After yesterday’s FDA Advisory Committee vote 13 to 4 to approve Provenge, and 17 to 0 on the safety issue, I told you to expect Dendreon (DNDN) shares to be up sharply today. And they were definitely up, spiking as high as $18 this morning. The spike is because there is a large short interest in the stock. I’ve reviewed some of the analyst recommendations by those who were negative on the stock, and they are clinging to the idea that the FDA will only issue an approvable letter, requiring the company to finish its current Phase III trial to further demonstrate efficacy before final approval. That data would not be available until 2010.

I believe the approvable letter idea is as wrong as the idea that the Advisory Committee would not approve the drug. But you should expect to see this idea dragged out over and over between now and May 15 to try to beat the stock down so that the hedge funds can cover their shorts. If you have a long-term capital gain in DNDN and you don’t want to go through this emotional roller coaster, I would not blame you if you sold now only at $14 or better and then bought it back sometime before May 15. However, if you sold:

• You may have a tax liability if the stock is not in a tax-sheltered account;
• Dendreon could sign a marketing partnership agreement any day, which would spike the stock again;
• And the stock may not go down much as new buyers who won’t normally even look at a company with unapproved products realize that FDA approval is imminent.

Therefore, what I would do and what most of you should do is nothing. Don’t sell. Sure, DNDN could go back down to $10 — or maybe not. But with FDA approval likely, a partnership agreement or two following that decision (and I do think a partnership will follow approval) and the opportunity to expand the Provenge technology into breast cancer and head & neck cancer, I think DNDN could easily be a $50 stock over the next few years. You wouldn’t want to miss that, so unless you are an agile trader, hold DNDN.

It seems to be an American trait to cheer for the underdog, and I like a David-versus-Goliath story as much as anyone. But I almost never bet real money on David, because that’s not the way the fight usually turns out. Though, in the case of Rochester Medical Corp. (ROCM), the subject of Monday’s Flash Alert, we get to enjoy the underdog story and make money, because the fight is over and David won. Wall Street just hasn’t noticed yet — not a single Street analyst follows the stock.

To recap a bit and expand on the Flash Alert, Rochester Medical was founded by Jim Conway, an IBM software engineer and inveterate tinkerer. His brother ran a urology device company and told him there was a real need for a latex catheter without pinhole leaks. In 1979, the two brothers started cooking up latex mixtures in their kitchen oven, developed a product and a company, and then sold the catheters to hospitals. Eventually, they sold that company.

By 1988, the Conway brothers realized that a significant proportion of the population is allergic to latex and could not easily use latex catheters. So, they started Rochester Medical to make catheters of silicone and other materials, and went public in 1991. By then, they had the idea of developing a Foley catheter impregnated with a 30-day, antimicrobial-emitting compound (not an antibiotic). The Release-NF catheter was born, and it was approved by the FDA in 1998. A study at the Johns Hopkins Burn Center in hospitalized acute-care patients showed urinary tract infection rates fell 70% using the Release-NF instead of a traditional latex catheter. That’s huge, and they should have owned the market in the year or two following the FDA’s approval.

But nothing happened. As I covered in the Flash Alert, Conway realized that the big guys in the business — C. R. Bard and Tyco — were pressuring the biggest distributors to hospitals — Premier Medical Solutions and Novation — to lock Rochester out of the market. So, Rochester filed an antitrust suit in 2004. Premier settled last November, and Bard settled in December. In theory, the trial against Novation and Tyco starts in May, but I expect a settlement from those two any day. Since Novation distributes for Bard, and Tyco distributes through Premier, both of which have already settled, it would be very risky for the defendants to go to trial. Also, ROCM’s litigator is Mark Lanier, who recently won a $253-million Vioxx judgment against Merck.

About 90,000 people die every year in the U.S. from infections that they get in health care facilities, and 40% of all hospital infections are caused by catheters. The annual cost of treating hospital infections exceeds $30 billion. There were 211 million catheters sold in the U.S. in 2006. So, as you can see the need for catheters that don’t cause allergic reactions and reduce the amount of infections patients get is a huge market and ROCM has the only approved product.

In addition to Rochester’s extended-care catheters made from silicone or proprietary materials and their acute-care drug-emitting catheter, they make the FemSoft Insert — a liquid-filled, conformable silicone urethral insert for managing stress urinary incontinence in adult women. This is a badly underserved market, as the problem typically hits women who are in their 50s and 60s and who have had children. Often these women are also too embarrassed to leave their homes until a friend or relative finally gets them to go to a doctor.

ROCM built their revenue stream one doctor or nurse at a time, by going to trade shows, calling on small hospitals that didn’t deal with Premier or Novation, and selling in the U.K. They had record December first-quarter sales of $7.5 million, up 63% from the prior year.

Backing out the settlements, which gives the stock an unrealistic price/earnings ratio less than 8X, as I said on Tuesday, I think ROCM can earn around 50 cents a share this year. But this number could be much higher, because Premier started distributing Rochester catheters to 1,500 U. S. hospitals on March 1 under a 27-month contract, and the Release-NF meets a compelling medical need.

I expect ROCM to report breakeven for the March quarter, which will have only one month of Premier sales. They will report March second-quarter results around April 18, and I think that they will give a very positive outlook for U.S. hospital sales for the rest of the year. I then expect 20 cents to 25 cents for the June third quarter and 30 cents to 35 cents for the September fourth quarter. That would have them exiting the year at a $1.20 to $1.40 run rate, so the 2008 fiscal year should be sensational. The run rate is the basis for my target price, and I could be off a quarter either way on when they hit it. I want you to buy ROCM under $23 for a $40 target by the end of this year. Remember the stock could have an explosive move any day if they announce a settlement with Novation and/or Tyco, so I recommend that you get on board now.

Avian Flu MegaShift

BioCryst (BCRX) said on Tuesday that they will delay intravenous Fodosine studies and shift their lead indication from T-cell Acute Lymphocytic Leukemia (T-ALL) to Cutaneous T-cell Lymphoma (CTCL). CTCL is a bigger market and probably provides a faster time to market, but the stock still dropped $1.58 on Tuesday on very heavy volume. The company said that they were concerned with the stability of the IV formulation due to particulate matter in the solution from the vial stoppers used in packaging. That will be fixed. But they also said that they expect a lower-than-anticipated response rate in T-ALL, well below the preliminary 18% complete response rate they reported at last year’s American Society for Hematology meeting.

The CTCL patient population is older (typically 50 to 60 years old) than the T-ALL patients, and I doubt the response rate in T-ALL says anything useful about future outcomes in CTCL patients — especially given the excellent safety and activity seen in those studies so far. There are about 16,000 annual CTCL patients versus 1,000 T-ALL patients, so it is easier to enroll participants in a clinical trial. Because Fodosine is an oral drug, it is a much better solution for a chronic condition like CTCL that could be treated on an outpatient basis. BCRX recently submitted their protocol for a Phase III CTCL study, asking for a Special Protocol Assessment that, if they hit their numbers, would essentially guarantee approval. The FDA should approve this by the third quarter, and the trial could start before the end of the year.

In addition, we will get preliminary data from the ongoing Phase II study of intramuscular peramivir in seasonal flu by midyear, with final data from this trial due before the end of the year. And although things have been quiet on the bird flu front, as Tuesday’s New York Times said: “Viruses mutate constantly, many experts point out. And when one has already acquired the ability to jump species, occasionally spread from human to human and kill 60 percent of the people who catch it, it is far too early to dismiss it.”

I am not changing my buy limit or target price on BCRX — it remains a Top Buy up to $19 for a $30 target.

Biotech MegaShift

Dendreon (DNDN) went before the FDA Advisory Committee today and won approval of Provenge by a vote of 13 to 4. The FDA does not have to follow the Committee’s recommendation, but they almost always do.

The FDA staff comments that were posted on Tuesday basically acknowledged that Provenge extended survival, but then questioned the statistical analysis. The summary said: “The submitted data tend to support a finding of clinically meaningful increased survival, but doubts remain about the persuasiveness of the efficacy data.” They expanded this to: “Based on the results of the statistical analyses of the efficacy data presented by the sponsor and the results of analysis performed by this reviewer, it appears that the two studies provide some evidence in support of using Provenge for the treatment of men with asymptomatic metastatic androgen independent prostate cancer.”

Then they added: “However, the key efficacy evidence (difference between the two arms in overall survival) is based on post-hoc analyses. Although it is impossible to precisely estimate the false positive rate due to the nature of the analyses, it is certain that the level of falsely claiming effectiveness for this product is substantially higher than the one in a conventional setting.”

One surprise to me was that although the company has always said that Provenge is safe with few side effects, the FDA said that patients taking Provenge reported a higher rate of cerebrovascular accidents like hemorrhagic and ischemic strokes — 3.9% of those on Provenge compared to 2.6% of those on placebo. The actual numbers were small, but the FDA said that they were a “potential safety signal” that they wanted the Advisory Committee to discuss. The Committee unanimously said that Provenge was reasonably safe for patients with advanced prostate cancer, which should minimize this issue going into final FDA approval.

The stock rose nicely Tuesday and Wednesday, as the market did not see any major surprises in the FDA comments. It did not trade today. Dendreon will hold a conference call at 4:30 p.m. PDT, after this issue is posted, to discuss the results. You can listen in at 800-289-0572, and I’ll have a Flash Alert out tomorrow if necessary. The stock will be up sharply on Friday, due in part to the large short position. DNDN remains a Top Buy under $7 for my $14 target. If you can get some under $7 on the opening, do it. In any case, do not sell any stock yet. We still have both the partnership announcement and formal FDA approval to go. Also, DNDN will have the money to put their breast cancer and head & neck cancer programs back into the clinic. You may not want to sell this one for a few years, just so you can have bragging rights.

Content on Demand MegaShift

Intel (INTC) is opening a $2.5 billion semiconductor manufacturing plant in Dalian, China. About half of Intel’s sales come from Asia, and this will be Intel’s first manufacturing facility in China. There will be more. The January 2009 $22.50 LEAP call is a Top Buy up to $3.50 for my $12.50 target in two years.

Silicon Image (SIMG) said that the issues causing the company’s unusually high tax rate guidance for 2007 of 55% to 60%, would improve to between 39% and 43% for 2008. Also, there had been concerns about the company’s inventory build-up, but that is expected to disappear as orders for HDTVs increase this year.

On Monday, the company announced the general availability of the second-generation SteelVine storage processors. I don’t talk very much about this part of their business, as we are in the stock for their HDMI products and the single-wire living room. But with high-definition video comes the need to store hours and hours of the stuff, and these SteelVine processors are designed to give motherboard and storage appliance manufacturers a more powerful and cost-effective solution, with lower power requirements and a smaller footprint. SIMG remains a Top Buy up to $13 for my $20 target.

Zhone Technologies (ZHNE) continues to lead the global Broadband Loop Carrier (BLC) market in real world provisioning of VoIP and IPTV services.They now rank among the top three DSL equipment providers in North America. During 2006, Zhone shipped over one million ports of its BLC platform. As long as their new products do so well, I think we should stick with the stock while sales of their legacy products decline to levels that will not mask the growth in their DSL business. ZHNE remains a buy up to $2 for my $5 target.

New Energy Technology MegaShift

We saw $68 oil briefly yesterday on rumors that Iran shot a missile at a U.S. ship in the Persian Gulf. Oil is still over $66 today. We’re paying $3.15 a gallon or more for regular gasoline in California, and the complaints are starting. Wait until the summer driving season gets here!

All of the alternative energy stocks were hurt by the sharp decline in the price of oil. To discuss where we stand with our current positions based on this decline and the current increase in oil prices, I’ll be updating the New Energy Technology MegaShift next week. But the bottom line is that the recent increase in the price of oil is not a fluke. Economic activity around the world is picking up as central banks flood the system with liquidity, and I think oil is headed up again, taking the alternative energy stocks with it Fuel Cell Energy (FCEL), Plug Power (PLUG) and Ocean Power Technologies (OPWT) will benefit, and I expect big moves from Connacher Oil & Gas (T.CLL), Gasco Energy (GSX) and Infinity Energy Resources (IFNY). Both Holly Corp. (HOC) and Royal Dutch Shell (RDS.A) will also respond to rising oil. And Rentech (RTK) looks especially cheap for the reason discussed below.

Energy Conversion Devices (ENER) will also move up rapidly with increasing oil prices, as consumers swing back to hybrid cars. Right now, though, the company is facing pressure from its largest shareholder, which told the company that it should consider management and other changes, according to an SEC regulatory filing. Coghill Capital Management, a Chicago-based investment firm that holds 2.4 million shares, or a 6.1 percent stake wouldn’t elaborate on the changes that it believes ENER should make but said that it intends to be in contact with board members to discuss its views. We will have to wait to see if anything comes of this.

Banc of America Securities began coverage of the solar cell sector, saying that a mix of government incentives, declining production costs and rising oil prices bode for “substantial growth” in the industry. But it rated ENER neutral. I think they’re wrong on this rating, as ENER is not only a leader in batteries for hybrid cars but also for solar panels. Buy ENER on dips under $32 for my $55 target.

FuelCell Energy (FCEL) jumped $1.50 on Tuesday after the Connecticut Clean Energy Fund chose six projects that would incorporate 68 megawatts of the company’s fuel cell products. FCEL valued the deal at up to $200 million if all six projects receive approval from the state’s two utilities. Under the 2003 state energy act, the two utilities are required to enter into long-term power purchase agreements with developers to purchase not less than 100 megawatts of Class I renewable energy. It was a big win for FCEL, and no matter how many of the six projects are built, they will be showcase installations for future contracts elsewhere. FCEL is a Top Buy up to $11 for my $22 target.

Holly (HOC) said that by 2009 it expects to increase its crude oil processing capacity by 18% or 20,000 barrels per day, to 131,000 barrels per day. They expect earnings before interest, taxes, depreciation and amortization (EBITDA) to increase by $332 million by 2010 to 2011 because of the plant expansions. That projection, based on 2006 prices, would represent an 80% increase in EBITDA from last year’s $414 million mark. The numbers will be considerably higher if oil prices are higher in 2010 to 2011, as I expect them to be. Hold HOC for my new $65 target.

Rentech (RTK) shareholders gave the company room to run a blue light special. At last Thursday’s annual meeting, shareholders approved the potential issuance of 20% or more of RTK’s outstanding common stock at prices as much as 20% below market value. These would be private investments in public equity by institutions and hedge funds, or PIPE financings. It is a common move for development-stage companies, and should give the company flexibility to finance more projects, invest in joint ventures or sell stock to a strategic partner. RTK remains a Top Buy up to $5 for my $11 target.

Connacher Oil & Gas (T.CLL) announced the expected spectacular financial results for 2006 last Friday. I’ve covered the production figures before: Conventional production more than tripled to 2,725 barrels of oil equivalent per day, and revenue grew approximately 25X over 2005 to $245 million. Cash flow per share increased 450%, despite a 75% increase in weighted average outstanding shares issued to finance growth. Capital spending, including acquisitions, reached $452 million, and the company completed almost $600 million in debt and equity financing while maintaining current assets well above current liabilities. Shareholder equity more than tripled, and total company assets increased over 400%. Despite all the good news, the stock is trading 24% below its 52-week high. Production should start from their first tar sands well within 90 days, which should provide a nice bump up in the stock. T.CLL is a Top Buy up to $4.50 for my $7 target.

Security MegaShift

American Science and Engineering (ASEI) won a contract extension for $17.5 million to provide the U.S. Government with service and maintenance for X-ray inspection systems. ASEI was awarded the initial phase in September 2006, valued at $11 million. The total contract has a potential value of $46.2 million, of which ASEI has received $28.5 million. ASEI is still in my buy zone under $59 for a $93 target.

Packeteer (PKTR) won a contract with NetVersant to deploy iShared appliances in 22 customer service centers. The value of the contract was not disclosed. PKTR now has over 65,000 systems deployed at more than 7,000 customers worldwide. Buy PKTR on dips under $12 for my $22 target.

Market Outlook

The S&P 500 generated an hourly sell signal yesterday, and it could be headed back down to test the breakout point at 1408. If that happens, it looks to me like it could bounce at 1410 and definitely should bounce at 1405 if this uptrend is still intact. New uptrends often come back down to test the breakout point, and if the test holds, as I think it will, enough bearish sentiment will build up to slingshot us up over 1460. If the S&P breaks 1405, it will put us back into a consolidation market. And if it breaks 1374 that will generate an important sell signal — but I don’t think that is going to happen. In fact, if today’s late-day reversal generates a new hourly buy signal, that would be the strongest possible pattern and point to a very quick move up over 1460. The economy appears to be gaining strength again and December-quarter final GDP was revised up a bit today, yet the chaos in the sub-prime mortgage market will keep Bernanke’s Fed from raising rates. As long as they continue to print money, the dollar will continue to fall and the stock market will continue to rise. You should be fully invested.

I’m always looking for great companies that fill a need in a sizable market. Today I’d like to tell you about a brand new company that fits all of these criteria and more. In fact, no Wall Street firms follow this stock, and I would normally just publish this recommendation in the Thursday issue, but yesterday, Forbes.com wrote the stock up, jumping it $1.45 on the opening. It slowly sold off for the rest of the day, but it is in the Top 25 of the Investor’s Business Daily Top 100, and it could have an explosive move any day now.

I’m talking about Rochester Medical Corp. (ROCM). ROCM makes urinary continence and urine drainage care products for the extended care and acute care markets. There is already great demand for these products, and ROCM is providing a superior solution. Their extended care catheters are made of silicone instead of latex to reduce allergic reactions. Their acute care Foley catheters include the Release-NF product that features an antibacterial-emitting technology to dramatically reduce urinary tract infections in hospitalized patients. No allergic reactions and no infections mean a much more pleasant time in the hospital for the patient, and it also allows doctors to focus on more serious ailments.

The unlikely founder of ROCM was an IBM software engineer whose brother ran a urology device company and knew what new products were needed. But even after their drug-coated catheter was approved by the FDA in 1998, they had very few domestic sales. After a while ROCM realized that they were being shut out by the major medical device distributors who were participating in anti-competitive practices. Without access to a group purchasing contract, Rochester Medical was blocked from 80% of the U.S. market, so they filed antitrust suits against Novation and Premier Medical Solutions, the two largest distributors to hospitals. Novation distributes catheters from C. R. Bard, the largest supplier, and Premier distributes from both Bard and Tyco, the #2 player.

Until the suits could make their way through the legal system, ROCM turned their attention to the UK market, as well as making private label products, to generate sales. The antitrust suits ground along, and late last year ROCM settled with Bard for $49 million and with Premier for $8.8 million. The case against Novation and Tyco continues, with a trial set for May 2007. I expect both companies to settle before then — perhaps in the next 60 days.

Backing out the settlements, which give the stock an unrealistic price/earnings ratio of less than 8X, I think ROCM can earn around 50 cents a share this year. But this number could be much higher, because Premier will start distributing Rochester catheters to U.S. hospitals, and the Release-NF meets a compelling medical need.

Things are finally falling in ROCM’s favor and as the last of the lawsuits come to a close the company could have another breakout day very soon — especially if they announce a settlement with Novation and/or Tyco — and I want you to have a position before that happens. Also, ROCM will be reporting March second-quarter earnings around April 18, and they should give a very positive outlook for U.S. hospital sales for the rest of the year. That would move the stock, too. I want you to buy ROCM under $23 for a $40 target by the end of this year. I’ll have a lot more detail on this interesting company in this week’s Radar Report.

@Road (ARDI) was acquired by Trimble Navigation (TRMB) last week for about $7.50 a share, of which $5.00 is in cash and the rest is 0.0447 shares of pre-split Trimble common stock for each outstanding share of ARDI common stock. TRMB split their stock 2-for-1 this week, so you will get 0.0894 of the new shares for each share of ARDI that you held.

My near-term target on ARDI was $8.00, and even though ARDI sold out at $7.50, we still have almost a 98% gain.

In light of this acquisition, many of you are probably wondering what to do with your ARDI shares, and what to do with the new TRMB stock. You don’t have to do anything with the ARDI shares unless you took delivery of the certificates, which hardly anyone does these days. If you were one of the few people who did, you will get a letter from Trimble explaining where to send your shares to collect the cash and new TRMB stock.

For everyone else, the cash and the TRMB stock will just appear in your brokerage account. Normally, there is reflex selling of the new shares by people who don’t want to own a small position in a company that they don’t know anything about. But I know TRMB very well and have followed it for years. They make Global Positioning Systems (GPS) devices, and I think they should do fine over the next couple of years. So, I want you to hold TRMB for a while, until any minor, mindless selling is over. Then within the next few weeks, I will recommend selling TRMB and, hopefully, switching into another GPS-related stock that I think is more attractive.

A couple weeks ago, we looked at some of the exciting developments happening in our Content on Demand MegaShift. This is one of the biggest MegaShifts of all, so I want to re-examine the stocks we own in this area today. And we’re going to look at this MegaShift from a different point of view — yours, the consumer, sitting in the digital living room.

As you know, Content on Demand is my shorthand phrase for a world where you get the information, data, entertainment and communications you want, wherever and whenever you want, with a minimum of billing hassles or techie problems. We already know from the accelerating adoption of VVD (Voice, Video and Data) integrated services from providers like Comcast (CMCSA) and Verizon that people want to live in a Content on Demand world. We also know from surveys and foreign examples that this is a huge, global market. So, it is important to get it right.

An October survey showed that 11% of respondents subscribed to VVD services, and by January that was up to 15%. An additional 18% said that they are likely to sign up by the end of April. One-fourth of the current subscribers are with Comcast, which is the market leader with 12.7 million customers. Time Warner Cable and Cox Communications were second and third, showing how well cable is doing versus the telephone companies. Verizon and AT&T were essentially tied for fourth, at about 10% market share each. So, Comcast is bigger than both of them combined.

When looking at the survey results of which provider those current nonsubscribers are likely to use, Comcast had an even higher market share at 27%. But Verizon vaulted into second place at 23%, and AT&T into third with 20%. It is going to be a war between the cable and telephone companies, and I think we own the right cable company. I recently moved CMCSA to a buy under $26 for my $62 target.

The digital living room, also known as the living room computer market, is the key to the consumer part of Content on Demand. Yesterday, Apple shipped the first Apple TV (formerly iTV) media center boxes for the living room. The $299 box acts as a server and router for digital media, so users can wirelessly play iTunes content stored on their PCs or Macs — including movies, TV shows, music, photos and podcasts — on their televisions and home entertainment systems.

One of Apple’s biggest advantages in bridging the computer and entertainment gap is that they understand the consumer better than Dell or Hewlett-Packard. The traditional high-end “personal” computer is labeled as a server, and there are corporate data centers with thousands of server processors working together. In that environment, low power, low heat dissipation and high performance are the keys. While these are all nice features for a living room computer, the real keys for consumers looking for an addition to their home theatre are (1) easy to set up and use, (2) no noisy fan, yet no problem with marginal ventilation, and (3) it looks good enough to be furniture. Steve Jobs has been against loud, distracting fans his whole life, and therefore has strived to make the user experience a huge priority. So, Apple has shown time and again that they understand the human interface much better than other tech companies, and Apple’s TV certainly looks good enough to be placed in a consumer’s living room, with its sleek, compact design.

I think Apple is trying to outflank Microsoft by becoming the dominant living room computer, and they plan to get there with two partners: Cisco and Intel (INTC). Apple’s current operating system and, even more, the forthcoming “Leopard” system due this spring, are media-centric. The Macintosh has always been the computer of choice for graphics, video editing and sound editing, and there is a lot of media management software that already runs on the Mac. That expertise and, in some cases, that same software can be ported to the Apple TV.

But Apple does not have experience in set-top boxes (the standard cable TV connection), home networking or WiFi phones. Since their acquisitions of Linksys and Scientific-Atlanta, Cisco has all three. But Cisco does not have a PC or great human interface experience. Apple does. At the same time, Intel would like to be in every living room computer, and the only major computer manufacturer that exclusively uses Intel chips is Apple. Intel’s VIIV processor has all the multimedia features needed, but it is expensive. Thanks to Moore’s Law, it will get less expensive every year.

So, Apple and Intel already work closely together. Will Apple and Cisco get together? Think of their recent tussle over the iPhone trademark as dating behavior. Cisco clearly owns the trademark. Cisco and Apple were in amicable talks to figure out some way to share it, when Apple casually introduced the product. That’s like a girl you are interested in showing up at your empty house, grabbing your car keys off the rack and driving off in your car. It’s a boundaries issue. So Cisco sued, Apple feigned innocence, and rather quickly the suitor (Cisco) agreed to let Apple use the trademark for no financial consideration. Why? Because Cisco knows they can either use their Scientific-Atlanta set-top box experience to try to compete with Apple, or they can join forces and quickly dominate the living room. Given that Apple is the only PC manufacturer that has its own operating system and its own hardware, it can quickly modify either to fit the needs of Cisco as a partner. And unlike having to partner with a Microsoft-compliant PC manufacturer, Cisco might be able to share in better hardware margins than the cutthroat generic PC business can sustain.

So the satellite, fiberoptic cable or WiMAX wireless signal comes to your home, where it is grabbed by a Cisco (Scientific-Atlanta) set-top box. In the box is a little Cisco router and a Cisco (Linksys) Wi-Fi module that handles Wi-Fi voice phones and Wi-Fi data connections from anywhere in your home. The router sends the video signal to an Apple TV, controlled by an iPod-like device with a click wheel. Music or video from iTunes or the VVD supplier would reside on a hard disk, providing all the functionality of a TiVO personal video recorder. The Apple TV introduced yesterday has a 40-gigabyte hard disk, and it is not a TiVO replacement — yet.

The potential market is huge. Market researchers estimate that between 2005 and yearend 2006, the number of North American homes with networked digital video recorders more than quadrupled, from 400,000 to 1.7 million. They predict that shipments of products with integrated wired home networking, like the Apple TV, will rise by more than ten times to hit 223.8 million units in 2010.

But there are still issues with the rapid spread of the digital living room. It is a complex integration problem to make sure all the possible sources of high-definition video streams work through several different brands of set-top boxes, media players and HDTV sets without dropping a frame — with multiple video streams going to several TVs and PCs at the same time. Today’s home networking systems are too hard to set up and too hard to use. I expect everyone to standardize on the single-wire HDMI standard that is the core product at Silicon Image (SIMG). However, there are other standards like DisplayPort and the Unified Display Interface vying to displace HDMI and become the standard for a secure digital link in consumer systems and computers. I watch the development of these potentially competitive standards closely. Since its weak guidance for March quarter results, Silicon Image stock has traded down to a 52-week low. But consumer electronics are always weak in the March quarter, and I think this is a major opportunity to buy a key player in the digital living room at fire sale prices. SIMG remains a Top Buy up to $13 for my $20 target — more than a double from today’s close.

The industry also has not agreed on a Quality of Service standard, which makes it very difficult to interoperate equipment. Everyone seems to want to control their Quality of Service as a competitive advantage, or at least so that they can provide better technical support. The Universal Plug and Play Forum is tackling this issue from a high-level software perspective, while the 802.1 Audio/Video Bridging Task Group is trying to make changes in silicon for Quality of Service. Two other groups need to agree to a standard: The Home Gateway Initiative representing telephone companies and their suppliers, and Cable Labs, which does R&D for the cable TV industry.

There also are too many different home network standards, seemingly one for each type of network. Wi-Fi is a standard for wireless networks (technically, 802.11n broadband), but there is the Multimedia over Coax Alliance for coaxial cable, the Home Phoneline Networking Alliance promoting existing phone lines, the Broadband-over-Power Line-based HomePlug 2.0 group, and several versions of the newer ultrawideband and Bluetooth wireless standards. Either the industry has to agree on one standard to run over all these physical networks, or one has to “win” by establishing a dominant market share, or engineers have to figure out how to let one connect to another easily.

No matter how it comes out, Telkonet (TKO) will be able to adapt its iWire system to any new home networking standard and continue to dominate the in-building Broadband-Over-Power Line market. TKO remains a Top Buy up to $5 for my $15 target.

Then there’s always the whole issue of digital rights management (DRM). It is unsettled but vital, because the home networks are designed to carry both personal and paid-for content, like songs and movies. So far, there’s no standard way to protect the so-called premium content from being copied and freely distributed. Microsoft’s Windows Media DRM is gaining momentum as a de facto standard because of its widespread use in PCs, but almost every other type of hardware maker doesn’t like it. But there’s no way the industry can ask consumers to live in a digital home with one DRM on their PC, another on their iPod and a third on TV content — none of which talk to another. Intel is promoting Digital Transmission Content Protection over IP as a core standard for this area.

Even the engineers working on ways to make things interoperable have more than one effort underway: The Digital Living Network Alliance, the Universal Plug and Play Forum and Intel’s Networked Media Product Requirements. Although Intel’s approach may get to market first, eventually I think the Digital Living Network Alliance will set the standard — and a lot of it will look like Intel’s.

If all this works out, between increasing market share and a future VIIV-based Apple/CiscoTV, Intel will see a meaningful revenue bump as early as 2008. That’s one of the reasons that I recommended the Intel LEAP calls.

But why not recommend Apple if they’re going to be at the heart of the digital living room experience? First, the success of the Intel-based Macs and the Apple TV is already priced into Apple’s stock, but not into Intel’s stock. Second, I still think Steve Jobs will be indicted for backdating stock options at both Pixar and Apple, and profiting from the backdating at Apple to the tune of tens of millions of dollars. Even though Disney said this week that their internal investigation cleared “all current members of management” of wrongdoing (Jobs is a Disney board member) and Al Gore’s investigation cleared Jobs at Apple, I doubt the SEC is impressed.

So, why not recommend Cisco? Well, to be frank, I missed it. When the stock was under $20 last summer I was worried about the effects of the predicted bad hurricane season on oil prices and the market. By the time that threat was gone, the stock was nearing the mid-$20s and now trades above $25. I would want to buy two-year LEAP calls on Cisco, but at current levels, I just don’t see an easy double or better, as I do with Intel. Maybe we will get another chance, or maybe not. I’ll keep you updated if the opportunity arises. Meanwhile, though, the Intel January 2009 $22.50 LEAP call (VNLAX) is a Top Buy up to $3.50 for my $12.50 target, and it is especially cheap right now.

Who else wins from the digital living room? I get asked lots of questions about Advanced Micro Devices (AMD) at the Money Shows. At January’s Consumer Electronics Show in Las Vegas, AMD introduced reference designs for a home cinema device and home media server under a new AMD Live! Banner, which runs Microsoft’s new Windows Vista Home Server operating system. These are direct competitors for Apple TV, bridging the gap between the PC and the TV in a good-looking form factor.

The home cinema device and home media server are meant to show consumer electronics companies how to get into this market using AMD microprocessors, and I’m sure they will find some customers, particularly in Asia. But it is a long way from a processor to a winning consumer product, as Sony and others have shown. I also think the advantages that AMD had over Intel for the last couple of years in both architecture (multiple processors on one chip) and performance per watt are gone — Intel is fighting back, and some server customers that moved to AMD are now moving back to Intel. That is the primary reason why AMD’s December quarter was so disappointing.

And, although they are not in the digital living room, someone has to win from delivering video to the living room. That someone is Harmonic (HLIT), where I recently raised the buy limit because I wanted to make sure that no one missed getting on board. Buy HLIT under $10 for my $16 target.

Avian Flu MegaShift

Gilead Sciences (GILD) presented at the Lehman Brothers Global Healthcare Conference on Monday, where they noted that Truvada is the leading HIV medication in the top five European Union countries with a 25% market share. But the biggest problem with HIV patients is that many are walking around ignorant of their infection. The global healthcare system is looking to automate HIV checks as routine processes. Because healthcare is not centralized it will take some time, but the more people know about their illness, the larger the market will grow as more turn to these drugs. Doctors are advocating beginning medication earlier than people are taking it now, which is another factor that will increase drug usage.

The stock jumped Tuesday after the presentation, as Merrill-Lynch upgraded GILD from neutral to buy with a $91 target. The Gilead January 2008 $50 LEAP call (YGDAJ) remains a hold, well on its way to my $30 target (equivalent to $80 on the stock).

Biotech MegaShift

Dendreon (DNDN) has a March 29 date with the FDA’s Cell, Tissue and Gene Therapy Advisory Committee to review Provenge. CTGT is a more hospitable panel for Dendreon than the Cancer Advisory Committee, which is known to be real sticklers, but CTGT is not a pushover. And while the new FDA Commissioner is a prostate cancer survivor, and the odds for Provenge to be approved are good, the company and I know anything can happen before an Advisory Committee. So, Dendreon filed a $146.8 million shelf registration for equity and debt that will give them more flexibility to do whatever is necessary, no matter what the committee decides. (They already have about $1 a share in cash.)

The FDA will release their briefing documents — its staff review of the Provenge data and questions for the advisory panel — next Tuesday, March 27. Expect the fireworks to start then. I will send you a Flash Alert immediately if anything changes, but it looks to me like Provenge will be recommended for approval. The stock is worth $25 to $30 a share if the FDA grants approval and if Provenge eventually does $1 billion in annual sales, as I expect. It really hasn’t started to move yet, and DNDN remains a Top Buy all the way up to $7 for my $14 target.

Geron (GERN) reported a December fourth-quarter loss of $13.1 million, and still has $214 million in cash on the balance sheet. On the conference call, management said that the money from the $3-billion California stem cell initiative has started to flow. They also pointed to extensive clinical progress in 2006, with numerous data publications, and they projected that the pace will continue for 2007. As I’ve said many times, if anyone has the silver bullet for cancer, it is Geron. Their stem cell work also will be easier under any Democratic initiatives from the current Congress that can get past a Presidential veto. Buy GERN under $9 for my $18 target.

Content on Demand MegaShift

Comcast (CMCSA) may say goodbye to Google, as the company has — for the first time — opened up bidding for its search provider. Under its existing contract, which ends this year, Google pays Comcast around $70 million annually for the use of its website, but Comcast is said to be looking for around $100 million from the successful bidder. Currently, about 70% of Comcast’s 12.7 million high speed Internet subscribers visit the site on a monthly basis, and the company plans to more than double its subscriptions in the next few years. Comcast is also requesting bids to manage its own website advertising, which could generate several hundred million dollars over the next three years. It’s this ability to leverage infrastructure and content that makes Comcast a media juggernaut.

Comcast is keeping an eye on its customer service mandate and announced that it is opening a new support center in Denver specifically dedicated to providing service to businesses that use Comcast Workplace High-Speed Internet and Workplace TV services, as well as Workplace Digital Voice. The center will have 200 technical support reps by the end of 2007. As I said above, CMCSA is a buy under $26 for my $62 target.

Telkonet (TKO) completed a shopping spree with its acquisition of EthoStream for $11.7 million in cash and stock. EthoStream will provide centralized remote monitoring and management platforms extending over high speed Internet access, digital video surveillance and energy management, all running on TKO’s Broadband-Over-Power Line system. That lets Telkonet provide a broader range of services and a higher return on the customer’s investment. The ability to offer a complete range of applications and service will allow Telkonet to market iWires as an in-building infrastructure backbone, which demonstrates true technology convergence. TKO is a Top Buy up to $5 for my $15 target.

New Energy Technology MegaShift

Silicon Valley CEOs, venture capitalists and technologists hit Washington this week to buttonhole politicians on the need to double funding for clean energy, “green tech” research. Their thesis is that the political climate has shifted, and clean energy will be an important issue in the 2008 presidential campaign.

One recommendation is to follow the model of medical research, now organized in the National Institutes of Health, and consolidate all energy research in one entity — a National Institute of Energy — that would fund public-private partnerships to support energy efficiency initiatives. They also asked for minimums for alternative energy use by government agencies, given that the Federal government is the largest consumer of energy in the country. Any of this would be great news for our New Energy Technology stocks.

Energy Conversion Devices’ (ENER) Cobasys joint venture with Chevron will supply its NiMHax nickel metal hydride battery systems for the Lotus Engineering EVE (efficient, viable and environmental) vehicle. This is the company’s first win in the UK. Buy ENER on dips under $32 for my $55 target.

Fuel Cell Energy (FCEL) and Air Products announced that they have commenced construction on an advanced hydrogen energy demonstration station funded in part by the Department of Energy. The joint project is to demonstrate a tri-generating (hydrogen, electricity and heat) process that can produce energy from material such as anaerobic digester gas from industrial or municipal wastewater treatment facilities, as well as readily available fuels, including natural gas and propane, at a significant cost reduction.

A recent study, Clean Energy Trends 2007, forecasts that the fuel cell sector is expected to leap from $1.4 billion in revenue last year to $15.6 billion in 10 years. And FCEL is definitely going to get a piece of this pie. Buy FCEL under $11 for my $22 target.

Plug Power (PLUG) announced its third acquisition since 2000 by acquiring Cellex Power Products Inc (Canadian) for $45 million, which gives PLUG an entry into the forklift truck market. That’s a $2.8 billion market growing 5% a year, with more than 700,000 electric lift trucks in operation. Importantly, Cellex has key clients and collaborators that Plug sees as vital to entering this market, including a recently completed field trial with Wal-Mart that Plug Power CEO Roger Saillant called “hugely important.” PLUG is a buy up to $5 for my $10 target.

Holly Corp. (HOC) went over my $60 target this week, with oil prices rallying. Crude oil for May delivery was up more than 3% today to $61.43 a barrel because U.S. refiners are expected to increase operating rates to prepare for the crucial summer driving season. Most of the incremental crude in the world is sour or heavy oil, which is what Holly and very few others can refine. So, I don’t want you to sell yet. I am moving HOC to a hold and raising the target price to $65.

WiMAX MegaShift

Alvarion (ALVR) won two orders, the first from Telecom Namibia for a country-wide BreezeMAX installation. The second is from Enforta, the biggest telecom provider in Russia. They will install WiMAX systems into six Russian cities covering 4.5 million people. ALVR is a Top Buy under $9 for an $18 target.

Market Outlook

Yesterday’s explosive upswing after the benign Fed statement demonstrated that the consolidation period since the late-February decline to the 1377 area is over. The S&P 500 blew right through obvious energy levels in the 1420s, and after a few days of consolidation, the 1510 target is back on the table. I expect that to be another congestion and testing area, followed (finally) by a breakthrough to record highs above 1550.

It would not be surprising at all to see a test back down to 1420 or even 1410, although that is as far as it should go if we are in fact launched on the two-year tech bull market. But if the market is really strong, it will just go sideways for a few days and then break higher. If you are not already fully invested, now is the time, and any pullback should be regarded as a gift.

It is no accident that yesterday Chinese stocks completed a full recovery from the one-day, 10% drop on February 27, which started the decline in our markets. The Shanghai Composite Index hit a marginal new high yesterday, which calmed global investors and brought money back into stocks worldwide.

It is also no accident that the U.S. dollar is again declining on world markets, which moved gold up sharply yesterday to reclaim the critical $660 level. Gold goes up when the dollar goes down. The Australian and New Zealand dollars hit multiyear highs against the dollar, while the British pound and the Canadian dollar surged against the U.S. currency. Now as soon as the euro takes off — as it will, because euroland growth is stronger than the U.S. and the EU central bank is about to raise rates — the dollar will be in freefall again.

Meanwhile, the Fed essentially took a rate increase off the table yesterday. I don’t think Chairman Bernanke is dumb enough to cut rates in an effort to save the economy from the imploding subprime mortgage market, simply because that small sector of our economy is not important enough to cause widespread financial stress. Probably half a million subprime borrowers will default on their mortgages over the next couple of years — bad news for them and bad news for whomever holds the mortgage, but it is really just a drop in the ocean compared to the rest of the economy. Or even to the housing sector. Of course, if Bernanke did cut the Fed funds rate, the dollar would go to new lows rather quickly.

You will still see commentators saying that new lows for the dollar would be bad for U.S. equities and bonds, and they are half-right. It would be bad news for bonds in the medium to long term. In the short term, though, even more inflation premium would come out of long rates, and bonds would probably rally for a while.

But for stocks, a falling dollar has been great news for the last five or six years, as well as for real estate, oil and commodities, and especially the metals. (That may be one reason that the Canadian dollar is so strong: metals prices are headed back up again.)

While, we don’t need a falling dollar to make a lot of money in our MegaShift stocks, it provides a nice tailwind for the whole market. I still expect our stocks to lead the market up for the next couple of years, as the real growth in the economy is happening in new technology-based products.

Tuesday’s drop, the second-biggest for the Dow Jones Industrial Average in four years, sent a clear message that the stock market has entered a more volatile time. Yesterday and today’s recoveries almost certainly are designed to suck more money into the market from those who think the “adjustment” is over. But the S&P 500 closed below the 1395 breakdown level, and it could rally all the way back to 1407 or even 1420 without convincing me that we are out of the woods. So, you should still be in the mode of letting the market tell you which way it’s going to go next, recognizing that the most likely direction is down through the critical 1375 level to the weekly breakout level at 1325, or even a bit further to 1295. That would be a typical nasty retracement in an ongoing uptrend. From there, and the fear such a drop will engender, we can start the two-year bull market in tech stocks. Because tomorrow is a “quadruple witching” expiration of index options, stock options, index futures and single stock futures, it will probably be relatively quiet.

The concerns about a liquidity problem from the unwinding of the “yen carry trade” that begins with borrowing money in Japan continue, as do the worries about the imploding sub-prime mortgage market. But the yen seems to have stabilized, which would not happen if there was serious pressure to unwind carry trades, and the sub-prime area is already attracting vulture investors and private equity. I suspect that one is about over, too.

Meanwhile, we have some really good news coming very soon at Dendreon (DNDN) and Infinity Energy Resources (IFNY), and there’s no need to wait to buy them or several of our other MegaShift stocks. I’m moving some from holds to buys and raising some buy limits and target prices today. So, let’s get started.

Avian Flu MegaShift

BioCryst (BCRX) started a project with SCOLR Pharma to use SCOLR’s drug delivery technology to develop an oral version of peramivir with higher bioavailablity. Potentially, this would make a second-generation, improved version of peramivir even more effective as an anti-viral against both seasonal flu and bird flu.

But we don’t need this to see the current generation of peramivir succeed in these clinical trials and get FDA approval. BCRX remains a TOP Buy all the way up to $19 for my $30 target.

Crucell (CRXL) got an additional $5 million from Aeras Global TB Vaccine Foundation to develop a human cell-based TB vaccine. This morning, they announced a licensing deal with Pfizer Animal Health for the same human-cell based vaccine technology. I think it is inevitable that human cells will replace chicken eggs in producing vaccines, and I’d like to see Crucell getting royalties on every single vaccine shot given anywhere in the world. Buy CRXL up to $28 for my $50 target.

Biotech MegaShift

Biogen (BIIB) and PDL BioPharma announced that daclizumab met its primary endpoint in a Phase II trial in relapsing multiple sclerosis (MS) patients. Patients showed a significant reduction in the number of new or enlarged lesions after 24 weeks. This is a randomized, double-blind, placebo-controlled trial of patients already being treated with beta interferon.

Daclizumab is a humanized monoclonal antibody, and this is the first randomized trial. The companies will now study the drug as a single agent in patients with relapsing MS. Biogen has a major MS franchise to protect, and one way to do that is to pursue lots of possibilities for future MS drugs in collaboration with other companies that have interesting technology.

The January 2008 $45 LEAP call (YZUAI) is very attractive with the stock just under $45, and I think the explosion in Tysabri sales this year will get BIIB up to $68, pushing YZUAI to my $23 target.

Geron (GERN) announced that after a review of recent accounting regulatory guidance that it will restate financial results to move some warrants from permanent equity into a liability item, until the warrants are exercised. This is a technical adjustment that does not affect revenue, costs or assets.

The company licensed Asia Biotech Corporation to use Geron’s small molecule telomerase activating compounds to develop non-prescription dietary food supplements, nutraceuticals and cosmetics. These are markets Geron certainly does not want to pursue, and I am dubious that telomerase really can be activated by oral compounds. However, they get to monetize this application by collecting some upfront fees, and I am sure the agreement includes potential milestone payments and royalties, although the financial terms have not been revealed yet. GERN remains a buy under $9 for that $18 goal.

Dendreon (DNDN) reported December fourth-quarter results on Wednesday. They lost $21.5 million or 28 cents a share in the quarter, and had $121.3 million in cash on the balance sheet. So, they are in excellent shape to get to the May 15 FDA decision and beyond, even without signing a distribution partnership. There is nothing quite as nice as negotiating those deals from a position of strength. I think this management has done an excellent job of protecting and maximizing shareholder value.

On the conference call, management said that Provenge will be reviewed by the FDA’s Cellular, Tissue and Gene Therapies Advisory Committee on March 29, so now we have a critical date coming up. There will be a conference call after the Committee votes, and I expect the Advisory Committee to recommend approval for relapsed prostate cancer patients who have run out of other options. That recommendation could vault DNDN to my $14 target all by itself. Now is the time to load up on this stock if you are ever going to own it, assuming you can take the risk of a turn-down by the Committee. That would cut DNDN in half.

Amgen (AMGN) will have to put a “black box” warning on Epogen and Aranesp (as will Johnson & Johnson for Procrit, their version of Epogen). The FDA said that based on recent studies, the label must say that “patients should be informed of the increased risks of mortality, serious cardiovascular events, thromboembolic events, and tumor progression when used in off-label dose regimens or populations.”

Note that phrase “off-label dose regimens or populations.” Also, the black box warning says the drugs should not be used to raise hemoglobin greater than 12 grams per deciliter. Doing so increases the risk of death or serious cardiovascular events; shortens the time to tumor progression in patients with advanced head and neck cancer receiving radiation therapy; and reduces overall survival and increased deaths attributed to disease progression at four months in patients with metastatic breast cancer who are receiving chemotherapy.

Epogen and Aranesep are used primarily to boost hemoglobin in kidney dialysis and cancer patients, and the vast majority of nephrologists and oncologists do NOT try to maintain hemoglobin levels above 12 grams per deciliter. But the news clipped the stock for $1.50 or so, and both Medicare and the European authorities are going to review their reimbursement rules to be sure Epogen, Aranesp and Procrit are only being used at appropriate levels in the right patients. I don’t think this will have any meaningful long-term impact on Amgen.

The Amgen January 2009 $70 LEAP calls (VANAM) were, as usual, hit harder than the stock. This is a great buying opportunity and my target price for AMGN has not changed. So, buy VAN AM up to $12.50 for my $25 target.

Affymetrix (AFFX) announced after the close on Tuesday that they won an important patent lawsuit against Lumina. The jury found that Illumina infringed on five of Affymetrix’ 375 patents, said a 15% royalty rate was appropriate and awarded AFFX $16.7 million covering the period 2002 through 2005. Illumina said that they will appeal, and maybe they will, but AFFX now has a lot of weapons at its disposal, so a settlement with substantial royalty payments is more likely. I don’t want you to chase the stock over the $26 buy limit, even though I still think my $40 target is solid. The market could easily put AFFX under $26 before the next earnings report, giving you one last chance to buy before the revenue acceleration I see coming this year.

China MegaShift

UTStarcom (UTSI) won its first contract in the Philippines with Philippine Long Distance Telephone Company, the leading telecommunications provider in the country. UTSI will deploy 150,000 lines as the foundation for a next-generation Internet protocol-based network.

UTSI received the expected NASDAQ letter telling them their 10-K is late, and the company will again request a hearing and get an extension to get their financials filed. These letters have become so common that it should not affect the stock at all. Don’t worry about it. Buy UTSI while it is under $9 for my $15 target.

Content on Demand MegaShift

Comcast (CMCSA) said that it is expanding its cell phone service test program beyond Boston and Portland. This mobile service links with other Comcast services like free calls to the cable landline phones, streaming TV shows to the handset, access to Comcast email and, coming soon, remote DVR programming.

According to yesterday’s Wall Street Journal, FCC Chairman Kevin Martin is circulating a proposal to resurrect the 30% national ownership cap on cable companies — equal to 27.8 million subscribers, as of today. What this means is that a single cable operator would not be able to serve more than 30% of pay television customers, which would quickly affect Comcast, because it already has a 27% market share (25 million subs) thanks to the recent Adelphia acquisition. (Time-Warner Cable is #2 with 14%.)

I don’t think this proposal will go very far for two reasons. First because the 30% cap was rejected in 2001 by a Federal appeals court as an obstruction of free speech. Chairman Martin is concerned about cable rates and also cable company power versus broadcasters, so he probably has another agenda in mind and this proposal will be part of the negotiations.

The second reason that this proposal should die is the rapidly expanding fiber networks from Verizon and AT&T. Comcast already has 11.5 million Internet broadband customers and 2.5 million voice telephone subs. It is obvious that the real competition is cable versus telecom, not Comcast versus broadcasters.

I will keep an eye on this proposal, but even if it passes the FCC, I’m sure that Comcast will take it to court again. So, I do not think this will affect our current investment in Comcast, and due to the recent market-related decline, I am moving CMCSA back to a buy under $26, while keeping my $62 target for two or three years out.

Intel (INTC) announced that they have started shipping their new quad-core Xeon processor (four processors on one chip). Xeon is made on their current technology, 65-nanometer production line and uses only 50 watts of power. That is a remarkable processing-to-power ratio, and it will only get better when they move to 45-nanometer production next year.

Wall Street doesn’t get it yet, but Intel is running like the Intel of old, recapturing the technology advantage from Advanced Micro Devices and managing their cost/price equation to keep AMD off balance. I don’t see that changing for the next couple of years, if ever again. AMD did a great job of grabbing the technology lead from Intel for server chips and had a wonderful two-year run. But it’s over. AMD will still be a supplier in servers, desktops and laptops, but Intel’s cost advantage means AMD will be under constant profitability pressure. And I would not be surprised to see another across-the-board Intel price cut soon.

The January 2009 $22.50 LEAP call (VNLAX) is a Top Buy at current levels and up to $3.50, for my $12.50 target, which means INTC’s common stock will be trading at $35 in just under two years.

New Energy Technology MegaShift

Energy Conversion Devices (ENER) announced that at his request, President and Chief Scientist Stanford Ovshinsky has relinquished his executive management responsibilities as part of an on-going management succession plan. Frankly, I don’t think CEO Bob Stemple was letting him do much anyhow, but it is nice to have it formalized.

Cobasys, the joint venture between ENER and Chevron, announced this week that they won the hybrid battery business for the 2008 Chevy Malibu hybrid sedan, coming this fall. It is the fourth win at GM, as the Malibu uses the Saturn Green Line drive train. And, of course, Bob Stemple used to run GM.

Cobasys also said that they are “exploring alternatives to support their growth strategy,” which will ultimately help them to take advantage of the opportunities available for energy storage products in hybrid vehicles. I expect Chevron and ENER to take Cobasys public, because in the current environment they should be able to get a high valuation. That should create a lot of excitement around ENER, giving them a public currency that they can use to swap for their own shares or sell off slowly. ENER remains a buy on any dips under $32 for my $55 target.

FuelCell Energy (FCEL) received California Air Resources Board (CARB) certification for the 300-kilowatt version of the company’s modular Direct FuelCell power plant. This is a major accomplishment as CARB has set stringent on power-generation emissions standards for 2007. The wheels may have been greased, thanks to the fact that FCEL’s 250-kilowatt version of this plant had already been through the certification process. As you know, California is one of the largest power consumers in the world and a major market for FCEL, so it is important for the company to cross all their “t’s” when it comes to emission standards. FCEL is now a Top Buy at current prices, and can be bought up to $11 for my $22 target.

Infinity Energy Resources (INFY) reported December fourth-quarter revenue of $2.8 million, excluding the discontinued well service operation that they sold for $52 million during the quarter, booking a $46.1 million gain. They had a slim profit from operations, but a loss after writing down properties. For the year, excluding the discontinued operation, they did $12.3 million in sales, up 34% from 2005, and had a net loss of 84 cents a share. Exploration and production operations produced approximately 1,630 million cubic feet of natural gas equivalent during 2006, up 27% from 2005.

IFNY ended the year with $37.6 million in book value, up 24.5% from the $30.2 million at the end of 2005. They had no debt, but less than $1 million in cash. Since the end of the year, they have borrowed $8.5 million on their new $50 million revolving credit line to fund their drilling and capital expenditures program, and they plan to spend $21 million to $27 million this year to drill 10 to 20 wells. They have leased a drill rig and the first well is already underway.

On the conference call, management said that their investment bankers did a major Board presentation covering all the potential bidders for all the different assets of Infinity, including bids for the whole company. The “fair value” ranges in the letters of intent were high enough that the Board said to go ahead and get definitive offer sheets over the next 30 to 60 days.

Some of these proposals are as simple as partnering up to drill more wells in Texas. Others are to buy non-core assets, like pipelines, that could be sold without hurting the value of the whole company in a takeover. Another group of proposals are to buy the Texas properties, while others want to buy the Colorado properties. And several others want to partner on the Nicaraguan leases.

The situation in Nicaragua is that the local governments are fighting the national government for a bigger share of the royalties. A Canadian company has drilled their first onshore well, and hit commercial oil at only 500 feet. But that well has become the center of the local versus state arguments.

Over the next 60 days, I expect the situation to be resolved, since neither the locals nor the state make any money if oil is not flowing and more drilling is not underway. But remember that Infinity’s lease concessions are offshore, and clearly under the control of only the Nicaraguan federal government. The current, probably short-lived disagreement between the local and federal governments will not impact the value of IFNY’s lease assets.

So, here’s what I think will happen. IFNY will sell their non-core assets, giving them a nice chunk of cash to pursue their drilling programs. They will probably sell their Erath County, Texas, assets because the bids will be so high. I expect their Erath operations to sell for more than the entire current market value of the stock — north of $50 million. And they may sell their Colorado oil shale assets, which is one of the reasons why I recommended the stock. I would not be surprised if they sold them to Gasco Energy (GSX), so we would continue to benefit from those wells via our Gasco holdings.

IFNY will probably partner their Nicaraguan holdings, retaining a 10% to 20% interest. So, if everything else that I mentioned above goes as anticipated, we will wind up with a ton of cash available for a special dividend equal to at least the current value of the stock, plus a potentially huge win in Nicaragua, where I believe they are sitting on one billion to two billion barrels of oil.

In 30 to 45 days, we should start hearing about deals and asset sales. On the conference call, management said: “The proposals that are coming in are of such a value that we feel that we need to go ahead and go down the road, because they are obviously significant higher than we’re trading at now.”

And that is why you need to own a full position in IFNY right now, before the news gets out. IFNY is a Top Buy all the way up to my $5 limit, and I am raising the target price to $10.

Ocean Power Technologies (OPWT) signed a deal with Pacific Northwest Generating Cooperative to install a PowerBuoy system that generates two megawatts of electricity. The wave power buoys will be anchored about 2.5 miles off the coast in 150 feet of water. If the pilot project is successful, it could lead to more PowerBuoy systems being added to the Reedsport OPT Wave Park, located in Douglas County near Reedsport, Oregon. I am raising the buy limit on OPWT to $2 and the target price to $4. I still believe that the best place to purchase the stock is on the London AIM exchange under the symbol OPT. The equivalent prices are a buy under 1.03 British pounds and a first target of 2.06 British pounds.

Rentech (RTK) signed a deal on Tuesday with Peabody Energy to provide up to 7.2 million tons of Illinois coal, beginning sometime between August 2009 and January 2010, and running through December 2017. The long-term contract gives Rentech a cost-effective supply of coal for the Rentech Energy Midwest Corp. project. As you may recall from previous Radar Reports, that project is to convert the existing natural gas-fired ammonia fertilizer facility in East Dubuque, Illinois, into the first U.S. commercial Fischer-Tropsch production facility using clean coal technologies. And, yesterday, Rentech got zoning approval to start construction on that same project. RTK remains a Top Buy up to $5 for my $11 target.

Connacher Oil & Gas (T.CLL) said that the independent geologists’ report for the company’s reserve position as of the end of December showed a large expansion in their reserve base during the last year.

• Proved crude oil reserves increased 67% to 2.4 million barrels.
• Proved and probable crude oil reserves increased 34% to 3.2 million barrels.
• Proved natural gas reserves increased 8,599% to 24.7 Bcf.
• Proved and probable natural gas reserves increased 5,197% to 33.5 Bcf.

These increases are due to last year’s acquisition of Luke Energy and the successful drilling in Saskatchewan and Alberta during 2006. Oil companies are valued on their reserves, and this data is strong support for the stock’s price.

Connacher’s 2006 production was 2,725 barrels of oil equivalent per day, up 214% from 2005. On a proved reserves basis, Connacher replaced 606% of its 2006 production, and on a proved and probable reserves basis, it replaced 732%. As you can see, Connacher is different from most oil companies because typically other companies replace less than they produce every year. With rapidly growing reserves, the stock would be worth much more in an acquisition bid. T.CLL is a Top Buy up to $4.50 for my $7 target.

Security MegaShift

Packeteer (PKTR) won the SearchNetworking.com 2007 Product Leadership Award in the WAN Optimization/Acceleration category for the PacketShaper. The awards covered 12 networking product categories, where 35 products were selected as potential “A” list networking products that IT professionals should consider evaluating. The winning products were selected by 1,400 networking professionals. Although there seems to be a generalized Wall Street fear that someone is going to knock off Packeteer, as evidenced by its much lower P/E ratio than slower-growing competitors like Citrix and Blue Coat Systems, I just can’t see that happening. At some point, Wall Street will catch on — one firm did this week, as Jefferies & Company initiated coverage with a Buy. I am raising the buy limit on PKTR to $12, as it has been very resilient in this decline, while keeping the $22 target price.

WiMAX MegaShift

Alvarion (ALVR) announced that NTT West Okinawa Branch Group installed several BreezeMax system networks to cover Okinawa’s hundreds of hilly and spread-out islands, which would make using a wired infrastructure for broadband extremely expensive and impractical. The field trials included surviving typhoons, and parts of the system have an extended reach of more than 66 miles — I have never seen a distance that great quoted for any other commercial WiMAX installation. Although Israeli stocks were hit hard in the global meltdown a couple of weeks ago, ALVR remains a Top Buy under $9 for the $18 target.

Even though I was looking for a big drop in the market before we really blast off on the two-year tech bull market that lies just ahead, last week was nerve-wracking. For now, the market seems to have stabilized. What that really means is the energy is balanced between buyers and sellers, and so far there is little indication of which short-term direction we will go next. But the range is pretty tight: Any substantial weakness in the S&P 500 under 1395 or strength over 1405 should tell the tale. So far, the bounce has been unimpressive if the bulls really are ready to reclaim all the ground that was lost from the highs. If I had to guess, I would say that we will break to the downside, but I don’t have to guess — we can just watch and wait.

If the S&P does drop under 1395, the next stops are 1325 and then 1295. I don’t think it will get worse than that. On the other hand, if it breaks 1405, we should be back up at the 1450 highs fairly quickly, with new all-time highs above 1550 in sight before the end of the year. As I’ve said many times, technology should lead the next big rally up, and I think our MegaShifts will lead technology.

So, while the stock market marks time, deciding what to do next, I wanted to update you on the Content on Demand MegaShift, where there were some interesting moves and rumors this week.

First, Qualcomm announced that they have a major new customer for their MediaFlo video-to-cell phone transmission service. Verizon, which already offers a video service called Vcast, said that they are launching a MediaFlo-based service, initially in 20 cities. They will send eight channels of full-length television shows to a cell phone for $15 a month. The picture is about twice as clear as Vcast, which means that it will be of similar quality to current TV. That’s definitely good news, since picture quality has been a problem with the current round of video-to-phone services — it’s the main reason why there are just over seven million customers today, or a measly 3% of all the cell phone users in the U.S.

Qualcomm’s next customer will be AT&T, which is launching a similar service later this year.

While you may not want to watch video on your current cell phone, there are plenty of media and technology junkies that are chomping at the bit for these advancements. And this, of course, will drive upgrades to phones with bigger screens and all the latest features, such as a digital camera or camcorder, personal digital assistant and maybe GPS. Also remember that AT&T (Cingular) is the exclusive distributor of the forthcoming Apple iPhone. Verizon and the other providers need to catch up, and there will be a full-scale price war in this area to drive the cost to consumers even lower. A little over 5% of current worldwide cell phone users already have a high-end smart phone that can get video, and those 50 million phones will turn into 500 million phones over the next four years.

Video on demand is an important revenue driver for the fiber-to-the-premises programs at Verizon and AT&T, as well as the network upgrades underway at the cable companies. Verizon already has over 100,000 subscribers and AT&T is just starting its installations. Those numbers aren’t big enough to scare Comcast (CMCSA) today, which has millions of subscribers to its digital cable and On Demand video service.

In addition to the fiber upgrades, the new mobile services using MediaFlo will be joined by more fixed and mobile WiMAX services starting later this year.

• Craig McCaw’s nationwide WiMAX service, Clearwire, went public this morning at $25 a share, valuing the whole company at $600 million. It starts its network rollout early next year, as does Sprint.
• Intel should ship Centrino processors with built-in WiMAX and Wi-Fi capability towards the end of this year — providing another route for video into the home. Then the PC-to-TV connection is an easy one-wire job, using Silicon Image (SIMG) HDMI chips.

By the time the 2007 holiday season is over, there will be over 100 million high-definition, flat-screen TVs installed around the world. By the end of 2008, that number could double as we approach the February 15, 2009 deadline when the analog signal goes dark. Sure, you’ll be able to buy a digital-to-analog converter to keep your old CRT set in use — but will you bother?

The growth in the demand for high-definition TVs is definitely going to benefit Silicon Image. Not only are their HDMI connections built into every new TV, but all the gear that has to connect together in the consumer’s living room — radios, DVDs, TiVOs, media centers, PCs — also needs an HDMI connection. Consumers are not going to buy this stuff if they have to plug in 24 RCA jacks to make everything work. One wire carrying voice, video and data from device to device with no loss of quality is the solution, and that describes HDMI. Over 500 consumer electronics companies have signed on to the standard, and the volumes are huge. SIMG is a great Top Buy at today’s close of $8.89, and all the way up to $13 for my $20 target.

The second factor that hit this week was yesterday’s announcement by Norway’s Tandberg Television. It recommended that shareholders accept LM Ericsson’s $17-per-share takeover bid for the company. Ericsson outbid U.S.-based Arris Group by more than 10%. Ericsson wants to be a leader in Internet Protocol Television, or IPTV, to homes, laptops, cell phones or whatever. Tandberg was the leader in MPEG-4 equipment for high-definition TV, until the market got real and Harmonic (HLIT) introduced better products.

Now, here’s where it gets interesting. Arris now has $1 billion in acquisition credit lines and no head-end (broadcaster, cable office, or telephone company office) equipment, and the same is true of at least five other companies that need to be in this product area. So, that means there are six potential buyout customers and only one independent head-end equipment company of any real size: Harmonic. At the same valuation as Tandberg, in a buyout situation Harmonic stock would go for $15.13 to $16.34. That’s an easy target, because Harmonic is worth more based on its newer products and because it would be the last chance anyone got to buy an IPTV and high-definition head-end equipment company with significant market share. Hmmm. This could get interesting. I am raising the HLIT buy limit again to $10 to help new subscribers get into this stock. The target price remains $16 for this year, and I expect it to go much higher in future years if it isn’t bought out.

Telkonet (TKO) drew several anguished emails when the stock slipped to $2.50 on Monday, and I feel your pain. David said: “I have held this stock for some time, and yet it hardly shows signs of real movement. What’s the deal or do I sell?”

William added: “Do you think it is going to hit your $15 a share anytime soon?”

The stock certainly has moved, but in the wrong direction. Yet, the company continues to make substantial progress, and recently said that they will be cash flow positive this year. I believe they can do it. Just take a look at what they have done so far in 2007:

• They signed a deal with the Department of Commerce to provide engineering and security services, a wedge into later selling them on Broadband over Power Lines.
• They’ve started shipping on the EDS/Army contract and the first system is up and running.They did a private placement of four million shares to get some breathing space until they turn cash flow positive. They won and are doing a 50-site rollout of BPL systems for all the WorldMark byWyndham timeshare properties in the U.S. and Canada.
• They signed an exclusive deal with General Electric’s GE Energy to co-develop an innovative BPL product that enables remote monitoring and management of utility substation equipment. GE Energy has already started test site installations.
• They introduced an energy management product, Telkonet SmartEnergy, and last Friday they announced that they will buy Smart Systems International for $7 million in cash and stock. Smart Systems has installed over 60,000 of its patented intelligent thermostat, air conditioner controller and wireless sensors for individual room control in various commercial applications. By eliminating unnecessary heating and cooling of unoccupied rooms, they cut energy consumption by up to 30%. Telkonet will modify Smart Systems products to run over BPL. Then they’ll go back to all the existing customers and sell them energy management as an upgrade.

And it isn’t even the middle of March yet!

TKO said that they will do about $25 million in sales this year, including $8.5 million from the various government contracts and $1.5 million from the initial GE Energy placements. In the last year, they’ve installed BPL systems in U.S. military sites; the Wyndham by WorldMark timeshare resorts; Accor Hotels in Denmark; the Royal Oak and Samlesbury Hall in the UK; Trump Tower, Trump Palace, Trump Park, Trump Park East and The Octagon in New York; the Queen Mary in California; and apartment complexes in Washington, D.C.

In the last year, the stock has gone from around $3.90 to today’s close of $2.75. Why? I don’t know. The company keeps winning contracts, installing systems and doing deals, as evidenced above. But the skeptics seem to be focusing on fiber or wireless winning virtually all the broadband communications business, and therefore treating TKO like a minor niche company. With the building conversion business TKO has already won, and the EDS contract to deploy BPL on virtually every Army and Marine base around the world, I don’t see how Wall Street can treat it as a niche company for long.

I think management can hit their goals this year: $25 million in sales and cash flow breakeven, which means no more cheap stock private placements. If they can do that, there’s no reason why TKO can’t power on up to $15 or higher. At that level, it would still be a small-cap stock with an $850 million market cap. I think sales growth will accelerate for a few years, so TKO remains a Top Buy up to $5 for my $15 target.

New Energy Technology

Fuel Cell Energy (FCEL) reported their January quarter after the close yesterday, and although it was a good quarter, it was short of the consensus revenue estimate. They did $6.8 million in revenues, up 15.3% from last year, but well under the $9.1 million consensus estimate. Product sales grew 63% to $4.9 million, but R&D was $1 million lower than last year. I am more interested in product sales, as that is what will make FCEL a big company. The R&D contracts are a way for them to get their development expenses funded, but they typically carry low profit margins.

FCEL reported a 38-cent per share loss, a bit larger than last year’s 34-cent loss but exactly on the consensus. How could they have such a large revenue shortfall, but still make their bottom-line number? Because the shifting revenue mix towards products and away from R&D contracts helped their profitability. They would have done even better if they had not written down some inventory of long lead time components. They have been building inventory in anticipation of several large multi-megawatt orders, and if those components are reduced in price, FCEL has to apply the reduction to their inventory.

The product backlog was up nicely to $36.7 million from $24.5 million last year, due to orders for megawatt-class products. The R&D backlog was also up sharply to $29.1 million from $12.9 million last year, mostly due to two recent contracts:

• A Department of Energy award to develop large scale stationary coal-based solid oxide fuel cells.
• A Department of Defense award to develop an electrochemical hydrogen-separation system that will generate electricity, thermal energy and hydrogen, which can be used as a fuel for hydrogen-powered trucks, busses and cars.

FCEL’s new 10-year manufacturing and distribution strategic alliance with South Korea-based POSCO Power to penetrate the Asian market is already starting to pay off, with an order for two 1.2 megawatt systems that will be combined into the largest fuel cell power plant in the world, capable of supporting 2,000 homes. South Korea has substantial subsidies for fuel cell installations, with initial subsidies of 23 cents to 28 cents a kilowatt hour. The power has to be exported to the utility grid to get the subsidy, so most installations will be multi-megawatt systems like those FCEL makes.

POSCO bought $29 million of FCEL stock at $7.63 a share after the quarter closed. The company used $22.3 million in the quarter, including a $6.8 million inventory increase in anticipation of some major orders. They have $104.6 million left on the balance sheet, including the POSCO investment.

Goals for 2007 include taking another 20% out of cost of goods sold, similar to 2006, which will get them to a positive gross margin. They’ll also increase power output by another 15%, and expect to book many multi-megawatt orders. In addition to South Korea and Europe, two other important markets this year will be California and Connecticut.

California passed the Global Warming Solutions Act of 2006 in December, which strictly limits carbon dioxide and other greenhouse gas emissions. Combined with our high electricity costs, the FCEL power plant is a great alternative for many applications. There’s no combustion, so the plants meet all emission standards and are very fuel efficient. FCEL has sold over 11 megawatts of systems in California, and recently booked another one-megawatt order from the city of Riverside. It will power a 30-million-gallons–a-day wastewater treatment facility and — get this — is powered by anaerobic digester gas (methane) created in the treatment process.

At the end of March, Connecticut’s Project 100, which I discussed last year, will announce the winning projects for major fuel cell installations. FCEL and its developer partners submitted bids for a whopping 98.6 megawatts of power, in projects ranging from 2.4 megawatts to 28 megawatts. This is the type of event that can really move a stock. I expect FCEL to win many of these, and therefore I am upgrading the stock to a Top Buy under $11 for my $22 target.

Tuesday’s plunge, a 416-point drop in the Dow, put investors on edge as fears of a slowdown in the U.S. emerged. I sent you a Flash Alert during this drop, advising you not to get anxious about the market’s action and steer clear of making emotional decisions regarding your holdings, as I see a strong two-year bull market on the horizon.

Today, I want to expand on that discussion a bit more to explain why this drop should not worry you. First, history tells us that a one-day drop of 3% or more doesn’t predict much. It has happened 51 times since 1950, and the average return on the S&P after the drop was +1.8% after one month, and +14.1% after one year. Both of those are higher than the typical month and year.

Basically, that tells me that the character of the market has changed, from a complacent, everything’s O.K., up-and-to-the-right pattern, to a more nervous, volatile and questioning mood. But I think the direction remains the same: Up and to the right. Rather than the beginning of a bear market, so far this looks like a nasty correction in a continuing uptrend. The bad news is that it’s going to be a choppier ride, but the good news is that choppier moves usually last longer. As the short-term traders keep trying to predict a top and sell short or buy put options on every little decline, they then have to reverse and go long when the market quickly turns and advances again.

What we should do is take a longer-term perspective, use the declines as entry points to start or build up positions and hold most of our stocks for much higher levels from the end of 2007 into 2008. I’ll be looking at the hardest-hit stocks for new ideas, such as the Chinese stocks that were hammered on Tuesday.

China & the Yen

The Chinese situation is interesting. The Shanghai stock market fell 8.8% on Tuesday, its biggest drop in over 10 years. I have talked before about the “yen carry trade” where the hedge funds borrow yen in Japan at 0.5% interest rates and invest in other assets that have a higher rate of return. The “conservative” funds buy U.S. Treasuries paying 5%, so they lock in a 4.5% spread. They then leverage that with borrowed money, usually 10-to-1 or 20-to-1, so they earn 45% to 90% a year. As long as the yen stays weak, it works.

The more aggressive funds borrow yen in Japan and then invest it in stocks — maybe in the U.S., but increasingly in China or India. Even with just 10-to-1 leverage, they can book huge gains — as long as the yen stays down and what they are buying goes up.

When the Shanghai market started to drop on Monday night, I saw the yen start to strengthen. By the end of the trading day in Japan, Shanghai was down the aforementioned 8.8%, and the yen was up 3%. That proves to me that the yen carry trade is unwinding, and hedge funds could pull out a lot more money as the yen continues to gain ground. This could also contribute to a choppier U.S. outlook as there is at least a trillion dollars invested in the yen carry trade right now. So, I’m doing my homework on China, but it’s too early to pull the buy trigger on Chinese stocks until we can see how bad the carnage is in the hedge fund arena.

Incidentally, Chinese stocks have daily “limit downs” that stop trading when they are hit. In that situation, funds have to sell what they can sell to protect themselves, and I think much of the sudden 150-point drop in the middle of our trading on Tuesday was caused by hedge fund program trading. So, we could see some dramatic moves in the U.S. if the Chinese markets have some more bad days.

Staggering a Bit, But Not Falling

In the near term, the S&P 500 should consolidate right where it is for a few days. It’ll look a bit like a boxer after taking a right hook to the face — it’ll stumble around for a little bit but will ultimately stay on its feet for the next round. This morning the S&P spiked down to 1380, and those levels were quickly rejected. But if we see only a tepid bounce in the S&P that stays under 1420, followed by a drop to close under 1395, I expect we will be headed for a quick retest of 1325 or even the 1295 breakout point. That will feel terrible to those who don’t understand that this is just part of the market’s characteristic cycles. I want you to stay calm if that happens, and start thinking now about what you would like to own or add to if we get that chance. It would be a great time to buy LEAP options or go on margin, if you are comfortable with that. Fast drops are usually followed by bigger rebounds — just look back at the May 2006 decline to confirm that.

If we see a bigger bounce that carries over 1420 and then over 1430, look for a slingshot move right back to the recent highs and probably well beyond. Our stocks should lead the charge back up if Tuesday’s big drop was just a one-day shakeout.

The Economy Is O.K.

As I talked about in Tuesday’s Flash Alert, the GDP revision came in at 2.2% growth for the December quarter, down from the preliminary estimate of 3.5%. That is one of the biggest revisions in 30 years. The main cause was a much bigger increase in inventories than expected, and unwinding that will cause another slow quarter in March, and maybe in June. Bad news? I don’t think so, as Bernanke’s soft landing goal requires a few quarters of sub-par growth.

The GDP Deflator was up 1.9%, finally falling into the Fed’s 1% to 2% comfort zone. But today’s Personal Consumption Expenditures Deflator was up 0.3% for the month, the fastest since last August, and 2.3% from last year — still a tad too high, but not enough to cause the Fed to raise rates. If the Fed doesn’t change interest rates up or down, and keeps flooding the economy with money to prevent a housing collapse, it will be very, very good for stocks and other assets, and very bad for the dollar. So far, the stock market has liked that scenario. While there will be a day of reckoning for this kind of monetary impropriety, it will be in 2009 or 2010, not 2007 or 2008. Until then, don’t worry, be happy you can buy some great companies at lower prices.

Biotech MegaShift

I know that I’ve been focusing on the Biotech MegaShift quite a bit in the past few Radar Reports, but today I only have two stocks that I want to cover. The first is very well-managed biotech that I am raising the buy limit on. And the other company tanked last week, causing a deluge of emails from you, and today, I’m pulling the plug on it.

ViroPharma (VPHM) reported a quarter pretty much in line with expectations, and confirmed guidance for 2007. December-quarter sales came in at $38.6 million, down 5% from last year and just short of the $40 million consensus. However, wholesalers reduced their inventories by two or three weeks, which accounted for the entire revenue decline. Vancocin prescriptions during the quarter were up 19%.

They earned 25 cents a share, well above the 20-cent consensus, even though revenues were light. That was because they completed their switch in Vancocin production from Lilly to their new third-party manufacturers, OSG Norwich and Alpharma. Gross profit margins hit 95%, and will stay over 90%.

For the year, revenues grew 26% to $167.2 million, as Vancocin prescriptions grew 23.2% and the company put through some price increases. The company guided for 2007 growth of 17% to 23%, with higher profit margins in 2007 than in 2006, thanks to the new manufacturing relationships. They reported 95 cents a share.

Clinically, VPHM presented more maribavir Phase II data in December, which showed an 11% to 14% mortality rate, compared to 21% in the placebo group. They began patient dosing in their Phase III study to prevent cytomegalovirus disease in stem cell transplant patients. They also got fast track designation from the FDA and, recently, orphan drug designation.

VPHM also started Phase II dosing in HCV-796 for hepatitis C, and will complete enrollment for the trial in the June quarter. We’ll get four-week follow-up data in the September quarter and 12-week data in the December quarter. They could start a Phase III trial by the end of the year, and certainly by early 2008.

ViroPharma is still looking for an acquisition or in-licensing deal for a second-approved product, and with $255 million on the balance sheet, they certainly can do a deal. They are very picky about both the product and the price, and really don’t care how many deals they do as long as each one is great for the shareholders.

Management didn’t have anything new to add on their efforts to overturn the FDA’s new rules for approving a generic version of Vancocin, other than to say that they are deep in the process and spent about $2.3 million last year on this effort. I still think the FDA will pull or dramatically change those rules, shooting the stock skyward. The other catalysts for the stock price are a great acquisition or good HCV-796 data in the second half of the year. This is one of the best-managed biotech companies that I have ever seen, and I am raising the buy limit on VPHM to $15 for my $28 target. The stock is trading above the new limit, but if the market weakens again you should be able to get it between $13 and $15.

Metabolic Pharmaceuticals (MBLPF) announced terrible Phase IIB clinical trial results for their obesity drug on February 21. They designed this trial like a Phase III trial, with a placebo arm and a diet and exercise regimen for all participants. They did not want to be fooled by good Phase II results into proceeding to Phase III if the drug couldn’t beat a placebo. It didn’t. At 12 weeks and 24 weeks, weight loss was less than one kilogram (2.2 pounds) in all treatment groups. So, the company discontinued the program.

After looking at the data, I think what may have happened is that the anabolic properties of this peptide, increasing bone density, offset the catabolic properties for fat reduction, but that’s a guess. Although Metabolic has $24 million in cash and other drugs coming for pain and osteoporosis, we owned it for the obesity drug. So, with that gone, I want you to sell MBLPF.

New Energy Technology MegaShift

As winter comes to an end, the demand for heating oil and natural gas normally recedes for a while, at least until the summer driving season and air conditioning electrical demand pick up with vacations and hotter temperatures. So, the two big drivers for oil and gas prices over the next few months will be the strength of the economy in the U.S. and China, and geopolitical factors led by Iran. The dollar is a wild card, because further weakness might finally tip OPEC into pricing oil in a basket of currencies that includes the euro and yen, instead of just dollars. If our economy strengthens, the Fed will be able to slow down their flood of liquidity, which would help the dollar, but oil prices would drift up as economic growth accelerates. If our economy weakens, the Fed will pump out even more money, the dollar will fall, and OPEC may act.

The Iran situation is getting serious simply because of our loss of face in the Middle East. Iran ignored a deadline last week to halt its nuclear program, and on Tuesday, their leaders said that the country would never again suspend uranium enrichment. The U.S. has insisted on suspension before there are any more negotiations, so we are at a painfully obvious stalemate.

The net of all this should be oil prices in a $50 to $60 range for the first half of the year, and in a $60 to $70 range in the second half. Most of our New Energy Technology stocks are influenced by the current price of oil, even though that is irrelevant for all but Royal Dutch Shell (RDS.A) and our two natural gas companies, Infinity Energy (INFY) and Gasco Energy (GSX). Regardless of what happens on a day-to-day basis, such as today’s drop in oil prices from yesterday’s two-month high, the trend is for steadily increasing prices. In this case, the trend really is your friend, and you want to be fully loaded in these stocks for 2007 and 2008.

Gasco Energy (GSX) reported earnings last night and held their conference call this morning. They lost two cents a share on $6.6 million in sales, compared to the consensus for a one-cent loss on $6.4 million in sales. Once again, increases in production of natural gas were offset by declining prices. They averaged $4.96 per Mcf this year, compared to $9.58 per Mcf last year, but production was up 43% for the quarter and 123% for the year. Production increased 17% from the September quarter.

For the year, revenues grew 52% to a record $25.7 million, and GSX reported a loss of six cents a share before an impairment charge. Again for the year, they averaged $5.38 per Mcf for gas, down from $8.16 in 2005. They have no hedges in place, which is one reason why I like the stock — it will shoot up as gas prices increase, because they have increased production so much and have not hedged away the pricing leverage.

GSX said that they will budget $40 million for capital spending in 2007, down from a heavy $87.3 million program in 2006, mostly to drill 10 wells in the Unita Basin in Utah, and complete another one in Wyoming. They have not touched their $25 million credit facility yet, and it is about to be increased to $37 million.

Gasco is an investment in the price of natural gas in the near term, and the development of oil shale in Colorado, Utah and Wyoming in the longer term, because it takes a lot of natural gas to heat the shale to temperatures hot enough to extract oil. The company is a very successful driller — since the end of the quarter, Gasco drilled a 12,000-foot well in a record 14 days. But they did suffer from the cold snap in mid-January, and had to shut down half their production for two weeks due to temperatures as low as 35 degrees below zero in Utah. I think the stock should recover rapidly with gas prices. GSX remains a Top Buy all the way up to $4.50 for my $9 target.

Plug Power (PLUG) also reported results for the December quarter this morning. The company shipped a lot of systems that were not installed in time to recognize revenue, so sales fell to $1.0 million for the quarter, down from $2.7 million last year and far below the consensus estimate of $2.9 million. Yet, they only lost 15 cents a share, just a penny worse than the consensus estimate for 14 cents, and that was a substantial improvement over last year’s 19-cent loss. The Street killed the stock today anyway, at one point pushing it to a lifetime low.

To understand what happened, you have to realize that Plug Power ships a GenCore stationary fuel cell to a customer, who then installs it, tests it and accepts it. When it is accepted, PLUG recognizes some revenue immediately and defers the rest over the warranty period for the system. So, for the quarter, they shipped 78 units, but only recognized “sales” of 14 units, down from 23 units in last year’s December quarter. Thirty-two of those units were on a consignment basis, probably to distributors, but all the rest will eventually be recognized. For the full year, PLUG shipped 152 units and recognized revenue on only 94 of them. By way of comparison, in 2005 they shipped 134 units. At the end of 2006, they had 149 units shipped but not installed, including the 32 on consignment, up from 99 units at the end of 2005.

The other piece of very good news was an incredible quarter for orders, with 447 booked in the three months. That brought them to 539 for the year — obviously, they made it a priority to close business in the quarter — compared to 117 orders in the December 2005 quarter and 324 for the year. The backlog rose to 572 units at the end of the year, compared to 194 at the end of last year.

So, let’s see — shipments up 13% for the year, shipped but not installed up 18%, orders up 66%, backlog up 194% — yup, better knock the stock down to all-time lows. As usual, Wall Street is missing the bigger picture.

In 2007, the company expects to install 400 GenCore systems, cut support costs by 50% by the end of the year, cut manufacturing costs by 25% by the end of the year, burn no more than $50 million of the $269 million in cash that they have on hand, and enter new fuel cell application areas. Sounds good to me. On the conference call, they said that the first two months of the year were the best two months ever for installations with 27 systems already installed and running. PLUG remains a buy up to $5 for my $10 target.

Rentech (RTK) was in the news this week, when Virginia Congressman Rick Boucher — the new chairman of a House Energy subcommittee — said that he hopes to jump-start the coal-to-liquids industry by re-introducing legislation to provide price guarantees to investors in coal-to-liquids conversion plants. A study last year by the Southern States Energy Board concluded that coal-to-liquids will supply 29% of the alternative fuels needed to eliminate the U.S. dependence on foreign oil by 2030. “Dependence” means getting alternative fuels to replace 60% of imported oil.

Boucher pointed out that there are more than a dozen coal-to-liquids plants in the planning stages in the U.S., including a $1 billion Rentech facility in southern West Virginia designed to initially produce 10,000 barrels of fuel a day, and then steadily increase to 30,000 barrels. His bill ties a price guarantee for coal-to-liquids plants to the price of oil. If oil prices fell below $40 a barrel, the government would make a payment to the conversion operations. If the price of oil rose above $75 a barrel, plant operators would pay the government. This indirectly confirms my calculations that coal-to-liquids is profitable at $45 oil.

Rentech will be a direct beneficiary of this legislation, with two coal-to-liquids facilities under construction and four more currently in the planning stages. As I’ve said before, Rentech is going to be a multiyear holding, and we’ll sell it at much higher levels if a big oil company doesn’t buy it out before then. RTK is a Top Buy under $5 for my $11 target.

Security MegaShift

American Science & Engineering (ASEI) reported their December third quarter on February 9. Sales increased 24.2% to $47.8 million, the second-highest quarter ever, and they reported $1.07 per share pro forma. But Wall Street was looking for $1.25 pro forma, and the stock fell a couple of dollars. As I’ve mentioned on a number of occasions, ASEI has a very lumpy business, with large contracts that may or may not be recognized for revenue in any particular quarter. For example, December-quarter sales increased 62% from the $29.6 million reported in the September quarter. They had a $106.8 million backlog at the end of the quarter, including a new $13 million contract with NATO. Since the conference call, they’ve announced:

• A $6.2 million order from a new Middle Eastern customer for multiple Z Backscatter Vans configured for harsh environments;
• Pilot testing of the privacy enhanced SmartCheck airport screening system at Sky Harbor International in Phoenix. SmartCheck creates an image that looks like a chalk outline of the passenger with a variety of threats and contraband outlined, but does not reveal facial or body features.

The new Democratic majority in Congress made a “first 100 hours” push that included implementing all of the recommendations of the 9/11 Commission. One of those recommendations is to focus on the security surrounding all cargo entering the U.S. Port and container security is a high-margin business for ASEI, with some CargoSearch systems already installed. And, the company also has a contract with the Department of Homeland Security for a cargo inspection system.

Stifel Nicolaus initiated coverage of ASEI this morning with a buy recommendation.
With a P/E ratio of only 21X, ASEI remains a strong buy under $59 for my $93 target as the world continues to find ways to deal with terrorism.

WiMAX MegaShift

Airspan (AIRN) reported December-quarter results yesterday, and the stock was clobbered today because they missed the consensus and then guided low for the March quarter. I know it is very frustrating for you to see Wall Street moving an early-stage stock in an explosive new area all over the place based on short-term results. It doesn’t make any sense to me, either. The right way to respond is to use days like today to pick up a few shares, lower your cost basis, or start a new position to go with an Alvarion (ALVR) position.

The company said that December fourth-quarter sales were down 17% from last year to $31.3 million, but that should not have been a big surprise since the consensus was $31.5 million. AIRN lost 10 cents a share, compared to a loss of eight cents a year ago, which was right on the consensus of 10 cents. No surprise there. They guided for $26 million to $28 million in sales in the current quarter, and the consensus was for $31.8 million. There is the shortfall. AIRN’s guidance for 2007 sales was simply “double-digit growth” to another new record, where the consensus was looking for 15% growth. That seems in-line, too.

Sales for the full 2006 year were up 15% to a record $127.8 million, including $46 million in WiMAX sales, and AIRN lost 73 cents a share pro forma. During the year, they migrated their product portfolio from proprietary circuit switching technologies to Internet-Protocol based products, especially fixed and mobile WiMAX. Airspan also announced that they won a major contract with I.C.E, the main telecommunications operator in Costa Rica, to build a nationwide WiMAX network.

Although their overall sales growth rate is slowed by the decline in proprietary products, AIRN is making the transition to certified WiMAX products on schedule. They are winning their share of the business, and I still think buying a basket of Alvarion, Airspan and Terabeam (TRBM) is the smartest way to participate in the WiMAX MegaShift. This should be the year WiMAX breaks out as a high-growth, investible area, and all three stocks should do fine.

As AIRN management said: “The WiMAX market continues to grow and the pace is becoming more frenetic by the week. There are numerous areas of keen activity at the moment as virtually every operator around the world looks at WiMAX and what it can do for them. Our WiMAX sales pipeline is gathering momentum as more and more operators around the world have come to recognize WiMAX and specifically our offerings as a viable alternative to DSL, to cable and more and more to 3G evolution.”

AIRN is targeting their first pro forma profitable quarter in 2007, which will require sales in the $38 million to $43 million area and continued improvement in gross profit margins. I think they will deliver that in the December quarter, as their partners Ericsson and especially Nortel are making WiMAX a major priority. Buy AIRN under $5 for my $10 target.

MobilePro (MOBL) has been the subject of many emails, which is certainly understandable with the stock at five cents. I have long said, and told the CEO point-blank, that Cornell Capital was a millstone around the company’s neck and needs to be replaced. MOBL’s CEO has a more positive view of them than I do, in part because they gave him money to start building the company when no one else would. But he does realize that the rest of the world does not like their deal with Cornell Capital.

On February 27, MOBL filed an 8-K that said they agreed to defer the $250,000 weekly principal and interest payments on the $15 million in convertible bonds until July 8, 2007. At the same time, they reinstated the previously-deferred $125,000 weekly payments on the other $7 million in convertibles, and increased the payment to $250,000 through July 8. Then MOBL gave Cornell Capital 7.3 million shares of stock to pay the principal and interest due.

MOBL can make these payments in cash or stock. If paid in stock, it is now valued at the lower of either 17.4 cents a share or a 7% discount to the average of the two-lowest daily-volume-weighted average prices during the five days immediately following the scheduled payment date. What that means in the real world is that someone can short the stock, depress it for two days, and get a lot more shares. Cornell Capital is being investigated by the SEC for doing just that with another company. Also, the most recent amendment lowered the highest assumed price of the stock from 27.5 cents to 17.4 cents.

Obviously, at five cents a share, 7.3 million shares of stock pays $365,000 in interest and principal, or about a week and a half of what is due. Counting the 20.8 million shares issued in January and early February, MOBL has added 28.1 million shares in the last 8-plus weeks, or 3.3 million shares per week. At the end of December, they had 608.5 million shares outstanding, so the dilution is on the order of a half a percent per week, or 26% per year. That’s unacceptable.

Management is looking for outside equity investors to fund the municipal wireless network build out, and may sell or joint venture other operations in order to take out Cornell Capital. These “death spiral” convertible financings are deadly, and although the CEO is a very experienced investment banker and deal guy, he has to scramble to save the company.

I think he will do it, but until we see a major step forward, I am moving MOBL to a hold. This is a real hold, as there is plenty of value here to take out Cornell Capital and continue to pursue the municipal Wi-Fi business that was the original reason why we bought the stock.