As I noted in yesterday’s Radar Report, Omniture (OMTR) reported earnings after the close. While they guided for revenues of $26 million to $27 million in the March quarter, with earnings of zero to one cent a share, the Street consensus was two cents. Omniture also guided the yearly estimate to $128 million to $130 million in sales, with pro forma profits of seven cents to nine cents a share. Again, the Street’s consensus was higher at 17 cents.

The stock initially dropped $1.50 in yesterday’s after market trading on the news. And it dropped even further today, down $2.88 from yesterday’s close.

Omniture is an online service that runs business optimization software for corporate marketing departments. The opportunity for growth in this field is enormous, and I think the stock’s current dip is creating a great buying opportunity. So, I’m raising the buy limit to $15 so that you can start a new position now, or add to a current one. I’m also lifting the target $2 to $22.

The market is down sharply today, mostly on fears of a slowdown in the U.S. Those fears were heightened by ex-Fed Chairman Alan Greenspan musing about a possible recession in the U.S., and the good economic numbers released today did little to hold back the selling tide. On the same recession fears, Chinese stock markets had their worst drop in years last night.

I expect the preliminary December-quarter GDP growth of 3.5% to be revised down to 2.7%, which is not low enough to believe that the Fed is about to cut interest rates. But neither are they about to increase them, especially with housing in a bottoming pattern. So, I view today’s decline as the beginning of a test back down to 1326 on the S&P 500, which will build up enough bearishness to push the market to new record highs this summer.

Despite today’s action, there is no change to our strategy. In fact, this may be our opportunity to buy a couple of China Internet stocks back at lower prices over the next few weeks. I also have some new recommendations that I have been monitoring, waiting for the right prices to pull the buy trigger. You will see numerous shorter-term traders saying to buy around 1407, which is the long-awaited 3% decline from the top. Although I think that they will be right longer term, I expect the S&P to drop well below that, which may shake some of them back out of the market. So, don’t let the flip-flops affect you.

I think we are in the right areas with the right stocks for a strong two-year tech bull market in 2007 and 2008. Declines like today’s are upsetting — that’s what they are designed to do — but should not cause you to make emotional decisions regarding your holdings. Let the hedge funds sell short, buy puts and start parading their bearish commentary on CNBC, and we’ll get ready for a big rally from 1326.

If the market is not as strong as I think it will be for the next several months, the more stable stocks like foods, beverages and healthcare should do better than the more cyclical stocks like computers and electronics. That’s typical. But if the market keeps going up, as I expect, then the cyclical stocks should outperform. That’s also typical. But an interesting point is that in the past, biotech stocks often did OK in mild down markets, where they were treated as healthcare stocks, and in up markets, where they were treated as emerging growth stocks.

That may be changing, so I wanted to update you on the Biotech MegaShift and how our strategy is changing to take advantage of what’s coming.

Biotech MegaShift

The major concern right now is the FDA and the fact that the agency has not approved many new drugs recently. Some tie this to the lack of a confirmed FDA Commissioner for much of the time that President Bush has been in office. Others think it is an overreaction to the Vioxx mess, painting the FDA as even more of a stick-in-the-mud when it comes to approving new chemical and biological entities.

I disagree. Dr. Andrew von Eschenbach may not have been confirmed until December 2006, but he was clearly running the agency well before that. And while it is true that the FDA has responded in many ways to their Vioxx failure, including requiring cardiac safety testing of virtually all new drugs, at the same time they are getting more aggressive and more open to new drugs that can either cure the diseases of aging or at least cut the costs of treatment.

I think the main problem is the paucity of interesting drugs coming through Big Pharma’s pipeline. I’ve been pointing out for at least 10 years that Big Pharma drug research has become amazingly unproductive, with billions of dollars spent on me-too drugs, tiny incremental improvements and failed programs. The FDA may not have approved many drugs last year, but they didn’t turn down many, either. They just don’t have a lot to do if the companies don’t serve up drug applications.

Having said that, there are some forces at work to make the biotech situation worse. If you immediately suspected Congress must be in session, you are correct. Representative Henry Waxman, a California Democrat, and Senator Charles Schumer, a New York Democrat, introduced biologics bills in their respective houses of Congress and seem determined to attach the legislation to a bill renewing industry fees paid for FDA drug reviews. The bills give the FDA a legal path to approve generic biotech drugs after patents expire without requiring the generic makers to repeat the clinical trials already done by the patent holders. The FDA would have the authority to decide on a case-by-case basis how much testing to require for each generic biologic.

The biotech companies point out that biologic drugs are complex and hard to copy exactly, so without testing there is no way to tell if the inevitable slight variations make the generic less effective, or even hurt people. The biotech companies call them “follow-on” drugs to distinguish the situation from generic chemically-based drugs, which are generally easier to copy.

The Generic Pharmaceutical Association says copies of biotech drugs would cost 10% to 25% less than the branded version. I can’t imagine how they can say that with a straight face, when chemical generics cost 50% to 95% less than the patented version did before expiration.

Amgen, acting as point man for the industry, said that follow-on biologics will play a “limited role” because the science is moving so quickly that newer biologics still under patent protection have dramatic advantages over biotech drugs that have been around so long that they are losing patent protection. There is a good deal of truth in that, but it requires companies to keep their place in the product development cycle. In fact, any biological drug that is still selling in large amounts when its patent expires probably deserves to lose market share rapidly to make room for newer, better drugs.

I think this bill will pass, but it won’t have much effect on the industry for many years. However, it could have a strong effect on the stocks this year, as the debate on the bill rages. So it makes me more cautious on recommending new biotech ideas unless they have positive late-stage clinical news or outright FDA approval coming soon. Even then, they need to be doing everything else right in order to qualify for a place in our portfolios.

The other possibility is that fear of generic competition can knock a stock down all out of proportion to the likely outcome, as happened to Amgen (AMGN), which I recommended in the last issue. Amgen has already replaced all its old products with new products that have many, many years of patent protection. Like Genentech, they understand that they must continually obsolete their old products from now on, so the market for a generic biologic is essentially meaningless when the time comes.

I’ll be watching three things especially carefully for the next six months or so:

• The progress of these bills through the Senate and House
• Wall Street’s reaction or overreaction
• The FDA’s approval record, especially the May 15 announcement on Provenge by Dendreon (DNDN).

Regarding that last bullet, I had a question from Aneil: “Michael, how sure are you about Dendreon? The stock is starting to pick up steam. This usually happens with new biotech companies awaiting an FDA approval. Might be a good ride up until the time frame when the FDA announcement will be made. After then, it seems so risky that I’m not very sure if the risk/reward can be justified. Any thoughts?”

I follow a three-step process to make a judgment call on whether a drug will be approved or not. You will not be surprised to learn that I’ve been both right and wrong both ways. I’m generally more right than wrong, but that’s because most drugs that get this far get approved, which makes the outcome easier to predict. I have been able to predict some turndowns in advance, and make money selling those stocks short. I’ve also been not only wrong but stunned from time to time by an FDA turndown — that generally happens when there is no FDA Commissioner, and therefore no one to prod the bureaucrats to take a stand.

The first thing I look at is the clinical data. The ‘problem” with Dendreon’s results is that they missed their primary endpoint. But extending survival is the gold standard for a cancer drug approval, especially in the case of relapsed prostate cancer that has not responded to other therapies. That describes Provenge.

The second thing I look at is the filing process. Dendreon got FDA approval to do a “rolling” filing, with the agency reviewing data as it came in all during 2006. They also got Fast Track review. They used numerous consultants to help prepare the filing, most of whom are ex-FDA examiners. They have “role played” what the examiner might question or need, and then have been proactive in providing the answers.

The third thing I look at is the Advisory Committee process. Most of the time, the FDA will follow the recommendation of the advisory committee, and it seems likely the agency will ask an advisory committee to evaluate a drug that missed its primary endpoint of tumor shrinkage, but hit its more difficult secondary endpoint of extended survival. The advisory committee is composed of doctors and researchers who are not FDA employees.

I try to put myself in their position. Would they like to have this drug in their treatment options? Who can really be helped by this drug? Does it make economic sense compared to other treatment options? Are their meaningful risks? Are their parts of the method of action that might create unknown risks?

It comes down to a risk/reward recommendation based on individual patient situations. In the case of Provenge, it has seemed to me for two years that doctors desperately need something new for patents that otherwise have to be told they are terminal, with nothing left to do. There are a lot of men every year in this situation. (And when the drug is expanded to breast cancer, an equally large number of women.) There appear to be very low risks of side effects, and the mechanism of action is well understood.

Therefore, I think Provenge will get a recommendation for approval from the advisory committee, and the FDA will approve it.

Your second question is whether we should hold the stock after approval. That depends on when Dendreon announces their distribution partner deal. If they get approval first, we will want to own it for the lucrative deal announcement. There probably will be a sell-off after both approval and a deal are announced, but will we want to trade it? Maybe, or maybe with a portion of our holdings. But as soon as they have the cash, Dendreon will start label expansion studies for Provenge in breast cancer and head and neck cancer. These two clinical research programs were put on hold in 2005 to conserve cash, and can be taken off the shelf quickly. So Dendreon could attract a whole new set of buyers based on a profitable product and a technology that can spin off similar products against any solid tumor cancer. This is the main reason why I expect that we’ll hold the stock through approval and beyond. The stock has started to move, but DNDN remains a Top Buy all the way up to $7 for my $14 target after Provenge is approved.

eResearch (ERES) reported their December fourth quarter in line with the consensus, but below my expectations. I have been going over the numbers and conference call, and I am convinced that each quarter for the rest of this year will be sequentially stronger. At the same time, I do not understand why revenues have not started accelerating yet.

The numbers tell the story. Sales were only $19.9 million, down from $25.4 million last year, yet backlog is up sharply to a whopping $96.4 million. Net income was four cents a share on a GAAP basis, or five cents pro forma. The Street was looking for four cents pro forma on $19.4 million, so they slightly beat the Street and the stock traded up 11 cents today.

The company had guided for $18 million to $20.5 million in sales and two cents to four cents a share, so they seem to be setting the guidance bar low enough to make it easy to beat. That’s why I think they guided for $19 million to $21 million and four cents to six cents a share in the March quarter, when the consensus was $23.1 million and six cents.

For the year, they earned 24 cents a share pro forma on $86.4 million in sales. They guided for $95 million to $103 million and 25 cents to 30 cents, compared to the consensus for $97.4 million and 25 cents. The analysts’ range of revenue estimates for this year ran from $78.9 million to $104.4 million, and I expect to see the very low forecasts go away in the current round of revisions.

What drives me nuts about this company is that they are guiding for $95 million to $103 million in sales this year when they have a backlog of $96.4 million already on the books! They already have as many transactions in backlog booked for 2007 as they performed in all of 2006. And, they signed $121.1 million in new contracts during the year, including $27.5 million in the December quarter. There is no shortage of business, and they continue to book new orders at a rate far higher than their quarterly revenues. They have to grow to a $30 million per quarter revenue rate in order to complete the work they have on their books. There used to be a reliable six-month delay between contract signing and commencement of the study, which started revenue recognition. Now the delay apparently has doubled to 12 months. We know ERES has the capacity to do much higher revenue levels, so the delay has to be coming from the customers. But why? This has been the factor I missed in my original analysis, and I don’t think anyone really understands why it is happening.

Fortunately, the adjustment appears to be over. Prices for semi-automated studies rose 8% from the September to the December quarter, suggesting less pressure on booking business. It could be that the backlog will steadily build from now on, reflecting a new business model based on a 12 month delay between contract signing and clinical trial commencement. That would mean revenues will steadily grow to the $30 million per quarter level and beyond. But I still think there is a time crunch lurking out there that will cause ERES customers to try to accelerate cardiac safety trials, which would be very good news for ERES quarterly sales and earnings, jumping us to the $30 million per quarter rate in June or September, rather than December.

Even without that, though, I think the stock is past its bottom and headed up for many years to come. At today’s close it was selling for 3.5X this year’s sales and 24X earnings guidance, with sales expected to grow 19% and earnings 25%. ERES remains a Top Buy all the way up to $16, and I think my $30 target is just a matter of time.

Geron (GERN) got FDA approval to start Phase I trials of a telomerase-based cancer vaccine to treat acute myelogenous leukemia. This vaccine is based on the same technology as their successful Phase I/II trials in prostate cancer. Essentially, they expose the immune system to telomerase, which occurs in cancer cells and normally remains hidden. The immune system then send killer T-cells sensitized to telomerase out to kill the cancer cells. Rather than try to find and “turn off” the telomerase, this approach simply kills any cell with telomerase in it. I like it because it matches the real cause of cancer — an inadequate immune system — and uses natural body processes to fix the problem. Some telomerase does occur in reproductive cells, so that may be a side effect that needs to be considered on a patient by patient basis. But the prostate cancer trials showed the telomerase vaccine to have a good safety profile with few side effects. Buy GERN while it is under $9 for my $18 target.

QLT(QLTI) reported this morning before the opening of the market, and the news was mixed short term, but excellent long term. Wall Street took the stock down a trivial 15 cents today, but the company’s long-term outlook matches my original reason for buying the stock: Macular degeneration is going to be treated by combination therapy, with QLT’s Visudyne combined with every other new drug. It is just a question of getting from here to there, which means getting through the Lucentis launch in Europe and getting results of combination clinical trials. The story for 2007 will be knocking these barriers down one by one, and I think QLTI’s new management team is going to outperform Street expectations this year and again by a wide margin next year.

The U.S. and Canadian experiences are a model for what happens when a new anti-VEGF (Vascular Endothelial Growth Factor) drug like Lucentis is introduced. Visudyne sales fall as the new drug takes market share. Then practitioners start using Visudyne in combination with the anti-VEGF drug, and sales stabilize. As combination therapy spreads, Visudyne sales start to grow.

In the U.S., although Visudyne sales fell over 30% for the year, they were flat in November, December and January. Combination therapy now has 10% of the U.S. market. In a January survey, 41% of U.S. retinal specialists said they would increase their use of combination therapy this year. That is not out of line, combination therapy already accounts for 38% of the Canadian market.

QLT is sponsoring a patient registry to track those using Visudyne plus an anti-VEGF drug like Avastin or Lucentis. There are over 1,000 patients being tracked in the registry, and that should go to 1,500 to 2,000 patents by the end of2007. So far, the average vision improvement is one line on the eye chart, with 35% of the patents requiring no retreatment. For the whole population, the average number of retreatments is 1.3 and the mean time to retreatment is 90 days. This data is being presented at various scientific conferences, including the Macula Society meeting in early May.

Another study from Germany, in the February issue of Retina, showed a mean increase in visual acuity of 1.8 lines on the eye chart after nine months, using a triple therapy of Visudyne, Avastin and steroids. There are numerous other studies underway, some supported by QLT and others by their marketing partner, Novartis.

Why does this work? Because Visudyne closes leaking blood vessels in the retina, while anti-VEGF drugs prevent these blood vessels from reforming. The two treatments have different and complementary methods of action.

First, the quarterly results. QLTI beat the consensus for $37.3 million in sales and three-cents a share pro forma, reporting $38.6 million and eight cents. It was a confusing quarter with divestitures, reserves for downsizing, a major legal settlement with the accompanying costs and so on. But I think the main message was that this management is guiding conservatively and methodically executing their plan to focus on ocular and dermatology products.

For the year, the company earned 37 cents a share on $175.1 million in sales. That was down 23.8% from 2005 due to the decline in Visudyne sales in the U.S. Because Lucentis will launch in Europe this year, I expect Visudyne sales to fall again, although the company is not giving specific guidance. Overall revenues should be about $150 million to $155 million, and that will be the bottom. Visudyne sales could be growing again by the September quarter due to combination therapy sales, which will be the key to this stock going forward.

QLTI remains a buy on dips under $8 for my $16 target this year, and higher numbers in 2008.

I had a question from David on buying last week’s recommendation of Amgen LEAPs: “Michael, I would like to buy the AMGN January 2009 LEAPS you spoke of but don’t know how to purchase/sell them. My broker is Ameritrade. Can you help? Thanks.”

Sure, David. On the Ameritrade website, go to the Trade Options page and you will see a box for “Underlying Symbol.” Type in AMGN and click “get option chain.” At the top of the page, change the Chain Type to “Calls” and in the Expiration box, use the down arrow to open the menu and scroll to near the bottom where it says “Leaps.” Then click “View Chain.” You will see the Amgen January 2009 $70 LEAP calls have an Ameritrade symbol of “+VANAM.” Every broker has different ways to denote options — Ameritrade with a “+” at the beginning of the symbol, Etrade with a “.”, others with a “+” as in VAN+AM, and others with a hyphen, VAN-AM. Yahoo uses “.X” as in “VANAM.X”. They are all different, but if you start with the stock and then look for the option change, you will find out how that broker or quote service wants the symbol formatted.

Market Outlook

The “overbought market that has to correct” continues to do a good job of confounding the bears. The S&P 500 took a couple of more dips down towards the 1450 to1453 breakout area yesterday and today, and prices were once again quickly repelled back to the upside. This confirms that this latest breakout area is significant, and the SPX should soon continue its inexorable rise to the 1510 target. Notice that the NASDAQ Composite Index (COMP) had a clear daily breakout on Wednesday, and closed up today in an otherwise down market. It would be very typical for NASDAQ technology stocks to lead the market up. We are well positioned for this move. Relax and enjoy it.

Technology is changing rapidly, and so is the way people use it. Ask anyone under 20 this question: “If you had to give up one of these, which would it be: Email, text messaging or Internet Messaging?” Virtually every one will say: “Email.” Does that surprise you? It shouldn’t. People want to communicate with one another in the fastest and most efficient manner.

Luckily for us, as Alan Kay, an Apple Fellow, once said: “If computing was a baseball game, we would be in the first inning.”

Companies are throwing money right and left at projects to develop new technologies to make our work, home and play easier. This year, Microsoft will spend over $6.5 billion on Research & Development (R&D), mostly for developing software. IBM spends over $5.8 billion on R&D for semiconductors, semiconductor production equipment, software and communications gear. Cisco will spend over $4.3 billion this year on advanced communications products. Applied Materials spends about $1.2 billion on R&D for new ways to make semiconductors. And Intel spends about $5.6 billion a year on R&D of new semiconductors. That’s a total of over $23.4 billion this year just from these five companies to keep pushing the technology envelope, cutting costs, improving products and integrating technology into our lives. People always seem surprised at the rate of change technology is causing in our lives, but with this kind of push, what do they expect? Heck, even Google will spend over $1.2 billion a year on R&D this year, and they weren’t even a factor in the first 40 years of commercial computing.

An example of how all this R&D spending will increase the rate of change, look no farther than supercomputers. Ten years ago, a teraflop supercomputer at Sandia National Labs took up 2,000 square feet of floor space, used 10,000 Pentium processors and ate 500 kilowatts of electricity.

Now fast forward to present day. If you recall, a couple of weeks ago, I talked about the Intel and IBM process breakthroughs that will let us build ever-smaller semiconductors in line with Moore’s Law for the next 15 years. Now Intel has a supercomputer processor in their research labs that has not dual cores (two processors) or quad cores (four processors), but 80 cores. The numbers are staggering. It can do a trillion calculations a second (one teraflop) on a chip the size of your fingernail, running at a reasonable 3.16 gigahertz clock rate, using only as much electricity as a 60-watt light bulb. Intel is stacking the memory in three dimensions on top of the chip to transfer an incredible 80 billion bytes a second.

That’s 2,000 square feet to a fingernail in 10 years.

Intel is targeting market introduction in 2011, as it will take five years to make it work in a real system, learn how to make the chip and get the necessary software written. But it is coming, and it will drive many new MegaShifts that we can only guess at today. A supercomputer on every desktop…and no let up in the rate of change as far as the eye can see.

While Intel’s and IBM’s breakthroughs will create incredible opportunities to invest in the upcoming years, right now with the market taking off due to the weakening dollar, I’m seeing some real opportunities in lagging or recently-hit stocks. I sent you a Flash Alert on Monday on Silicon Image (SIMG) and a new buy on Energy Conversion Devices (ENER). Today, I’d like to tell you about another opportunity to invest that should give you a double over the next two years at most — and probably by the end of 2007 — in one of the biggest and best biotech companies.

LEAP Into Amgen

Amgen (AMGN) is one of the largest biotech companies, with a well-established portfolio of drugs. Its original Epogen drug, which was licensed to Johnson & Johnson for use in cancer in Europe, supports people on kidney dialysis or chemotherapy by stimulating the production of red blood cells to treat or prevent anemia. Aranesp is the new version of Epogen, and Amgen has the worldwide rights in both dialysis and cancer.

Neupogen, their second drug, stimulates the production of neutrophils to fight infections. It, too, has a second generation version named Neulasta.

Enbrel, the primary drug that the company received when they acquired Immunex in 2002, inhibits tumor necrosis factor (TNF), and has applications anywhere there is an excessive response to inflammation or immune threats, such as psoriasis and rheumatoid arthritis.

Amgen’s major collaborations are with Alcon on treatments for eye diseases, with Predix for oral autoimmune drugs, with NPS Pharmaceuticals for hyperparathyroidism, and with Cytokinetics for oral drugs to treat heart failure. The company used to be very secretive about its pipeline of drugs, but a couple of years ago they decided to lift the curtain and really dazzle Wall Street with the breadth and depth of their research programs.

The stock dropped from $87 in September 2005 to $65 last July, and then recovered only partly to $75 in January this year, before sliding back under $70 to $68.28 today. Wall Street is worried about the usual issues: Reimbursement rates, because Medicare and SSI pay most of the dialysis bills, and competition from new drugs. But Amgen has been very skillful at protecting their reimbursement in the past, and the competitive issues are no different from any other major biotech company.

The key to this recommendation is their broad product pipeline coming through trials, their proven ability to get drugs approved and on the market in a big way, and their demonstrated lobbying skills in protecting their reimbursement rates. With the Democrats in control of Congress, there is sure to be continual pressure on all drug prices — but that has been priced into the stock for months.

Although some analysts are using 12-month target prices of $110 to $114, I am only looking for $95 over the next two years. Like my recent Intel recommendation, this is a situation we want to participate in, but not by owning the stock. There isn’t anything wrong with making 37% on your money over the next two years, but we can squeeze a double out of the same move by buying the January 2009 $70 LEAP call contract (VAMAN). I know some of you have not bought options in the past, but these LEAPs run for nearly two years and are as easy to buy as the stock. You do need to get your account qualified with your broker to buy options, but that usually takes less than a day and you only have to do it once. LEAPs are OK for retirement accounts, too. So, I want you to buy VAMAN under $12.50, which is roughly equivalent to a $70 price on AMGN stock. At my $95 target price for AMGN stock, these LEAPs will sell for $25 and you will double your money. If the more enthusiastic $110 projection comes true, you’ll have better than a triple.

More on Energy Conversion Devices

Energy Conversion Devices (ENER) reported earnings last Thursday and dropped $5.85 on Friday, closing under $30 a share. I sent a Flash Alert on Monday morning urging you to buy back into the stock with a $32 limit. If you recall, we sold ENER in January 2006 at $50.63 for a 119% gain in six months, and I have been watching it ever since for another buying opportunity.

If you read my original July 14, 2005 recommendation on ENER, you know that one of the big reasons why I like the company is that Bob Stemple, the former CEO of General Motors, is running it. He has entrée all over the world to the automobile companies that are making or planning hybrid cars, and ENER’s Cobasys joint venture with Chevron to make nickel-metal hydride batteries for hybrid vehicles is a major contributor to revenues right now. Since my first recommendation, ENER has announced NiMH wins for the Ford Escape and Mercury Mariner, Honda Accord and Toyota Camry. They already had the Toyota Prius and the Honda Civic. Plus, they have at least another dozen trials and negotiations underway, and have been chosen by Hyundai for that company’s forthcoming hybrid.

Also since my first writeup, ENER has doubled production capacity for the United Ovonic Solar thin-film photovoltaic roofing material, just in time for the worldwide solar boom funded by government subsidies. They will be increasing capacity by 10 times over the next four years. The cheapest way to go solar is to install an Ovonic roof at the time a house or commercial building is built or re-roofed, because the owner has to pay for the labor anyway.

Finally, Ovonic Memory Systems has signed additional technology licenses with Intel, Elpida Memory, STMicroelectronics and Nanochip since my first recommendation. This product line will have a longer-term payoff as it moves from research to production over the next three years or so.

As I said in the Flash Alert, ENER stock was hit because management pushed out their profitability forecast by about six months, from the June quarter to the December quarter. Big deal. With dominating products in two of the biggest Green Tech areas — hybrid cars and solar power — and a potentially major kicker from Ovonic Memory technology replacing flash memory, making money in this stock is primarily an issue of buying it right. The last time we bought it, I didn’t plan to sell it so quickly, as I think of it as a three- to five-year holding. Of course, if it shoots back up to unsustainable levels, like it did last time, we will take profits rather than fall off the surfboard and drown. But I am hopeful that we will see a classic “steadily up and to the right” chart for the next few years. I want you to buy ENER under $32 for a $55 near-term target. If you are nervous abut the market or the stock, at least buy half a position, and then buy the other half at $25 or $35, whichever comes first.

Avian Flu MegaShift

Crucell (CRXL) reported $99.9 million in sales (76 million euros) and a small profit before one-time charges in the December quarter. After three acquisitions, including Berna Biotech, the company looks very different from last year. The new 5-in-1 childhood vaccine is selling well since the October introduction, and seasonal flu vaccine sales were noticeably strong. They did $185.2 million in sales for the full year, and expect to increase at least 42% this year to $263 million. They also said that they will be operational cash breakeven in 2007.

Working jointly with one of their licensees on the human cell line vaccine production technology, Crucell announced a yield breakthrough. They can produce monoclonal antibodies with fermentation yields of more than 10 grams per liter, a target they set just one year ago. That is 10 times the current standard, and Crucell thinks that they will be at 20 grams per liter this year. That allows smaller bioreactors and lower production costs, bringing this technology closer and closer to the day it completely replaces chicken eggs in vaccine production.

The stock sold off about a dollar a share due to the size of the one-time charges, but, hey, that’s why they call them ONE time charges. We won’t see them again this year. Crucell remains an excellent buy under $28 for my $50 target.

Biotech MegaShift

Affymetrix (AFFX) reported earnings late last week, and the news was pretty good. The conference call was even better. The company did $104.2 million in sales, below last year’s $111.5 million, and reported earnings of 13 cents a share, well below last year’s 43 cents. But the results were good because AFFX returned to profitability after the September quarter’s 21-cent loss, placed their new 500K array chips in the market in December, and clobbered the Street estimate of four cents a share. They also got their gross profit margin back to the 60% area, and said that it will stay there in 2007.

I believe that for three reasons. First, the higher-margin 500K chip just started shipping and will become a larger and larger percentage of sales this year. Second, AFFX will introduce a one million array chip midyear. Third, they are pushing hard to get diagnostic chips and systems into the market — many with partners — so they can reduce their dependence on selling to research labs, where budgets and timing can be fickle.

The company said that they have about 20 clinical diagnostic programs in development, mostly collaborating with partners. Affymetrix will open a clinical services laboratory later in 2007 to make it easier for doctors and clinics to transition to the new systems. The FDA recently issued draft guidelines for In-Vitro Diagnostic Multivaiate Index Arrays, which is the long way to say Affymetrix diagnostic chip systems. The FDA also just approved the first of these tests, an Agendia system named MammaPrint. It measures the expression level of 70 genes associated with recurrent breast cancer and calculates the probability of the cancer spreading. That should help doctors design more personalized treatment programs.

Affymetrix is the best-positioned company to take advantage of the enormous amount of data coming from human gene sequencing, both in providing much of the equipment to do the sequencing and also in using the information to create diagnostic products. The stock moved up about a dollar on this news and then another 76 cents today, but we had plenty of time to buy it under $26. AFFX can be bought on any market-related dip under $26 for my $40 target. If it doesn’t come down soon, I will probably raise the buy limit, to make sure that everyone has the opportunity to get onboard.

Biogen-Idec (BIIB) reported good results this morning, but missed Wall Street’s estimates and the stock slid $2.49 today. December-quarter revenues increased 11.9% to $708.3 million, driven by sales of Avonex for multiple sclerosis and Rituxan for rheumatoid arthritis. But that was also a bit short of the $714 million analysts were looking for. Tysabri contributed only $30 million in sales in the quarter, but has now been prescribed to over 10,000 MS patients. The company gave a very positive outlook for Tysabri in 2007, saying that they have trained enough doctors and clinics to let Tysabri become a significant contributor to sales and earnings.

After adjusting for special items, BIIB reported 53 cents a share. Analysts were looking for 54 cents. The company guided for 2007 revenue growth in the mid-teens and $2.50 to $2.65 pro forma. That was in-line with consensus expectations for 15.6% growth and $2.57 a share. So, the hit to the stock was based on a $5.7 million revenue shortfall and a one cent per share shortfall.

Our LEAP calls were hit for $1.50 today, closing at $7.80. Our January 2008 $45 contract (YZUAI) remains a strong buy under $12 for my $23 target, or higher.

Content on Demand MegaShift

Silicon Image (SIMG) reported last Thursday and the stock was killed on Friday, causing me to put out a Flash Alert that you should have received Monday morning. As I said in the Flash Alert, the December quarter was good, although by the time I adjusted the numbers for one-time events, SIMG was three cents per share short of the consensus. And their guidance for the March quarter was a little light. The March period is not important for consumer electronics, and certainly not important enough to knock the stock down $2.93 on Friday. The company guided up for the full year, looking for $340 million to $360 million in sales, well above the consensus for $343 million. Yet the stock has not recovered from Friday’s drop and is still selling for only 12.3X my 75-cent earnings estimate for this year. That’s very cheap for 25% to 30% growth. So, I’m adding SIMG to the Top Buys, and I recommend that you buy a full position or even a little more in SIMG at these prices. The buy limit remains at $13 and target price at $20.

New Economy MegaShift

Omniture (OMTR) will acquire Touch Clarity, a London-based provider of automated behavioral targeting software and services. Omniture is paying up to $60 million and can now offer automated analytics to their existing data collection software service. This is an incremental revenue opportunity, and it is already fully integrated because Touch Clarity was an Omniture development partner. The deal will close by the end of March and will add to sales but dilute earnings for 2007. The new pro forma revenue range is $134 million to $136 million, up from $128 million to $130 million. The new earnings range is three cents to five cents a share, down from seven to 10 cents a share. The stock was knocked from the high $14s to the low $14s due to the lower earnings forecast. I recently raised the buy limit and target price on OMTR to be sure you own this dominant provider of web analytics, and I want you to buy OMTR now under $15 for my $22 target.

New Energy Technology MegaShift

Barclays Capital published a report arguing that global warming will provide as much opportunity for some growth companies as it will harm others, and the net result will boost the global economy for the next 25 years, rather than have a devastating impact on economic growth. They pointed out that every energy source evolution, from dung to wood to coal to whale oil to oil, was stimulating for the economy. Every major technological change was accompanied or followed by faster economic growth.

I agree broadly with these conclusions, recognizing that many of the changes will be disruptive to our food supply, the way established companies do business, and even real estate values. Many areas of the economy will have to restructure to cope. However, change and risk equal opportunity for our New Energy Technology companies, which have a chance to displace older energy companies — or sell out to them. We need to increase world energy capacity by 50% by 2035, while at the same time reducing dependence on hydrocarbons generally, and in-ground oil specifically. Our companies will lead this energy revolution, and I am working on a couple of more ideas for this MegaShift. But for now, let’s take a look at two of our holdings that reported earnings recently.

Holly Corp (HOC) reported a good quarter, with sales up 15.5% to $938.1 million, net profits up 19.5% to $47.7 million, and earnings per share up 29.2% to 84 cents share. That was a penny above expectations. Refinery margins slipped a bit to $12.08 per barrel from $13.71 in the fourth quarter of 2005, which is not surprising since that quarter followed Hurricane Katrina.

For the year, sales of refined products rose sharply to $4.02 billion, up 32.1%, while earnings per share jumped 72.8% to $4.58. That was the third straight record year, thanks in part to their 4.5 million share buyback. The company raised the quarterly dividend 25% to 10 cents a share.

In 2007, the Street consensus is for $2.77 billion in sales and $3.55 earnings per share. That assumes oil prices stay around $60, which may be right for the first half of the year, but I expect it will be low for the second half. I am looking for $4 billion in sales, essentially flat with 2006, and $4 per share, reflecting some additional squeeze on refining margins. However, HOC is not just an oil price story. The company specializes in refining sour crude, and since their July 2006 plant conversion, they can now produce ultra low sulfur diesel at their two refineries in New Mexico and Utah. In California, that’s the only kind of diesel you can buy, and all 2007 diesels can only run ultra low sulfur fuel. In Europe, 40% of the new cars are diesel, designed to burn ultra low sulfur.

I expect U.S. sales of diesel passenger cars and light trucks to accelerate dramatically over the next few years, because they are very economical compared to their gasoline brethren and no longer pollute. My Ford Excursion diesel gets about 18 mpg on the highway, or 14 mpg towing, while the V-8 and V-10 gasoline versions get eight mpg to 12 mpg, if they’re lucky. And I don’t have to get a California smog certificate, because the engine burns clean.

Holly’s focus on handling sour crude gives them a technology edge, which qualifies them for this MegaShift. At a price/earnings ratio of 15.1X the consensus estimate or 14.5X my estimate, the stock is still cheap. In 2005, Forbes ranked Holly’s five-year annualized total return of 80.7% as the best in the oil and gas industry. In 2006, Forbes ranked HOC’s five-year average growth in earnings per share of 52.3% as #1 in the oil and gas industry. This is a well-managed company, and HOC remains a buy under $46 on any oil-price related panic, and otherwise a strong hold for my $60 target.

Rentech (RTK) reported sales of $35.4 million in the December quarter versus essentially nothing last year, when they did not own the East Dubuque, Illinois, fertilizer plant. They lost six cents a share, compared to five cents last year. The revenues are funding a big increase in R&D, where the company spent $8.4 million, compared to $1.3 million last year.

Most of this spending is going for equipment and construction of their Product Development Unit, a fully integrated Fischer-Tropsch, coal-to-liquids demonstration facility in Commerce City, Colorado (near Denver). The plant will demonstrate the process by producing fuels and naphtha from various hard and soft domestic coals, petroleum coke and even biomass and municipal solid waste feedstocks. The fuels will be provided as test quantities for potential customers, such as the Department of Defense, and also to companies that want to investigate using the Rentech Process. This plant should be physically complete in the September quarter and come online around the end of this year.

Another chunk of R&D is going to convert the East Dubuque plant to an integrated clean fuels and ammonia production facility. That should come online in late 2009 or 2010, and will be the first commercial scale application of Fischer-Tropsch technology in the United States.

Their two projects with Peabody coal are also advancing, with the scoping phase expected to take the rest of the year. Deals with Williams Coal and Arch Coal seem to be coming along slower. The Natchez project with the German energy company DKRW is moving forward with a six- to 12-month feasibility study. DKRW is also working on their 11,000-barrel day project in Medicine Bow, Wyoming, where they have contracted to sell clean diesel to Sinclair Oil.

Senators Obama and Bunning introduced the Coal to Liquid Fuel Promotion Act of 2007, a bipartisan bill to provide meaningful incentives to accelerate CTL production of clean fuels. The bill includes valuable tax credits for the equipment to handle carbon dioxide. Another piece of legislation under consideration is to make CTL fuels part of the Strategic Petroleum Reserve.

Rentech ended the quarter with $53.8 million in cash, so at their current $8.7 million burn rate, they have enough cash to last six or seven quarters. I expect them to sign more deals and increase sales from the fertilizer plant to stretch out their cash. The price of the nitrogen fertilizer that they produce has soared due to the demand for more corn for ethanol, while the price of their natural gas feedstock has been pretty stable, leading to improved profit margins.

RTK is a Top Buy under $5 for my $11 target, and it is more and more obvious that this will turn into a multiyear holding for much higher prices.

Robotics MegaShift

iRobot (IRBT) fell $2.79 on 1.2 million shares after they reported an unexpected loss for the fourth quarter and guided down for 2007. Sales rose 31.5% in the quarter to $61.1 million and they lost eight cents a share, even though the gross profit margins improved a couple of points to 37.5%. Consensus expectations for a six-cent loss were a little higher, but the real disappointment was management’s forecast for 2007 of $225 million to $235 million in sales (19% to 24% growth) and eight cents to 15 cents per share. Estimates had previously ranged around $250 million and 30 cents.

The company sold 725,000 Roomba vacuum and Scooba floor washing robots, plus another 385,000 units to the military and industrial markets. Management said that they will enter a third category of robotics in the second half of the year, and they expect that to be another growth accelerator.

So, this is still a fast-growing company, with improving margins and new products coming. I think IRBT is weaker in marketing than I originally thought, but I still believe the robot hobbyist/inventor/science fair kit for $149 that they introduced at the Consumer Electronics Show is going to pay huge dividends.

Just to be cautious, I am lowering the buy limit $1 to $18 and the target price $8 to $30, but I still think you should buy IRBT on this drop.

Market Outlook

I discovered at last week’s Orlando Money Show that many advisers were waiting for a 3% pullback in the S&P 500, from about 1450 to under 1407, to buy stocks. My analysis said that was unlikely to happen, as the S&P cleared major resistance in the 1435 to 1440 area. Sure enough, after a quick test back down to 1435 on Friday, Monday and Tuesday, the market took off. The next stop up is 1510. While there could always be a test back down to the 1450 breakout level, we are more likely to find a temporary resistance/support level on the way to 1510 that will be tested, followed by a slingshot up to the old highs at 1552.

I think we will break through to new highs this year, although it could be postponed to 2008. It depends on how fast the dollar gets weaker under the Bernanke “money from helicopters” regime. When it does break into new high territory, watch out — we could easily hit 1800 before this party is over. I recommend that you get fully invested right now, if you aren’t already. The Intel and Amgen LEAPS are a good place to start.

Hello, again. I’m now back from the Money Show. And while it would have been easy to forget about the stock market and relax in the Florida sunshine, I still kept my eyes pealed for any developments in our holdings. So, today I’m writing to tell you about two exciting opportunities that we now have for investment.

Silicon Image (SIMG), last Thursday, reported their December-quarter earnings, which fell three cents short. So, on Friday, the stock fell $2.93 from its Thursday close of $12.17. Let’s see, that’s a Price/Disappointment ratio of 97.7X. Let’s hope they give us that kind of ratio on the excellent earnings that this company will produce this year and next year.

The December quarter was very good. The company reported record revenues of $87 million, up 42% from last year, and 29 cents a share compared to 15 cents last year. That was far ahead of the $79 million and 28 cents a share that I said I was expecting in last Thursday’s Radar Report. But the reported results included a royalty payment from Genesis Microchip related to their recent patent settlement, which accounted for $11.8 million in sales and five cents share. Adjusting the results for this one-time event, operating results of $75.2 million and 24 cents a share fell short, so Wall Street killed the stock.

SIMG’s March-quarter guidance was also a little light at $68 million to $72 million in sales, compared to the consensus for $73.2 million. But the March quarter is always light for consumer electronics. They guided above consensus for the year, which is more important. Management is looking for $340 million to $360 million in sales for the year, compared to the consensus for $343 million.

So let’s recap. Excluding the Genesis royalty payment, sales grew 22.5% for the quarter and 33.3% for the year, and will grow 20% to 27% in 2007. Flat screen and high definition TV sales will only grow as the end of the analog broadcast signal approaches in February 2009. New media centers from Apple and others, plus the Windows Vista rollout, will spread Silicon Image’s HDMI interface chips everywhere. Earnings will hit 75 cents or so in 2007, so the stock is selling for only 12.3X earnings.

This extreme sell-off is dumb. The company is starting a $100 million buyback program. Go thou and do likewise. Load up on SIMG — build a full position (or even a little bit more) at today’s giveaway prices. The buy limit on SIMG remains at $13 and the target price at $20.

Back Into Energy Conversion Devices

Energy Conversion Devices (ENER) experienced a similar fate last week. The stock was hit for $5.85 a share on Friday, knocking it under $30. If you recall, we sold ENER in January 2006 for a 119% gain, and were waiting for another opportunity to get back onboard. You can find my original write-up on the stock in the July 14, 2005 Radar Report. ENER is a leader in batteries for hybrid cars, solar panels and a new memory technology that Intel and other semiconductor companies have licensed. We bought the stock in July 2005 at $23.10 and sold it in January 2006 at $50.63, and I said we’d buy it back when it came down to more reasonable prices. That it did.

ENER’s sin was the usual: Results a bit worse than expected, and guidance a bit lighter than expected. I have long thought that Wall Street analysts should be forced to run a start-up or development stage company for at least a year before they are allowed to publish research on them. These analysts come out of their MBA programs and treat everything like another case study. But then I realize that if they had any real world experience, they probably wouldn’t kill stocks like SIMG and ENER on very small shortfalls, and run them up on very small above-consensus results. And that would take away much of our opportunity to buy stocks when they are down and sell them when they are overdone on the upside.

In this case, ENER reported December-second-quarter sales of $22.9 million and a loss of seven cents a share compared to a 19-cent loss in last year’s comparable quarter. But Wall Street was expecting a low of six cents a share on $33.5 million in sales. Robert Stemple, the CEO of ENER and former CEO of General Motors, withdrew his forecast for sustained profitability by the end of the June quarter. The reason he gave was not a lack of sales, but rather a longer time to “secure additional funding opportunities for our emerging technologies.” I believe the translation of that is that ENER needs to increase production capacity (again) and marketing activities in the solar business, and maybe find some more licensees for Ovonic Memory. In any case, they are going to trim some costs to produce smaller losses until they arrange their funding.

With all three parts of their business in the early, fast-growth stage, I am not that interested in whether they report a six-cent loss or a seven-cent loss for a quarter, or even whether they turn profitable in the June quarter or the December quarter. It is obvious that if we can buy this stock right, we will have another strong holding in the New Energy Technology MegaShift. Their United Solar Ovonics operation just doubled photovoltaic module capacity in the U.S. and signed a deal with a Chinese company to build a 30-megawatt photovoltaic plant in China. China is determined to make the 2008 Summer Olympics in Beijing the “Green Olympics,” with solar power everywhere. I want you to buy ENER under $32 for a $55 target. It is probably safer to buy half a position immediately and then see if there is any follow-through to the downward pressure on the stock. You might get the second half in the mid-$20s, or you might have to buy it in the mid-$30s on the way back up. Either way, the position should be a big winner over the next couple of years. I’ll update the fundamentals of the company in this week’s Radar Report.

Greetings from the Money Show! While I’ve been meeting many of you at presentations and booth times here in Orlando, earnings reports have been coming thick and fast. And the S&P 500 is consolidating at high levels in preparation for an assault on the all-time highs of March 2000. As I said last week, the biggest story of the next five to ten years — and maybe of our whole investment lifetimes, making the dot-com mania look like a blip — is going to be the accelerating decline in the value of the dollar. You simply must reposition all of your assets to benefit from this, especially avoiding areas that will be badly hurt by the falling buck.

Stocks in general will benefit from a weaker dollar, especially high-growth stocks that do a lot of business overseas. So, before we get to this week’s earnings reports, I want to review the industry that drives the whole electronics revolution underlying the Content on Demand MegaShift, and recommend the biggest, best and cheapest stock in the group.

Back to Basics: The Semiconductor Industry

Moore’s Law, named after Gordon Moore, a founder of Intel, says that the number of transistors that can be put on a square inch of silicon will double every 18 months. It costs about the same amount of money to process that silicon, no matter how many transistors are on it. So the implications of Moore’s Law are:

• Computing power or memory per square inch of silicon will double every 18 months.
• The cost of computing or memory will fall 50% every 18 months.

Last week, I talked about the Intel and IBM breakthroughs in high-k metal gate transistor technology that will help keep Moore’s Law alive for at least the next 15 years. By 2020, the average $1,000 multimedia personal computer will have the brainpower of a human being. Everyone will have a 24/7 personal assistant, attuned to exactly what they need to work more effectively, research, interact and play. The opportunities that are coming to invest in companies riding this wave will make the last 30 years just look like fooling around. In the semiconductor life cycle as a driver of economic growth and fortune building, we are about where the automobile was in 1918. The Model T brought motorized transportation to the masses, and although it required learning a lot of new things and broke a lot, you could fix most of the problems yourself — and you were expected to. Sound familiar?

The steam engine in 1750 had a dramatic impact on the agricultural economy, and created the Industrial Revolution. The automobile in 1898 had a dramatic impact on the industrial economy, and created the mass production, middle class consumer economy. The semiconductor in 1952 has been having a dramatic impact on the mass production economy and creating a world-wide technology economy. But the speed of change, driven by Moore’s Law, is far higher than those two earlier revolutions. Every year, technology products become a higher and higher percentage of the world’s GDP. And every year, semiconductors have a higher and higher percentage of the content in both technology products and the older products of the mass production economy (think washing machines and cars), and the even older products of the industrial economy (think robotic assembly).

As you can see, the semiconductor is still at the core of the technology economy revolution. Someday, it will be replaced by DNA and genomics, but as Intel and IBM made abundantly clear, “someday” means sometime after 2020. Semiconductor sales were up 8.9% last year to a new all-time record of $247.7 billion, well ahead of my expectations. They will be up again this year, climbing about 7% to $267.5 billion. The Content of Demand MegaShift is driving a lot of this demand, but we also see strong chip sales to the Security MegaShift, the Video iPod MegaShift and the WiMAX MegaShift. And there are also semiconductor sales in many technology advances in MegaShifts that you might not first think of, like Biotech, New Energy Technology, New World Economy and Nanotech & New Materials.

Buy Intel LEAPs

The semiconductor business is strong, so I want you to have more exposure to it. Happily, we can do that best by getting back into the biggest semiconductor company of all, Intel (INTC). The stock performed poorly after we sold it last year, and their weak guidance for the March quarter knocked it down again. But with Windows Vista now shipping to both businesses and consumers, I expect Intel to have a strong second half in 2007 that will extend through 2008 into 2009. Love it or hate it, Windows Vista is going to succeed and drive a major PC upgrade in corporate America over the next three years. The new security features really do work, and while using the words “security” and “Microsoft” in the same sentence usually causes a snicker, Microsoft has an enormous amount of resources focused on this program. One nefarious reason for the expected strength in Windows Vista sales is that Microsoft can use security as the reason for integrating new applications and thwarting the antitrust forces in Europe and the U.S.

Everyone knows Intel will have a seasonally weak March quarter. They’ll report 22 cents or 23 cents a share, about flat with last year’s 23 cents. But I expect their guidance for June to be a bit above expectations, and with the S&P about to head for new all-time highs, institutional money should pour into this stock for the rest of the year. I think Intel will earn $1.15 a share this year, a bit above the consensus of $1.09 and well ahead of the 86 cents that they reported in 2006. In 2008 they should hit $1.50 to $1.60 a share as Windows Vista-based PCs ship in large quantities.

INTC has been trapped under $22 for quite a while, but I think it can break through this barrier, with the help of Windows Vista. My target price for INTC is $35, which I expect sometime in 2008. You may just want to buy the stock under $22 and hold it for a 59% return over the next two years, but I am always trying to find you doubles that will qualify for long-term capital gains tax treatment. So, I want you to buy the January 2009 LEAP calls with a $22.50 strike price (VNLAX) under $3.50. The target price is $12.50 at expiration, a 250% return. This is most definitely a Top Buy. I am going to follow this position in the Content of Demand MegaShift, because that is the biggest current driver of semiconductor sales.

Before we wrap up our Intel discussion and take a look at our MegaShifts and current holdings, I had a question about Intel from subscriber Louis. He asked: “Is the chip Intel announced last Friday and talked about in your commentary today the same technology they bought the rights to use from Energy Conversion Devices (ENER)”

No, it’s not. The Ovonic technology is for memory chips, not processors. I think Intel is interested in using that technology to re-enter the memory business at some point. Intel used to make DRAM and still makes one type of flash memory, and has always been interested in that market, although they don’t talk a lot about it. Anything they do with the ENER technology will be additive to my earnings estimates above and just drive the stock higher by the time the LEAPs expire in 2009.

Avian Flu MegaShift

BioCryst (BCRX) reported a smaller than expected loss of 34 cents a share on $2.1 million in revenues. They spent $11.2 million on R&D in the quarter, compared to $6 million last year, due to the expanded peramivir and Fodosine clinical programs.

As usual with a development-stage company, the numbers matter less than the business fundamentals. Here, the news was good. In January, Phase II trials started for both Fodosine (a pivitol Phase IIb trial for relapsed T-cell leukemia/lymphoma) and peramivir (intramuscular dose for seasonal flu). BioCryst signed a deal with Mindpharma to develop and sell Fodosine in oncology markets in Europe, Asia and Australia. The new CEO was very upbeat for clinical progress in 2007, and, of course, we should get results for peramivir against avian flu around midyear. BCRX remains a Top Buy all the way up to $19 for my $30 target.

Biotech MegaShift

Affymetrix (AFFX) reported this morning, beating estimates and guiding at or a little above the consensus for 2007, and the stock closed up $1.14 for the day. Earnings fell to 13 cents from last year’s 43 cents, while revenues hit $104.2 million. They said that analyst estimates for 2007 are “reasonable” but added that gross profit margins should return to the mid-60% level by the end of the year. That is higher than most analyst estimates I’ve seen, and was one of the factors that caused Caris & Co. to upgrade the stock today to above average.

As I’ve mentioned before, AFFX just started shipping the new Genome Wide 5.0 Array in limited quantities in December, and this is going to be a big product this year. I’m raising the buy limit on AFFX $2 to $26, just in case you can get it in a market decline, while keeping my target at $40 for now.

Dendreon (DNDN), as I’ve mentioned before, might sign a marketing partnership even before Provenge gets FDA approval on May 15, and Kenny asked: “Which company best suits their needs? Which company do you think will ink a marketing deal with DNDN?”

Any big pharma with an interest in oncology would be very interested in a new, novel cancer technology that will spin out many more drugs against other forms of cancer. Any big pharma currently in prostate cancer would definitely be interested in a new prostrate drug. My best guess would be Pfizer, but Merck, Lilly or Novartis are other highly-likely partners. Bristol-Myers would also be on the list, but they may be about to be acquired, which could slow down talks. Continue to buy DNDN under $7 for my $14 target, which will occur either when a partnership is inked or the FDA approves Provenge.

Content on Demand

Harmonic (HLIT) reported a good quarter, which I covered last week. This week, Cisco reported, and the CEO was more optimistic than he’s been since 2000. He actually used the phrase “killer application” to describe video, and he’s usually a pretty calm guy. I also mentioned last week that Comcast (CMCSA) had a good quarter but “disappointed” Wall Street by raising their capital spending budget for 2007 to $5.7 billion, up from $4.6 billion in 2006. The reason for the increase is because cable companies have to spend a ton of money improving and expanding their systems, or they will lose video customers to the telephone companies that are now deploying fiber to the home. Because TV is the core of any cable system, with Internet access and voice just profitable add-ons, the industry has no choice but to follow Comcast.

One easy way to upgrade a cable system is to increase the number of segmentable nodes. For example, if an optical fiber is running to a neighborhood of 500 homes, where it terminates in a box (node) that then sends the signal over coaxial cable to the homes, that node can be split into two or four nodes. Each node in a two-way split only has to support 250 homes; in a four-way split, 125 homes. As video downloads, Internet traffic and voice customer hours increase, the service won’t degrade if the nodes are split.

Harmonic’s products are designed to upgrade with a simple plug-in circuit board. Some of the competitors require a “forklift upgrade” in which the old box is completely replaced with a new box. Because the cable companies know they will be splitting and resplitting nodes in the future, until they too finally have fiber to the home for all their customers, Harmonic has a tremendous advantage in selling equipment in this new, multi-service environment. Incidentally, Comcast is one of Harmonic’s largest customers. HLIT remains a Top Buy on any dips under my new $9 buy limit for the new $16 target.

Silicon Image (SIMG) reports this afternoon. I am looking for above-consensus results: $79 million in sales and 28 cents per share, but their take on the HDMI market for the rest of the year will be the key to the stock. Consumer electronics are seasonally weaker in the March quarter, so I don’t think their short-term guidance will make a lot of difference. I expect them to guide for $71 million to $73 million in sales and 13 cents to 15 cents a share in the March quarter. As always, I will send you a Flash Alert if needed. Buy SIMG under $13 for a $20 target.

Zhone (ZHNE) reported the other week, and I said that I would update you after the conference call, but didn’t get it in last week. As Ary asked: “Last week you said you would update us on Zhone this week after listening to the conference call. What happened?”

Well, not much. December-quarter sales were $44.3 million, not much better than the September quarter’s $43.1 million and still well off last year’s $53.2 million. EBITDA (earnings before interest, taxes, depreciation, amortization and, in Zhone’s case, stock-based compensation) improved to a loss of $2.3 million from a loss of $5.1 million in the September quarter. However, pro forma EBITDA was positive in the same quarter last year at $1.1 million. So, there was nothing for Wall Street to get excited about here. The company guided for March-quarter revenues to be slightly lower at $40 million to $42 million due to the usual seasonal weakness, but that was already in the valuation.

The bright spot is their next-generation products for DSL, which pushed revenues from SLMS (single line, multi-service) up 11%. I am keeping ZHNE on the buy list with the same $2 buy limit and $5 target, but removing it from the Top Buy list. It will take the company some time to get their overall revenues growing again, as legacy product sales decline and new SLMS product sales grow. When they finally do report a good growth quarter, the stock will jump, but we’ll still be able to get into it under $2.

One reason I am keeping it on the buy list is that ZHNE is a prime target for a buyout or to be taken private, and that would happen at $4 or $5 a share. I think it is obvious that Mory Ejabat would like to make it a stock market success in its current incarnation, but the venture capitalists and leveraged buyout firms that founded the company may have other ideas.

New Economy MegaShift

Omniture (OMTR) reported after the close today. I expected them to beat the consensus of a penny a share, and they did two cents per share pro forma on record revenues of $23.5 million. They added over 250 customers in the quarter, bringing them to 1,800, and processed 420 billion transactions.

However, they guided for revenues of $26 million to $27 million in the March quarter, with earnings of zero to one cent a share. The Street consensus was two cents. Further, Omniture guided the yearly estimate to $128 million to $130 million in sales, with pro forma profits of seven cents to nine cents a share. But the Street consensus was 17 cents. So, the stock dropped $1.50 in aftermarket trading on this guidance.

I haven’t had a chance to listen to the conference call, but I think that it will be really interesting, as I think a number of big companies feel like their website was overwhelmed or not competitive during the holiday season, and Omniture’s pipeline of new clients will cause them to have a very positive conference call. I may well raise the buy limit on OMTR after I hear the conference call, and if so I will send a Flash Alert tomorrow. For now, OMTR remains a buy under $10 for my $20 target.

New Energy Technology MegaShift

Rentech (RTK) drew a question from Jonathan: “Michael: Does their CTL process remove sulphur and mercury? Does the process reduce carbon emissions? Coal is cheap and plentiful but faces a lot of hurdles unless it can deal with these issues.”

You bet! Virtually all of RTK’s patents deal with controlling the pollution from the Fischer-Tropsch process, as opposed to improving the basic process. Rentech realized early on that if they could develop a near-zero emissions process, it would be acceptable in the U.S. and give them a strong market differentiation from Sasol, the industry leader based in South Africa. Coal-to-oil in Germany during World War II and South Africa during apartheid was a political necessity, and damn the pollution. In China, it is an economic necessity, and while they are uncomfortable with the pollution, growth came first. But in the U.S., Rentech had to get it to near-zero emissions to attract the interest of the coal companies, which they now have done — Willams, Peabody and Arch are on board. I think this technology is a lay-up for widespread adoption because it provides value-added for the coal companies and makes them environmental good guys — an unaccustomed position for them. RTK is a Top Buy under $5 for my $11 target, and I expect it to turn into a multiyear holding for much higher prices.

Royal Dutch Shell (RDS.A) reported record annual profits at the end of last week, but forecast lower refining margins due to the lower price of oil, higher costs and lower growth targets. However, they also announced a big stock buyback, which they can easily fund from their record cash flow, and the stock went up after the conference call.

Because I am convinced oil prices will go up as the Fed and central banks around the world keep printing money, which also means growth will be OK in the U.S. and double digits in China and India, I am not concerned about their forecast based on the current price of oil. I did like the expanded share buyback, and you can still buy RDS.A on any dip under $66 for my $75 target.

WiMAX MegaShift

Alvarion (ALVR) reported this morning, and the stock is up after they showed strong momentum in WiMAX. The numbers were a bit confusing due to a loss of $4.5 million in discontinued operations, namely the Cellular Mobile Unit. But they broke even from continuing operations and reported three cents a share pro forma, beating the Street consensus by a penny.

More important, ALVR built on good news earlier this week by showing $24 million in BreezeMax sales in the quarter, almost reaching their goal of exiting 2006 with half their revenues from WiMAX equipment. BreezeMax accounted for all the growth in continuing operations in the quarter, with sales up 40% from the September quarter and up 140% for the year to $72 million. That was 40% of their sales for the year, and it is obvious WiMAX equipment will be well above half of this year’s sales.

What I really like about ALVR is that they have managed to get profitable on current operations even after funding very high R&D investments in mobile WiMAX. They already would be at 10% pro forma operating profit margins, if it were not for the mobile WiMAX program. This gives them a chance to be well ahead of their competitors, and they are now winning back contracts that initially went to competitors who could not deliver on their promises.

Earlier in the week, ALVR won a big contract from Chungwa Telecom, the leading telecom company in Taiwan, to install a BreezeMax system in central Taiwan, which includes a very mountainous area. WiFi hotspots will feed data into the BreezeMax system, as well as directly-connected customers.

The company guided above consensus for $49 million to $53 million in sales in the March quarter ($50 million consensus), and one to four cents a share earnings (one cent consensus). They are targeting 15% to 20% revenue growth for the year, composed of 50% growth in WiMAX and flat non-WiMAX sales. They expect gross profit margins in the high 40% area, a bit above their long-term goal of 45%.

Alvarion had 140 WiMAX deployments in 2006, more than any other vendor, and they are in more than 200 trials right now, again more than any other vendor. They are driving the OPEN WiMAX standard, designed to be sure customers can plug-and-play WiMAX gear from any vendor in their systems. They’ll be making a major push in this area at the big 3GSM conference in Spain next week. (GSM is the most popular cellular standard in Europe.)

ALVR has the only commercially viable mobile WiMAX system on the market right now, but without many handset suppliers and the ability to plug-and-play equipment from other vendors, it isn’t a practical decisions for larger carriers yet. What is really resonating with customers is the ability to deploy an initial fixed WiMAX system that can generate revenues now, and then be expanded to mobile WiMAX later. A lot of the trials in the U.S. and Asia, some with Tier 1 carriers, are based on this product roadmap.

As I said two weeks ago, I was very surprised to see another newsletter switch their subscribers from ALVR to Airspan (AIRN), in advance of this week’s good news. I was very happy with the conference call, and the stock is up about 11% this week as the Israeli stock market hits new records. I still want to own AIRN and Terabeam (TRBM), as well as ALVR, but the truth is that Alvarion is the leader and ALVR remains a Top Buy under $9 for my $18 target. That’s just the first target, and I expect this to be another multiyear holding.

Market Outlook

The S&P 500 is consolidating above the crucial 1440 level that it broke through last week. As early as tomorrow, I’m expecting a strong run to begin towards the all-time high set in March 2000 at 1552.87. You should be fully invested for this move.

Wow! This is a week to remember — the biggest breakthrough in the production of semiconductors in 40 years — real Nobel Prize stuff. I moved to California from the East Coast in 1968, a year before a private company named Intel began using polysilicon to make transistor gates, which determine whether the transistor is on (1) or off (0). In 1970, our investment management company made a venture investment in Intel, and I have followed the company ever since.

Polysilicon is the material that Moore’s Law is based on — Gordon Moore’s prediction in the mid-’60s that chips would shrink 50% every 18 months. The roadmap to continue that shrink rate until about 2010 has been known for years, but most people thought it would be very difficult to get past that point using polysilicon.

A couple of years ago, Intel told me that they thought they had a technology to extend Moore’s Law for at least another decade, and this week they revealed it. In fact, Gordon Moore, now 78, flew in from his Hawaii retirement home to label this the “biggest change in transistor technology” since polysilicon.

What did they do? They replaced polysilicon with a metal gate based on hafnium, which holds a charge better than polysilicon and therefore can be shrunk smaller before the gate leaks electricity. Transistors leak more current as they get smaller, which means they also overheat. The new technology leaks only 10% to 20% as much as the old, so your batteries will last much longer. Then they combined the metal gate with a higher insulating material (called high-k) to create a more efficient structure. The chips run faster and, importantly, use substantially less energy.

IBM has had a team working on the same idea, and both teams announced results last Friday — in good geek style — too late in the day to have much news impact. The difference is that IBM builds gates inside the wafer, while Intel builds them on top, which makes it easier to produce. Consequently, Intel’s technology will be on the market by the end of this year, showing up in servers, desktops and laptops, while I don’t expect to see commercial products from IBM until 2008 or 2009. So, when IBM will just be starting to put their chips on the market, Intel will already be in full production in three factories in the first half of next year. For a rare 40-minute video visit inside one of Intel’s new fabs, click here.

Intel’s new high-k metal gate chips, code-named Penryn, will have 410 million transistors at the next technology point of 45 nanometer line widths. The current polysilicon chips have 280 million transistors at the same line width. Over 2,000 transistors that are 45 nanometers wide can fit on the period at the end of this sentence.

So, Michael, if it is such a great breakthrough, when do we buy back INTC stock? I think the best answer is “soon.” The Windows Vista introduction on Tuesday was not an “event” that will cause a sudden jump in seasonally-slow PC sales, so the March quarter will probably be as lackluster as Intel has already indicated. But everyone already knows that, and I think what is not priced into the stock is the substantial market share they can win back from Advanced Micro Devices in the second half of the year, based on the Penryn processors. These will be high-end, high-profit, server-class chips. At this point, it looks like we have avoided a sharp market drop (see the Market Outlook below), so if the rally that started today is a real breakout to the upside (confirmed by a resumption of the dollar’s decline), I will pull the “buy” trigger. We may buy LEAP calls when the time comes — I will send you a Flash Alert when you need to take action.

More of our companies are reporting December-quarter earnings or other news, and it looks like the MegaShifts that I have identified will be the market leaders in 2007. Here are the details.

Avian Flu MegaShift

Gilead (GILD) reported another excellent quarter. December fourth-quarter sales hit $899.2 million, up 47.6% from the December 2005 period and well ahead of the $847.7 million consensus. They did 78 cents a share, a dime better than expected. The new Truvada HIV drug accounted for $327.1 million in sales, $31 million above consensus expectations. On the conference call, management said that the company will no longer break out its forecast for HIV drug sales, but gave an overall 2007 revenue forecast between $3.4 billion and $3.5 billion, up 31% to 35%.

The stock shot up over 11% today to an all-time record high of $71.53, and out January 2008 $50 LEAP call options (YGDAJ) climbed 35% to $24.95. That’s better than a sharp stick in the eye! Continue to hold YGDAJ for my $30 target.

Biotech MegaShift

Affymetrix (AFFX) reports next Wednesday after the close. They already preannounced December-quarter revenues around $100 million, up from $84.7 million in the third quarter and just above the consensus for $99.5 million. AFFX showed growth even though they didn’t launch their new GeneChip, which has 500,000 arrays on a single chip, until December. There were costs associated with the launch, so it is possible that earnings will be a penny or two under the consensus estimate of four cents a share. The range is from a loss of a penny a share to profits of 10 cents a share, so there really is little consensus on what happened with the GeneChip launch.

Guidance will be more important, because expectations are low for the March quarter — $89 million in sales and one cent a share, with a range from minus a penny to plus two cents. But the launch of the SNP 5.0 Array chip could create revenue and earnings upside for the guidance, with improving profit margins every quarter in 2007.

I was surprised to learn, this week, that one of the new short sale newsletters is targeting AFFX, just as the company is beginning an important new product cycle. I don’t know what the newsletter is thinking, but I think they are about to get squeezed. Buy AFFX before the earnings report if it dips under $24 in a market-related decline. My $40 target is still good, and may even be low.

Millennium Pharmaceuticals (MLNM) won’t report for a couple of weeks, but they did say that they grew product sales 15% to $220 million and hit their 2006 goal of non-GAAP profitability for the year. That was pretty good considering Celgene launched Revlimid in mid-year for the multiple myeloma indication that Millennium’s Velcade targets. Millennium is spending a whopping $400 million a year on R&D to expand the label for Velcade, and, of course, the current revenues do not reflect any results from that spending yet.

The company guided for 2007 Velcade sales of $240 million to $260 million, indicating growth of only 9% to 18%. But the first half again will be comparing against a period when Revlimid was not taking significant market share, so that is not bad. On even that modest growth forecast, plus royalty income on Integrilin of $140 million to $150 million, the company expects non-GAAP profitability in the $10 million to $20 million area. With more than $800 million in cash, they have the resources to expand Velcade indications dramatically. MLNM remains a buy under $11 — it is trading back and forth across that level — for my $23 target, possibly via a takeover.

China MegaShift

UTStarcom (UTSI) won more IPTV (Internet Protocol TV) contracts with China Telecom and China Netcom, the two largest network providers in China — actually, two of the largest in the world. UTSI is a major supplier of IPTV equipment in China, and over the next few months that will become the “story” Wall Street needs to return to the stock.

I got an email from Jack about UTSI: “UTSI is one of the biggest customers of Sigma Designs (SIGM) for video decoders, where they have a monopoly position for HDTV decoders. Why don’t you recommend SIGM as another way to play both China and Content on Demand?”

Sigma Designs has a leading position in video decoders, but these chips decode well-known standards like MPEG-2 and MPEG-4. Other companies like ST Micro and Broadcom already ship video decoders, and I expect Cisco to start making their own chips this year. Cisco acquired Scientific-Atlanta, an important Sigma Designs customer, which has a long history of buying chips from outside suppliers at first, and then developing their own chips to replace the outsiders as volume picks up.

Like flash memory, the demand forecast for video decoders looks great. But demand attracts supply, and just as SanDisk recently tanked in the flash memory area, Sigma Designs probably has one or two good quarters ahead before substantial new competition takes chip prices down towards commodity levels. I don’t see how we could hold this stock for the full year required to get capital gains tax treatment. So, I don’t see it as a long-term value taker in the industry, like UTSI or Harmonic. Buy UTSI on dips under $9 for my $15 target.

Content on Demand MegaShift

Harmonic (HLIT) reported an excellent quarter and won an Emmy! The quarter was well above the consensus at $75.3 million in sales and 13 cents a share. If you look at revenue for the last three quarters, the pattern is pretty nice: June, $53.3 million; September $62.9 million; December $75.3 million.

December-quarter revenues were strong due to cable orders, and satellite orders were strong but came in at the end of the quarter. The company’s book-to-bill (orders to shipments) ratio hit 1.20, or 20% more orders than shipments. Many of those late-in-the-quarter orders will ship in the March quarter. Meanwhile, the cable companies were focused on getting VOIP (Voice over Internet Protocol) telephone services going for most of 2006, but then realized Verizon was starting to eat their lunch in video and came back to ordering from Harmonic in the December quarter. This sets up an interesting opportunity for the March quarter to show strong satellite sales of very profitable MPEG-4 video encoders while cable orders continue strong. I think it will happen, and Harmonic will beat analyst expectations and their own cautious guidance again, guide above expectations for the June quarter, and say the second half of 2007 will show good growth from the first half. Sales to satellite customers are expected to triple this year from 2006.

If all that happens, HLIT will do $300 million and earn 45 cents a share in 2007, far above the $273 million and 30-cent consensus estimate, and the stock will be in the mid-’teens by the end of the year. I am raising the HLIT buy limit to $9 and the target price to $16 for this year. When Wall Street realizes the video build out will last until 2010, HLIT should go much higher.

Now about that Emmy. Harmonic and Time Warner, a major customer, shared the Science, Technology and Engineering Emmy for Time Warner’s Start Over video-on-demand service. Harmonic’s DiviCom Ion encoders are used by Time Warner to efficiently deliver high-quality video streaming for the service.

Comcast (CMCSA) dropped sharply today in a great example of how short-sighted Wall Street is and how it is making it harder for U.S. corporations to manage themselves for the long term. The company reported revenues up 30%, including some from the Adelphia buyout, to $7.03 billion. That was about equal to the consensus for $7.05 billion. Earnings hit 20 cents a share, short of the consensus for 24 cents, but the difference was almost entirely from accounting adjustments related to updated valuations of the Adelphia and Time-Warner transactions. That is not what hit the stock today.

In the December quarter, Comcast booked 613,000 digital video subscribers, 508,000 digital phone customers and 488,000 cable Internet subscribers. Remarkably, they added 110,000 new customers in basic video — their strongest growth in 10 years — and this was almost certainly related to people buying the “triple play” offering of basic cable, phone and Internet access. As those folks upgrade their TVs, they can be moved to digital video subscribers. For all of 2006, Comcast added 80,000 subscribers net to basic video, and they expect to beat that in 2007.

For this year, Comcast is looking for cable revenue growth of 12% and overall revenue growth of 11%, both in line with the consensus estimates. None of this is what hit the stock today, either.

Wall Street’s “problem” was that Comcast said that they will spend $5.7 billion on capital spending, well above the $4.8 billion consensus forecast. Consequently, free cash flow will be flat in 2007, after 30% growth in 2006. They will use the extra $900 million in spending to accelerate the introduction of new high-definition video products and to accelerate selling services to small- and medium-sized companies. That’s what hit the stock today.

But why? If Comcast had said that they were increasing their stock buyback program by $900 million, the stock would have gone up today, not down. Instead, they are investing in HDTV and the large, previously overlooked business market. Is this a bad idea? I don’t think so — both of these areas will produce higher returns on investment than just buying back the stock.

In the long run, this won’t matter, but in the short run, it really bothers me that Wall Street would ding a company for investing in its future instead of buying back stock. Management essentially thumbed their nose at Wall Street and said that they will split the stock 3-for-2 on February 21. Well done. CMCSA remains a good hold for my $62 target.

Market Outlook

The S&P 500 broke out over my 1440 target today in decisive fashion, and it is time to get fully invested. The next stop is in the mid-1500s, and from there this upturn could expand into something really big. The underlying driver has nothing to do with housing, consumer debt, oil prices, or anything else you probably are worried about. The driver is simply that the Fed is aiming a fire hose of liquidity at the economy, and it usually goes into financial assets first, before spreading rapidly through the rest of the economy. The 3.5% preliminary GDP report for the December quarter is testimony to their success.

Will inflation pick up? Of course. Even with the constant redefining of the Consumer Price Index, they won’t be able to hide it. So the Fed will raise interest rates, not cut them, but they will continue to print money. Destroying the value of the dollar is the only way to get out from under foreign holdings of U.S. debt, overleveraged real estate and incredible Social Security and Medicare obligations. The plan is that the debt holders and retirees will get paid, but they’ll get paid in rapidly depreciating dollars, so the U.S. economy won’t be hurt. The plan will even work, for a while. If the dollar is falling, real assets — stocks, oil, real estate, gold and other metals, and so on — must rise.

So, what should you buy? It is always a good idea to diversify more, and even though it is very tempting to average down in some of our stocks, especially in the New Energy Technology MegaShift, I recommend buying a different stock in the same area you want to build up. Right now, I think you should especially target these stocks:

• Avian Flu – Top Buy BioCryst (BCRX) first, but if you are already loaded on it, Crucell (CRXL) is OK for new purchases.
• Biotech — Top Buys Dendreon (DNDN) and eResearch (ERES) first, then the Biogen-Idec January 2008 $45 LEAP calls (YZUAI), Geron (GERN), and Millennium under $11.
• China — UTStarcom.
• Content on Demand — Certainly Harmonic under my raised buy limit, Silicon Image (SIMG), and Top Buys Telkonet (TKO) and Zhone (ZHNE).
• New Energy Technology — Start with the petroleum-related recommendations: Top Buys Connacher Oil & Gas (T.CLL), Gasco Energy (GSX), Infinity Energy (IFNY) and Rentech (RTK). Then add the fuel cell companies, Fuel Cell Energy (FCEL) and Plug Power (PLUG).
• Robotics – iRobot (IRBT).
• Security — American Science (ASEI).
• WiMAX — Top Buy Alvarion (ALVR), then Airspan (AIRN), Terabeam (TRBM) and MobilePro (MOBL).

I expect to send you a Flash Alert early next week on one or two more immediate buys.