

Infinity Energy Resources (IFNY) gave a positive update to their guidance this week. They said that third quarter 2006 oil and gas production will average approximately 5.3 million cubic feet of natural gas equivalent per day, about 15% higher than the record 4.6 million cubic feet per day produced in the June quarter. They also said that they still plan to start drilling again in October, which will lead to a “meaningful” production increase to new record levels. There will be a continuous drilling program in 2007, and they may deploy a second rig.

Their oilfield services operation will do a record $10.5 million in the September quarter, up 13% from $9.3 million in the June period. It is still for sale, and management is still exploring alternatives for debt financing to carry out their exploration and development program. IFNY is a Top Buy under $6.50 for an initial $9 target, and much higher levels over the next three years.

Rentech (RTK) will be presenting at a Credit Suisse conference on September 21. The Department of Defense has decided for national security reasons to switch to diesel and jet fuel produced from domestic coal — exactly the process RTK provides. This is going to be huge, and there is no reason to wait to buy RTK under $5 for my $11target.

WiMAX MegaShift

There is a chicken-and-egg problem with many technologies, especially those involving new hardware and a new service. The hardware companies don’t want to design and build products until they are sure the service or network will be there. The network companies don’t want to invest billions to build something when there are no customers to use it. Intel made a leap of faith by committing to put WiMAX connectivity in their laptop processors. Now Sprint Nextel has solved the chicken-and-egg problem by committing to the new, national WiMAX network that I’ve been talking about. It will be available in the fourth quarter of 2007, running at speeds comparable to DSL and cable modems.

It will provide wireless connectivity not only to laptops, but also to digital cameras and camcorders, music players, security systems for homes and offices, and even home appliances. The manufacturers of all those devices now have to scramble to get products ready for the 2007 holiday season, or risk losing market share to competitors. Of course, the sudden rush to build hardware will tip other network suppliers into providing WiMAX, and they will have to scramble to get ready to compete with Sprint. Sprint plans to spend $1 billion in 2007 and $2 billion in 2008, and they already have cellular antenna systems in 85% of the Top 100 U.S. cities. All in all, this is terrific news for WiMAX.

At the same time, about 300 cities and towns are looking at deploying WiFi networks. Google is going to provision Mountain View by itself and San Francisco in a partnership with Earthlink. But Google says that they don’t want to bid on any other contracts. They want to get their hands on a couple of systems to figure out the best way to deliver search and ads over the other 298 networks. All of these WiFi networks will be upgraded to WiMAX within 10 years.

Alvarion (ALVR) will be presenting at the ThinkEquity conference in San Francisco next week, on September 13th. They and Siemens, their partner, just won a contract with Call Plus in New Zealand to build a WiMAX network. Call Plus is the third largest telephone company in New Zealand, and this will be one of the first WiMAX deployments in that country. ALVR is a buy up to $9 for my $18 target.

MobilePro (MOBL) will present at the Noble Financial Microcap Conference in Charlotte, North Carolina on September 26. MOBL is a buy up to 25 cents for a 60-cent target.

Short Sales

Google (GOOG) finally managed to stop us out yesterday, by closing just over my $384 stop-loss at $384.36. Go right back into it, as this is the time it should start a significant drop, as advertising rates start to fall with the slower economy. Short GOOG over $375 and use a $388 stop-loss. My target remains $200, sometime in 2007.

Market Outlook

The last trading day of a month and the first four days of the following month are normally better-than-average days in the market, as new money flows in from automated investment programs, pension funding and so on. Last week’s persistent, albeit low-volume upturn included solid up moves on Friday and Tuesday — the first and second trading days of September. But yesterday and today the reality hit the fan, and the whole prior week’s gains vanished.

It is certainly possible that the former resistance on the S&P 500 at 1296 could turn into solid support for a move up to the May 8 high of 1327, or even beyond. But that was breached on today’s close, and the market will have to rally tomorrow to keep those upside targets in play. Maybe September and the first couple of weeks of October will turn out to be benign — but that’s not the high-probability outcome. I still think a rapid move back down to 1170, or even 1140, is in the cards.

Subscriber Michael wrote: “Well, you’ve managed to completely confuse me. You are anticipating a possible sharp market downturn, and yet you are expecting the market to go up (as it almost always does) after October. We are not becoming market timers, are we?”

Fair question. I have always been willing to step aside when I see really bad news ahead. We went to 85% cash before the 1987 crash and again in February 2000, before the Internet bubble burst. I’m not always right, for sure, but I just can’t stand to be fully invested when the risks are very high and the rewards are relatively low.

Since I made the mistake of getting reinvested at the end of August 2000, in the belief that the worst was over, I have been deploying more tools to give me an idea of where the risks and rewards lie. Over 30 years ago, I started pointing out to people that most of the statistical work in the stock market is based on a false assumption that stock prices changes follow a normal distribution. Without going into the gory details, a lot of work — like calculating betas and alphas — is based on this false assumption. The infamous hedge fund Long Term Capital Management based their whole investment strategy on it, and when they failed in 1998, they darn near took down the whole international banking system.

I have found, and am using, some new tools that tell me how much energy is available to move stock prices in one direction or another, and about how far prices are likely to go. The tools are based on very solid academic research by people who understand that stock price changes are not normally distributed. It will probably be a couple of years before I totally trust these tools and am willing to talk about them, but right they are pointing to a sharp decline in the broad markets. My outlook for the subsequent rally is not based on these tools, but rather on the usual pattern in the third and fourth years of a presidential term. As I’ve said before, from the October low in the second year of the presidential cycle, the typical 12-month rally is 50% — and that is well worth being invested for. So, my focus right now is getting potential recommendations lined up — I’ve mentioned some in past Radar Reports — and figuring out when and where to pull the trigger so we can cash in big time over the next 24 months. For the equity portion of your portfolio, I’m willing to hold what we have through the coming market storm. You just need to be sure you have a comfortable cash position.

Another subscriber, Zack, wrote: “After reading your suggestions on how to approach the investment in the MegaShift stocks, I need to work towards a higher cash position. Based on the 25 to 30 stocks you have in the MegaShift portfolio, if I can realistically only hold say six to eight stocks, which ones should I focus on? What is your ranking on stocks with the greatest potential for increasing over the next six months?

The Top Buys are a good place to start. My assumptions for the next six months include higher oil prices (in spite of a benign hurricane season so far), a cold winter, much worse bird flu news, persistent inflation, more Fed interest rate increases, worries about the economy slowing and capital spending budgets getting cut, and a slowdown in growth in China.

So if I had to pick six stocks outside of the energy sector for the next six months, I would go with BioCryst (BCRX), Dendreon (DNDN), eResearch, Harmonic, Telkonet and Alvarion. In the energy sector, I think Connacher, Gasco (GSX), Holly, Infinity Energy Resources and Rentech are all cheap. Decide what percentages of your portfolio you want in cash, technology, and energy, and then use these stocks to get invested.

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