Frustrating Bulls and Bears Alike

Hmm, first quarter GDP revised up again to +1.0%, existing home sales up 2% and the Dow Jones Industrial Average plunges 358 points to a new 2008 low. The S&P 500 closed below 1300, heading for a retest of its March low at 1270. This just shows you what $140 oil and the realization that GM and Citigroup are not going to make it this time can do.

The market continues to do what it does best, frustrating bulls and bears alike until it shakes everyone out of their positions, and then can make a major move up or down with no one benefiting. As I’ll discuss at the end of this Radar Report, I still think that we are seeing a classic double bottom and the next move will be up, so my best advice is to remain fully invested. But if you are feeling toyed with by the day-to-day market volatility, you are not alone.

In times like these it can be helpful to step back a bit and look at the big picture. I’ve been asking myself: “Where will the really big money be made over the next 10 years?” We all know that in the near term, say the next three years, the big drivers of this technology wave are:

  • Universal connectivity, allowing everyone in the world to connect to the information, people and even objects (through RFID) that they need in order to function in the 21st century
  • Voice-video-data (VVD) convergence, delivering everything seamlessly to both fixed and mobile connections
  • Digital consumers, with the impending February 17, 2009 shut-down of analog television marking the end of the fastest growth period in this area
  • Medical and biotechnology, which can continue as a major driver for decades if someone can get control of the dysfunctional FDA (my suggestion: Have them certify for safe dosage only)
  • New energy technologies to cope with permanently higher oil prices, another driver that will continue for decades

But as broadband connections and cell phones become a given, like electricity, and hot water , what will be the new high-growth drivers to keep technology as the most important investment sector in the world? In my Money Show presentations, including the upcoming event on August 7 to 10 at the San Francisco Marriott, I talk about five currently-small high growth areas with great promise:

  • China, where today’s short-term problems will be forgotten in five years, and we will be reinvesting after the dust settles
  • Security, where 9/11 will never be forgotten and companies like American Science & Engineering (ASEI) face ever-increasing demand
  • The New World Economy built on universal connectivity and VVD convergence
  • Robotics, where there are very few investment alternatives beyond iRobot (IRBT)
  • Nanotechnology, which has the potential impact of computers and biotechnology added together

Nanotechnology is in such an early stage that it is hard to find anything to invest in. Most of the best companies are still private. In the past, I’ve recommended hardware and software tools companies like Veeco (VECO) and Accelrys (ACCL), and I keep looking at FEI (FEIC) as a possible recommendation. We are already in a molecular-level materials company, Integral Technologies (ITKG.OB), which hit my $4 target price once and will do so again. But we don’t have a direct investment in nanotech, and we need one.

Harris & Harris (TINY) is not a nanotech company. It is a closed-end venture capital fund that invests in nanotech companies, which are mostly private. During the mania for nanotech in 2002 to 2004, it frequently sold for three to six times its net asset value. I saw strong buy recommendations in early 2005 at a 150% premium to net asset value.

Now, I grew up on a farm and still currently live on a farm, but I did not just fall off the turnip truck. Closed-end mutual funds like TINY normally trade at a discount to net asset value. When I am interested in a closed-end fund like H&Q Life Science Investors (HQL), I love to see a 15% to 20% discount to net asset value before I buy it. (HQL is currently at a 13.5% discount and starting to look interesting.) There’s been a lot of academic work on why closed-end funds normally trade at a discount, with the most popular theory being the potential taxes on the unrealized gains in the portfolio.

There are some circumstances where a premium to net asset value is justified. The Korea Fund (KF) often traded at a premium during the many years the Korean market was effectively closed to outside investors. But there is no circumstance where a 500% premium to net asset value can be justified, unless the fund is carrying Manhattan real estate at cost from 1908.

When I looked at TINY a couple of years ago, the premium to net asset value had fallen to about 100%–the new investor got to pay double what the portfolio was valued at. Gee, thanks. To be fair, venture capital companies usually carry an investment at cost until something happens. If the something is bad, they write the value down, reducing the net asset value of the fund. If it is good, like a new round of financing at a higher price, they write the value up but not all the way up–perhaps to 75% or 85% of the new valuation. Between financing events, even though the portfolio companies are presumably making progress, the fund normally does not increase the value of their shares. So while a small premium to net asset value might be justified to reflect the real current value of a portfolio of attractive private investments, 100% is better than 500% but still ridiculous.

Fast forward to today. TINY has a net asset value of $5.77, just 18 cents off their all-time high. The company just did a 2.5 million share, privately-placed equity financing at $6.15, a discount to their market price but a premium to their net asset value, so there was no dilution. But the stock promptly fell to $6.15, and the premium to net asset value fell to 6.6%. Now you’re talking! I can’t guarantee you that TINY won’t go to a discount to net asset value in the future (for the first time in its history), but I have followed their portfolio for several years and I like what I see. They own a $5.37 million position in Nanosys that accounts for 6.5% of their portfolio. Nanosys produces the building blocks of nanotechnology: nanowires, nanotubes and nanodots, and has long been my candidate for the Intel of nanotech. It could come public this year. Solazyme, which produces renewable diesel fuel from algae, is a $3.5 million position (4.2% of the portfolio) and another potential IPO this year, as is Molecular Imprints ($4.5 million; 5.4% of the portfolio). The entire TINY portfolio was shown in the March quarter shareholders’ letter:

The company reinvests its capital gains rather than paying them out, so compound interest can kick in with a vengeance once the IPO markets open up. I think that will happen sometime between October and next April, and two or three companies will go public. TINY will be able to sell some stock and add the proceeds to their current $53.6 million in cash. Even if the equity markets then shut down for a couple of years, TINY will be able to make more investments on very attractive terms to get ready for the next up cycle. If I’m wrong about a stock market downturn starting next April and it just keeps climbing, many more of their portfolio companies will become public, driving up the net asset value. Since their founding, nine of their portfolio companies have made it public, and four more were acquired. That’s an excellent record.

Their net asset value compounded at a 20.1% annual rate for the last five years, and I think they can keep that up for the next 10 to 20 years. Even if the premium to net asset value never expands again, that would be an excellent investment return. But, of course, the premium will expand in a better market for either IPOs or nanotechnology, or both, and give us an even better return on the stock.

One of the drains on the return TINY can provide is the increasing cost of bureaucracy on a small company. This is something to think about as we approach the Presidential election, because if the U.S. is ever going to get out of its current mire, most of the heavy lifting will be done by small and medium-size companies, and many of those will be producers or innovative users of technology. Additionally, I believe General Motors will file for bankruptcy before the end of 2009, possibly very early next year after management collects their bonuses, which will be a watershed event in passing the mass production baton from the U.S. to Asia. Taxing or over-regulating small business and entrepreneurs will simply impoverish the country as we muddle towards a new role on the world stage that can maintain our standard of living.

In 2002, TINY employed one internal accountant, one outside accounting firm, no corporate compliance consultants and no internal lawyers. Their annual audit cost $55,000. Five years later, thanks to the misbegotten Sarbanes-Oxley Act and, additional investment company reporting requirements, as well as Financial Accounting Standards Board proclamations on valuing assets, the company has two internal accountants, three accounting firms, three law firms, a compensation consulting firm, a compliance consultant, an asset-valuation consulting firm and two internal lawyers. Their 2007 audit cost $290,000, and their 2008 audit will be about $340,000. This is all for a company with 13 employees, including the lawyers.

Even under a Democratic administration, I don’t think the regulatory burdens will increase anywhere near as rapidly as they did in the last five years, so if TINY can grow its assets dramatically through some IPOs or acquisitions, the burden as a percentage of assets should fall and leave more income for us. But this is an area I will watch closely, as I don’t trust either Presidential candidate to do the right thing.

By investing in Harris & Harris, we get immediate exposure to 31 leading nanotech companies, each working on dramatic new products that will eventually revolutionize our lives. They won’t all work out, of course, but TINY management has a good record of picking winners, and they diversify enough so that even a complete failure won’t hurt the net asset value all that much. As the companies come public or get acquired, we’ll get a jump in the stock to reflect the higher net asset value, and then a further jump as the premium to net asset value expands because investors will get more bullish on nanotech after seeing some successful IPOs and big-ticket buyouts. I want you to take advantage of the weakness caused by this private placement and buy TINY up to $6.50 for a $10 target in 2009 and much higher levels in subsequent years.

The Harris & Harris Portfolio

  • Adesto Technologies –Developing semiconductor-related products enabled at the nanoscale
  • Ancora Pharmaceuticals – Developing synthetic carbohydrates for pharmaceutical applications
  • BioVex –Developing novel biologics for treatment of cancer and infectious disease
  • BridgeLux –Manufacturing high-power light emitting diodes
  • Cambrios Technologies – Developingnanowire-enabled electronic materials for the display industry
  • CFX Battery – Developing batteries using nanostructured materials
  • Crystal IS –Developing single-crystal aluminum nitride substrates for optoelectronic devices
  • CSwitch –Developing next-generation, system-on-a-chip solutions for communications-based platforms
  • D-Wave Systems –Developing high-performance quantum computing systems
  • Ensemble Discovery – Developing DNA Programmed Chemistry for the discovery of new classes of therapeutics and bioassays
  • Evolved Nanomaterial Sciences – Developed nanoscale-enhanced approaches for the resolution of chiral molecules
  • Exponential Business Development Company –Venture capital partnership focused on early stage companies
  • Innovalight – Developing solar power products enabled by silicon-based nanomaterials
  • Kereos –Developing emulsion-based imaging agents and targeted therapeutics to image and treat cancer and cardiovascular disease
  • Kovio –Developing semiconductor products using printed electronics and thin-film technologies
  • Mersana Therapeutics –Developing advanced polymers for drug delivery
  • Metabolon – Discovering biomarkers through the use of metabolomics
  • Molecular Imprints – Manufacturing nanoimprint lithography capital equipment
  • NanoGram –Developing a broad suite of intellectual property utilizing nanoscale materials
  • Nanomix –Producing nanoelectronic sensors that integrate carbon nanotube electronics with silicon microstructures
  • Nanosys – Developing zero and one-dimensional inorganic nanometer-scale materials and devices
  • Nantero – Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes
  • NeoPhotonics –Developing and manufacturing optical devices and components
  • Nextreme Thermal Solutions – Developing thin-film thermoelectric devices for cooling and energy conversion
  • Phoenix Molecular –Developing technology to enable the separation of difficult-to-separate materials
  • Polatis –Developing MEMS-based optical networking components
  • PolyRemedy –Developing a robotic manufacturing platform for wound treatment patches
  • Questech – Manufacturing and marketing proprietary metal and stone decorative tiles
  • Siluria Technologies –Developing next-generation nanomaterials
  • SiOnyx – Developing silicon-based optoelectronic products enabled by its proprietary “Black Silicon”
  • Solazyme – Developing algal biodiesel, industrial chemicals and special ingredients based on synthetic biology
  • Starfire Systems –Producing ceramic-forming polymers
  • Xradia –Designing, manufacturing and selling ultra-high resolution 3D x-ray microscopes and fluorescence imaging systems
  • Zia Laser – Developed quantum dot semiconductor lasers

Content on Demand MegaShift

Infinera (INFN) drew an understandable question from Jeremy B.: “Can you please discuss your current opinion of Infinera? I’m worried that it may be time to sell this stock and would love to hear your feedback.”

I covered this in some detail in last week’s issue. They have one very large customer, Level 3, and some other 10%+ customers, so at this point they are vulnerable to any slowdown in spending from those four–and that is exactly what is happening this quarter. But they’ve just introduced their next-generation optical component, and it puts them at least three years ahead of the competition. We are at the inflection point where many more telecom companies have to start ordering, so the customer concentration issue will slowly fade away. Infinera uses a razor-and-blades business model, selling the boxes at little or no profit and then shipping add-on boards to scale up capacity at excellent profit margins. That’s why the Deutsche Telekom order will cost Infinera $4 million in losses over the next two quarters, even though it was a fantastic win with a Tier One customer, beating out all the other Tier One suppliers.

What will move the stock now is orders, orders, orders, and I think we’ll see several announcements before the end of the year and a virtual tsunami in 2009. So this is not the time to sell INFN, and if you don’t have a position, I would go ahead right now and buy INFN all the way up to $15 for a $30 target.

Michael H. asked: “Can you please comment on the risks of delisting for TKO and ZHNE? Now ZHNE has received a warning from NASDAQ. What are your thoughts about the near-term risks and long-term effects of such a possibility?”

The American Stock Exchange where Telkonet (TKO) is listed is much more tolerant of stocks trading for less than $1 a share, which is one reason companies move from NASDAQ to the AMEX. I think TKO’s results will have the stock well over $1 by the end of the year, so I’m not worried about them. TKO remains a buy up to $5 for my $15 target, a 2,700% return from current levels.

Zhone (ZHNE) is a different matter. Their choice is to figure out a way to get the stock up or leave the NASDAQ National Market for the OTC Bulletin Board where they will have lower liquidity. The quickest way to get the stock up in the short term is to do a reverse split, and even though the Zhone board is packed with financially sophisticated people, they often make this major mistake.

ZHNE has to trade above $1 for 10 business days in a row before December 8 to avoid delisting, and even if they can’t do that, they can appeal the decision. If we get the market rally I am expecting, they should be OK. If not, I will lobby the Board to not do a reverse split, but rather move to the Bulletin Board until they can get the stock price back up by posting good results instead of financial chicanery.

We don’t need to worry about this for a while, and I am keeping an eye on it. Meanwhile, ZHNE remains a buy up to $1.50 for my $4 target.

New Energy Technology MegaShift

Gasco Energy (GSX) is still under $4, and I find that amazing. Natural gas prices are up 80% over the last year, more than oil prices, and the futures market is saying they are not coming back down. The cold winter of 2007-2008 took gas inventories to very low levels, and the hot summer means electric utilities are burning lots of gas. That makes sense, because $12 gas equals about $75 oil, so there is no way a utility would choose to burn oil. If have a Gulf hurricane and natural gas spikes to $18 or $20, utilities will still burn it because oil would be at $170 to $200 a barrel.

The U.S. is not increasing liquid natural gas imports because we don’t have enough LNG terminals and because Europe and Japan are outbidding us for the stuff. So a company like Gasco is going to rake it in for the next many months, and GSX is a timely buy up to $4.50 for my $9 target by April 2009.

Subscriber MDC asked: “Can you explain why you think Holly Corp. (HOC) is going to rise? It seems to me the refinery business stinks right now.”

It sure does. That was the thesis when I recommended Holly Corp. (HOC). The stock was down because refinery margins had been squeezed as the price of oil rose faster than the price of refined products. I know it doesn’t feel that way when you are filling up the SUV, but it’s true. I thought the summer driving season would give the refiners their usual opportunity to widen the spread by keeping gas prices high. Although gas is high, oil keeps shooting up–including today’s record over $140–and investors sell off the refinery stocks.

As I’ve been saying, I think oil is at the high end of its trading range, barring the transient effects of a major hurricane. When the head of the Libyan oil company says oil is headed for $170, he is just “talking his book.” Maybe it will hit $170 on hurricane news, but oil has been in a parabolic increase for several months and the one thing we know about parabolic increases is that once they’ve gone vertical, they (a) can go higher, longer than the shorts would believe, and (2) they break viciously. So I think it is only a matter of time–a short time, at that–before you see HOC and the other refiners rally sharply. HOC remains a buy up to $48–a full $10 above the current price–for my $70 target.

U.S. Geothermal (HTM) held their first-ever financial conference call with about 30 participants after the close on Monday. I thought it went really well, but the stock sagged about 30 cents Tuesday and Wednesday, and then rocketed up 44 cents in today’s crummy market on the news that HTM will be added to the Russell 3000 index on June 27. It sagged for two days because they are having the normal start-up problems that need to be solved. I like this, both because management learns how to solve the problems as well as what to look out for, and also because it gives me insight into their honesty and openness. Lots of people can talk geothermal, but an experienced management team that has actually started up a few wells and a couple of power plants will make better acquisitions and run a tighter ship every time.

Currently, HTM is debating ways to increase the heat flow at Raft River, either by drilling a $1 million injection well or maybe a pair of wells for $5 million, one injection and one production. They’re also thinking about adding a small filtering plant to increase water quality. Another team is trying to reduce costs by convincing the regulators to let them monitor nearby wells for impact on a monthly or quarterly basis instead of weekly or even, in some cases, daily. These are all the things a company deals with once it goes from talking geothermal to producing geothermal, and they were not reasons to drop the stock. While I think the whole Russell index thing is silly and transient, I take some satisfaction in watching the stock move away from the sellers that knocked it down.

Not surprisingly, the company is seeing lots of deal flow, with other companies and entrepreneurs wanting to sell them geothermal properties, joint venture or sell a company. I predicted this in my original write-up, and all their current start-up issues just make them a more sophisticated buyer, able to ask tougher questions and do better due diligence before they pick their next deal.

The results of drilling tests at Neal Hot Springs should be out in 30 or 40 days, and that will drive the stock up next. There was some worry about Congress extending the renewable energy tax credits, and HTM management said a one-year extension is a lock, and the industry might be able to get a five-year extension if the Democrats win in November. HTM is a Top Buy up to $4 for my $6 first target, and I expect us to hold this stock for much higher prices over the next several years.

Robotics MegaShift

iRobot (IRBT) got a $3.3 million Department of Defense grant to develop a flexible robot that can move through spaces smaller than the robot’s overall dimensions. It would be used for search and rescue or urban reconnaissance. IRBT is just under my $15 buy limit, and I think the $30 target is still reasonable.

Market Outlook

The Fed spoke yesterday, the market liked it, and then the S&P 500 sailed over 1326…and couldn’t hold. That meant today would be bad, even before Goldman Sachs said to sell GM and short (!) Citigroup. But in the bigger scheme of things, we are only retesting the 1270 bottom in March (1255 in the overnight futures), and on the big monthly chart this is just a routine pullback. If you listen to CNBC, you will think it is the end of the modern financial era–that’s what you are supposed to think. As long as we bounce off 1270 (or 1255 at the worst), the set-up is still there for a slingshot move over 1326 to 1440. At that point we’ll learn if a move to new highs is still in the cards, or if the prospect of an Obama presidency is going to kneecap this market after Labor Day.

Oil Peak Predictions

Like so many summer markets, this one is a tough one. But it isn’t the usual “sell in May and go away” problem–actually, the 10-year cycle and the Presidential cycle show the 2008 market normally would be higher by Labor Day than the end of May. The problem this time is shaking off the known bad news and breaking out of the 1270 to 1440 trading range on the S&P 500 that reflects the fear around the housing mess, the credit crunch, inflation and high oil prices. Oil prices are in a parabolic increase, which is a main factor keeping a lid on equity prices. The bad news is that parabolic increases often go much higher and last much longer than anyone expects, and oil really could hit $200 a barrel after a bad hurricane or a geopolitical incident. The good news is that parabolic increases don’t last. Best of all, when they end instead of consolidating at a higher level–they break. When that happens, the stock market should soar. Another way to look at this is that oil hit nearly $140 a barrel this week, and the S&P is still well above the March lows. If the bears can’t use the current flow of bad news to knock stocks down, what are they going to use in the future?

I think oil will peak at $155 to $160 sometime in the next 45 days or so, but that’s just a guesstimate from looking at the chart. There now is a chance that $140 marked the top, but we won’t know until it either makes another run or two at that level and then fails, or breaks $130 right now. If you see that breakdown happen at the same time the S&P 500 breaks out above 1345 and then 1370, expect the rally to April 2009 to accelerate dramatically.

We’re in the part of the quarter where we should be hearing negative earnings preannouncements, and there haven’t been many. [One, Infinera (INFN), caught me by surprise, as discussed below.] Once we get past July 3 and investors begin to stop worrying about the first half of the year, the companies should confirm on their conference calls that the second half will be much stronger. We are well-positioned for that shift in perspective and sentiment.

China MegaShift

One area we are almost entirely out of, and better for it, is China. The Shanghai Composite Index has fallen 11 of the last 12 trading days, capped by a 6.5% drop last night. It is down more than 50% since the October high – the equivalent of having the S&P 500 at 800 today, or the Dow Jones Industrial Average at 7000. Over $1.2 trillion in market value has gone to money heaven.

The idea that China would prop up their market at least through the Olympics was wrong. Investors are worried that the government will focus on keeping inflation down instead of concentrating on measures that will promote growth or boost stocks. This fear is already appearing to be warranted, as just this morning the government said they will raise the price of oil about 18% tomorrow, even as the World Bank increased their estimate of China’s 2008 growth rate from 9.4% to 9.8%. Inflation is running over 8%, so the Chinese central bank has raised rates six times since the beginning of 2007 and also sharply raised reserve requirements. The Chinese stock market had a great run, increasing 500% in two years to become one of the most expensive equity markets in the world. Newbie stock buyers poured money in at the top, opening 1.1 million new accounts in September as the market approached its October 16 high. They had never seen a bear market–now they have, and they are shifting into cash. But the stock market has a long way to fall before this is over.

I don’t think the Chinese economy will slow much for the next year, so we still have time for UTStarcom (UTSI) to get to my target price. UTSI remains a hold for the $10 target.

Content on Demand MegaShift

Infinera (INFN) reaffirmed their guidance for the June quarter, but they forecast their September quarter revenues in a range from $75 million to $80 million on Monday of this week, saying that they expect North American demand to be weaker than expected. This was new guidance; the consensus forecast was $97.7 million. The only way they could have had such a shortfall in orders would be if one of their largest customers dramatically reduced their purchases. In the March quarter, Level 3 Communications accounted for 31% of revenues, while Cox Communications, Interoute Communications and XO Communications each accounted for more than 10%. Odds are that it was Level 3 that accounted for most of the cutback. The company blamed the shortfall on the timing of new network builds at existing customers, the sales cycle with potential new customer wins, and a product transition associated with its recently announced new system.

Infinera cut their 2008 annual revenue growth forecast from 25% to 10%, which would bring them in at $340 million. The Street was looking for $388.5 million, so the $20 million shortfall in the September quarter will be followed by about a $28 million shortfall in the December quarter.

Analysts immediately moved their 2008 estimates from an 11 cent profit to a 12 cent loss, and cut the 2009 outlook from 30 cents to four cents, with many looking for a loss. The stock dropped over $3.50 Tuesday on over 10 million shares traded.

The earnings news completely overshadowed some really amazing news: Deutsche Telekom, a Tier One telecom company, selected Infinera’s deep wave division mulitplexing (DWDM) gear for its pan-European network. This is a very big contract. It marks the company’s first win of a Tier One customer and IFIN will book $4 million in additional costs in the September and December quarters in connection with it. It will be the best possible reference installation for future Infinera sales.

What’s more is that Deutsche Telekom is known as one of the toughest buyers in the business, and INFN beat out Alcatel, Ciena, Nortel and others to win this contract. Deutsche Telekom said the Infinera equipment will carry them into the next decade. INFN is the only company that can offer this kind of capacity and flexibility to Duetsche Telekom and its Tier One competitors. No telecom company can afford to fall behind in the broadband growth that is in store over the next three to four years, and I expect substantial orders from several more of the big companies.

This week, Infinera is at NXTcomm08 in Las Vegas, where they’re demonstrating their commercial 100 gigabit Ethernet (100 GbE) service over a long-haul network from their booth to Los Angeles and back. While this is of interest only to the most advanced network owners today, such as Level 3 and Deutsche Telekom, it will become a mainstream product in two years. Their new ILS2 chip, (which they have called their most important product introduction since the original optical chip), can process eight terabits of data per second on a single optical fiber. That is the equivalent of about 1,700 DVD movies per second. They appear to be three to five years ahead of any competitor.

I don’t like being surprised any more than the next guy, so when it comes to Infinera I have to question their management’s insider selling program and even whether the company’s CEO should be replaced. However, at the end of the day their financial model makes sense, as their gross profit margin expanded from last year’s June quarter of 28% on $58.4 million in sales to 34% in September, 36% in December and 45% in March. Their market opportunity is huge as 100 gigabit Ethernet moves from the bleeding edge to mainstream, and their technology is so good that we should treat this dip as an opportunity to initiate or add to positions and wait for the payoff from the Deutsche Telekom contract win. INFN remains a buy up to $15 for a $30 target.

New Energy Technology MegaShift

Saudi Arabia claims they increased oil production by 300,000 barrels a day in May, and will go up another 2% or 200,000 barrels a day in July. I’d like to see independent verification of the reported May increase, as the country has a long history of bragging about one thing and while having done another. As for the 200,000 July increase–forget about it. Not only do they not have the capacity, but even 200,000 barrels would not offset the declines in Nigeria and the North Sea. The only thing that could possibly turn this into a fruitful prediction is if Saudi Arabia’s new oil field at Khursaniyah suddenly becomes more productive after being behind plan for over a year–fat chance. Oil traders know that the real message of a 200,000 barrel promised increase is that Saudi Arabia is tapped out–they would have to promise us a million barrels a day to break oil prices.

One of the biggest problems in the supply and demand for oil is the number of countries that subsidize gasoline prices. This includes countries such as the aforementioned China. The CEO of EnCana, a leading company in the exploration, production and marketing of oil, said oil demand is growing fastest in countries that regulate and depress gasoline prices; pointing a finger at:

    Country–Gasoline price per gallon

  • Venezuela– $0.19
  • Nigeria–$0.56
  • Iran–$0.56
  • Saudi Arabia–$0.56
  • Mexico–$2.45
  • Indonesia–$2.45
  • China– $2.84 (before tomorrow’s increase)

For the last few years, chuppies (Chinese urban professionals) have been driving around in SUVs. Beijing Auto has the Trojan, and SUV imports (BMW, Porsche, Lexus, Cadillac) are up from 100,000 a year in 2002 to 370,000 last year. Why not, when the government keeps gas prices down?

Boone Pickens has called our imports of foreign oil “the biggest transfer of wealth in the history of mankind.” He thinks the $700 billion a year we now pay for imported oil will increase to $10 trillion a year within 10 years. I would not be surprised if we got there simply by a continued devaluation of the dollar. In an environment only 1/10 that bad, our alternative energy technology stocks will soar.

Energy Conversion Devices (ENER) is already soaring. They priced a secondary stock and convertible offering this morning, and had to increase the size to meet demand. The stock hit a new 52-week high today, so this has to be one of the best-placed secondaries ever. One hopes that the vultures who short every company that announces an offering, planning to cover on the deal (which is illegal), received their just desserts today.

Obviously, we were right to hold onto our whole position even after the stock soared past our $55 target price. The company really is doing better, but at today’s close of $77.98, it is selling for over 50x my earnings estimate and about 10x my revenue estimate. While the mo-mo crowd at Investor’s Business Daily could keep it running, it is time for us to get off this train, so I sent you a Flash Alert earlier today to sell ENER for a 178.5% gain in 16 months. The stock is down $2.48 in the aftermarket, but if you missed the Flash and did not get out today, sell it tomorrow.

U.S. Geothermal (HTM) filed their 10-K this Monday, but won’t hold their conference call until after next Monday’s close. The very first thing I want to ask them is why on earth they would do that, as it helped knock the stock down about 10%. I expect the answer is growing pains affecting a small company that is learning investor relations on the job.

While I haven’t found anything bad in the 10-K thus far, they did say that Ormat has completed their redesign/repair planning process, and HTM will shut down Raft River for a while to implement the changes. Obviously this is both necessary and transitory, but none the less it nicked the stock.

Today they issued a press release saying that the net electrical power output of the Raft River plant is running 10.5 to 11.5 megawatts. With four production and four injection wells in operation, the maximum net electrical output achieved by the plant during March, April and May were 11.2, 12.0, and 11.7 megawatts respectively. The power plant operated at 99% availability during the same period, including scheduled maintenance. Under their contract with Idaho Power, prices during the spring months of March through May are 73.5% of the contract price, and then 120% of the contract price during the summer and winter peak months of July-August and November-January. The remaining months are paid at the 100% price level.

I expect a very positive call after the close on Monday. If you don’t have a full position in HTM yet, use today’s weakness to get in before the call. HTM is a Top Buy up to $4 for my $6 first target. I expect us to hold this stock for much higher prices over the next several years.

WiMAX MegaShift

TowerStream (TWER) was added to the NASDAQ naked short sale list last Friday, which means the manipulators are out in full force. Honestly though, regardless of what you might read on a few message boards, TWER is doing fine. They recently switched from a traditional telephone system to a VoIP system that will let them integrate several physical call centers into one virtual center. Their phone costs went from $25,000 a month to $8,000 a month, and their sales calls went from 70 per salesperson per day to 100. TWER is a Top Buy all the way up to $6 for my $16 target. TWER is my best buy for 2008.

Sell ENER for an Outstanding Gain

Energy Conversion Devices (ENER) priced a secondary stock and convertible offering this morning, and had to increase the size to meet demand. The stock hit a new 52-week high today, so we were right to hold onto our whole position even after the stock soared past our $55 target price. But now ENER is selling for over 50x my earnings estimate and about 10x my revenue estimate. While the crowd at Investor’s Business Daily could keep it running, it is time for us to get off this train. Sell ENER for a 178.5% gain in 16 months.

When breaking news occurs I always want to stay on top of it and make sure you’re the first to know. However, this buy isn’t the only exciting bit of information I have to share with you today. Stay tuned for more market news in today’s Radar Report.

A Fast and Furious Rally to Come

The S&P 500 dropped 105 points off its touch of 1440 on May 19, including a nearly 70 point drop since our last issue on June 5 through yesterday’s close. I was ready to send you a Flash Alert any day this week, but the S&P 500 obliged by making its second major bottom late today, just a few points above the 1326 level I’ve been talking about. It’s still possible there will be an intraday spike down to touch 1326–it is amazing how magnetic these support and resistance levels can be–but today’s action suggests that would be a great buying opportunity. And I’m sure that, just as we saw at the market bottom on the March 17 turn day, you’re about to be deluged by bears and put buyers talking about how right they were, how much the market has dropped in the last couple of weeks, and why you should turn negative. They’ll cite the usual suspects: the subprime crisis, high oil prices, the weak dollar, consumer confidence, slowing earnings growth, and whatever other already-discounted negatives they can think of.

In fact, this is just a classic double bottom with the second bottom higher than the first. The amount of negative energy the market has stored up, with the VIX Fear & Greed index back in the low 20s, will support another run at the 1440 resistance level immediately ahead. This should be a fast and furious rally, and if we see enough negativity persisting all the way up, this will be the rally that finally breaks through and sends us back to the old highs around 1555. This can happen in spite of the weak fundamentals because there really are only two major problems with the market right now.

Two Major Problems With Today’s Market

The market’s first problem is the credit crisis, where I believe the Bear Stearns bailout marked the bottom of that mess’s panic phase, even though we will continue to hear about the fallout for the next several months. However, I must warn you that there’s another major round of the subprime collapse coming next April as the option ARMs start to reset in earnest. But, that’s a 2009 worry, even though it may cause the stock market to peak next April 19.

The other major problem is the price of oil, which is to say the supply of and demand for oil. Our New Energy Technology MegaShift stocks will continue to be impacted by the real price of oil, so this week I want to take a look at the forces surrounding that. There’s been a lot of howling recently on the stock message boards and in Congress (as far as I can tell, they both operate at about the same intellectual level) regarding the impact of speculators on oil prices, the need for a windfall profits tax and so on.

The truth is that both the supply and demand situations are very tight. Saudi Arabia has been misleading the West about its ability to pump additional oil for years, and I rarely see commentators mention that their incremental oil is not the sweet light oil they are known for, but rather heavy harder-to-refine oil. OPEC production fell by 350,000 barrels a day last year. Other suppliers are suffering declining production (specifically, Mexico and Russia) or even going from oil exporters to oil importers (like Indonesia, which is about to drop out of OPEC). On the demand side, rapid industrialization in China and India continues to push their oil imports higher. During the last several years, growing demand from China and India has been met virtually barrel-for-barrel by increased supply from Russia. That’s over, but these demand forces are not going to change in the short or long term.

Speculation may have an impact on prices at the margin, but people forget that for every hedge fund betting on higher oil prices by buying a futures contract, there’s someone else selling it to them. The real impact on oil prices comes from the fundamentals. The global demand for energy grew at an above-average rate in 2007 for the fifth year in a row, with most of the growth in emerging nations like China and India which subsidize fuel prices. With that type of incentive, Mr. Tatas’ $3,000 car is going to be the iPod of India’s younger generation.

Thirty years ago when oil prices surged, it was new production from the North Sea that helped knock prices back down. This time, non-OPEC production increases will have to come from the Canadian oil sands, deep drilling in the Gulf of Mexico, or opening up the Arctic. All of these options are relatively expensive, which suggests that oil would not go back below $50 a barrel even if demand stopped growing–which it won’t.

Alternative Energy Options

The alternative energy stocks we’re invested in will lead the way to a low-carbon society, but unfortunately solar, wind and biofuels make up less than 2% of global energy production today. Geothermal, wave power, and coal-to-oil conversion are effectively not even on the map. We have a 130 year supply of coal in this country and today it is the fastest-growing of all the main fuel types. But while coal can produce electricity, you can’t run a car or truck on it without converting it to synthetic oil.

Will consumers change their energy-using behavior enough to impact prices? Only at the margin. Gasoline prices increasing about 35% has reduced the demand for gas in the U.S. by about 1.5%. That dramatic rise and minimal reduction is the poster boy for an inelastic demand curve. In any case, the growth of demand in the rest of the world will overwhelm any cutbacks in the U.S.

High prices certainly are a signal that over time we need to invest in new production, new energy sources, new energy technologies and energy efficiency. None of these can happen quickly enough to impact the price of oil in the near term. However, all of these actions taken together can have a significant impact in the longer term.

One of the biggest benefits of the current energy price crunch would be the uncoupling of the transportation and energy industries in terms of their political power and lobbying. Of course, our wonderful politicians will have to stay out of the way if we have any chance at all of getting out of this situation.

Applying lessons we’ve already learned, we know that in order to decrease the consumption of cigarettes and alcohol all the government needs to do is tax them. Along the same line of thinking, a windfall tax on the profits of oil companies would go a long way towards discouraging the production of domestic oil. This reaction is so obvious that it’s hard to call it an unintended consequence.

Crude Oil’s Rebound

Crude oil just had a huge rebound, based in part on a Goldman Sachs forecast for $150 oil this summer. I suspect they are “talking their book” and the firm is net long oil, but no one can deny that $135 to $150 oil could happen easily. The more important question is what will the price per barrel of crude oil average this year and next.

Yesterday, the Department of Energy predicted $4 a gallon gasoline through next year, with oil prices averaging $126 a barrel in 2009, up from $122 a barrel this year. While they are obviously just trendlining recent experience, in this case they’re probably pretty accurate. But then they expect oil to drop to $86 a barrel in 2010 they must be expecting a worldwide depression! I’m expecting some very tough times myself in late 2009 and 2010, but I’m not sure I’d go that low with an oil price forecast.

As oil prices remain high, our trade deficit will stay large. In April, the trade deficit hit $60.9 billion, the highest level in 13 months. The higher deficit was driven in part by a $4.3 billion increase in crude oil imports to a record $29.3 billion in April. That was at an average price per barrel of $96.81. If the price of crude had stayed at the $60 per barrel level, where it was last year, then the trade deficit would have been $11 billion lower in April. Obviously, with oil now in the mid-$130s, the trade deficit is going to keep getting worse even if the American consumer finally starts buying less junk from the previously mentioned China. Incidentally, that is not happening yet. In April the trade deficit with China jumped 259% to $20.2 billion, as we imported everything from toys and games to televisions, clothing and electrical appliances.

New Energy Technology MegaShift

Assuming oil trades over $100 a barrel for the next 12 months, our New Energy Technology MegaShift stocks should do very well. Interest in the sector remains high, and investors are always looking for new ideas. Now, let’s take a look at our New Energy Technology portfolio of stocks so that you can see what I mean:

Connacher Oil & Gas (CLL.TO) uses Steam-Assisted Gravity Drainage technology to extract oil from the Canadian tar sands at an equivalent cost of about $50 a barrel. Canada is the new Saudi Arabia, except they’re right at our doorstep and friendly. CLL.TO is just over my $4.50 buy limit and should be bought on any dip for my $9 target price.

Energy Focus (EFOI) has a simple proposition for Wal-Mart and Safeway: Instead of putting incandescent light bulbs in to heat up freezer cases, switch to optical fiber lit by LEDs and save a ton of money on your energy bill. EFOI is a Top Buy all the way up to $6 for my $15 target.

Energy Conversion Devices (ENER) produces thin-film solar roofing that does not have a silicon base. With oil over $100 a barrel, their technology makes sense even without subsidies. However, subsidies are huge for solar, and that just makes the stock even more attractive. We’ve had a great run with this stock and it’s well over my target price, but I still think we should hold ENER to see how much more we can squeeze out of this rally.

Gasco Energy (GSX) is a direct beneficiary of the high natural gas prices we are now seeing due to the demand for summer air-conditioning, and will continue seeing on into the winter according to the futures markets. GSX is a timely buy up to $4.50 for my $9 target.

Holly Corp. (HOC) is a refiner of sour or heavy crude oil. They’ve been caught in the squeeze between accelerating crude prices and slower-increasing gasoline prices. That squeeze is just about set to reverse and I expect all the refiners to do very well between now and the end of the year. HOC is a buy up to $48 for my $70 target.

U.S. Geothermal (HTM) is in production at their first location and ready to develop and produce from new geothermal wells. They make money if oil is over $40 a barrel. Expect the company to become a consolidator in this industry, picking up other, smaller participants or leases that will enable HTM to grow rapidly. HTM is a Top Buy up to $4 for my $6 target.

Infinity Energy Resources (IFNY.PK) is working their way through their capital-shortage problems, preserving the 1.6 million acre oil concession offshore Nicaragua as the largest future driver of shareholder value. Although this isn’t going to work out quickly, I still think IFNY can be bought up to $2 for my $7 target after they monetize Nicaragua.

Ocean Power Technologies (OPTT) is a leader in converting wave energy to electrical power. Wave power, onshore wind power and geothermal are the lowest cost alternative ways to produce electricity, equivalent to about $40 oil. With oil at current levels, wave power makes a huge amount of sense. Buy OPTT up to $20 for my $40 target.

Plug Power (PLUG) sells fuel-cell based backup power systems, with an interesting application for cell phone towers in less-developed countries. The company is well-financed and PLUG can be bought up to $5 for my $10 target.

Rentech (RTK) is the company that can turn all that U.S. coal into oil. Their Colorado demonstration project should open this year. The process produces oil at the equivalent of about $50 a barrel, which is one reason three big coal companies have licensed it. Buy RTK up to $4 for my $8 target.

FuelCell Energy (FCEL) is getting orders for large stationary fuel cell plants in both the U.S. and Korea. These produce electricity and heat, and make economic sense with oil over $100 a barrel. As their costs come down, that breakeven price point will also come down.

FCEL reported their April second quarter results last week. Revenues shot up to $31.6 million compared to $11.4 million last year, while product sales tripled to $26.4 million from $8.9 million. They lost 38 cents a share, compared to 32 cents last year, because they are still losing money on every shipment. POSCO Power, their Korean partner, ordered 70 megawatts of capacity. Their product cost to revenue ratio fell to 1.50 from 1.85 in last year’s quarter. That means it cost them 50 cents more to make every watt than they got in revenue, and I want to see steady declines in this ratio until they flip into positive gross margins. Most of their new orders are for megawatt-class equipment, which has better product margins than the smaller stuff. Backlog is up to $134.7 million, 266% above last year’s 436.8 million, and that doesn’t count the recent major wins in Connecticut.

Now that the California Public Utilities Commission has increased the size of projects eligible for cash incentives to three megawatts and increased total funding to $179 million, I expect significant new orders to follow the 19 megawatts FCEL has already sold into the state. Twenty-seven other states and the District of Columbia now have renewable power standards totaling about 30,000 megawatts. In Connecticut, one of those states, FCEL has won three projects using 16.2 megawatts of FCEL equipment.

Our high electrical efficiency means we use less fuel to make a kilowatt hour of electricity resulting in lower carbon dioxide emissions and greater fuel cost savings compared to conventional combustion based power generation equipment. For customers operating their products on biogas, using the available waste heat for combining heat and power, the energy savings and greenhouse gas reductions are even greater. These attributes are particularly important in any area of record high cost for fuel and electricity.

According to an article in the June 1 issue of The New York Times, the U.S. wastes 66% of its energy and 33% of all CO2 emissions come from electricity generation. If U.S. industry recycled its waste heat and put waste gases to work instead of burning them, it could reduce greenhouse gases by 19%. Because FuelCell Energy’s Direct FuelCell runs at a very high electrical efficiency, it takes less fuel to make a kilowatt hour of electricity. That results in lower CO2 emissions and substantial fuel cost savings. On top of that, customers who feed the fuel cell with biogas can use waste heat to generate heat and power, generating essentially pollution free electricity at efficiencies approaching 80%–more than double conventional power plants.

Obviously, FCEL is a long-term position for us, and they have to get their costs down the learning curve far enough to be profitable. I expect that to happen when they introduce their latest technology improvements in mid-2009. The good news is that they are far, far ahead of anyone else in doing that with megawatt-class equipment, and their success in Korea (an expensive energy country committed to energy independence using green technology), California and Connecticut shows that they can make these large sales. FCEL is a Top Buy up to $12 for a $22 target.

There hasn’t been a lot of news this week, as investors’ focus turns to June quarter earnings. Over the next couple of weeks we will hear about any major misses in the hardware and services sector. Guidance was so cautious for this quarter that there shouldn’t be too many negative surprises, but business is quite weak in consumer electronics, so we may see a negative preannouncement or two in that area.

Content on Demand MegaShift

Infinera (INFN) said that they will show their new fiber optic network chips at next week’s NXTcomm08 conference. These are faster chips that can send data over longer distances with the highest capacity in the industry. The company says that this is their most important product introduction since the original passive photonic chip. The company’s strength is in converting optical signals to digital and then back to optical quickly, but at the NXTcomm08 show they will also demonstrate an all-optical chipset to give customers the choice. INFN is a strong by up to $15 for my $30 target.

Intel (INTC) said the Federal Trade Commission has opened a formal probe of their microprocessor business at the request of rival chip-maker Advanced Micro Devices (AMD). I don’t expect anything serious to come of this, and it won’t help AMD catch up to Intel’s manufacturing strength. INTC should be one of the best-performing big cap tech stocks in the rally I see coming through the end of the year, so the Intel January 2009 $22.50 LEAP calls (NQAX) remain a Top Buy up to $6 for my $12.50 target when the stock hits $35.

WiMAX MegaShift

Alvarion (ALVR) and Nortel agreed to collaborate on an end-to-end WiMAX solution. The deal pairs Alvarion’s WiMAX radio equipment with Nortel’s core network and backhaul systems, creating applications and professional services including network consulting, design and management. Alvarion becomes the exclusive supplier of base station equipment to Nortel worldwide.

This actually represents a retrenchment by Nortel from spending money on WiMAX to focus on Long Term Evolution (LTE), the alternative standard favored by most of the entrenched cellular carriers in the U.S. Nortel is making another in a long series of bad bets, but that’s their problem. It is a great opportunity for Alvarion to partner with a world-class distribution channel. Nortel will contribute technology and money to develop the joint solution, and the many Nortel customers now in WiMAX trials will be migrated to Alvarion equipment. ALVR is a Top Buy up to $11 for my $17 target.

MegaShift Stocks Make a Run

Today’s breakout over 1395 (finally!) should mark the beginning of the big move to 1440, and then on to new highs over 1555. For most of this week, it looked like the S&P 500 was determined to go back down to 1326 for one last test of that major support level. It is still possible that this could happen, because in order to be sure we are off on another upleg the index now has to survive a test tomorrow or early next week back down to 1395 from above, and then rebound from that area to close above today’s close. That would indicate a very strong buy signal.

If 1395 does not hold, a drop to 1326 would ideally be driven by some bad news related to the problems we already know about, and would push the VIX Fear & Greed Index up to touch its broken trendline at 25. That combination would make me very confident that the “sell in May and go away” crowd will come back after Labor Day to a market substantially higher than it is today, no matter whether we go straight up from here or visit 1326 first. Either way, there will be no graceful way to get in. We will know soon which scenario will play out.

I wanted to talk about two stocks this week that have been doing very well for us, namely Sequenom (SQNM) and Energy Conversion Devices (ENER). Sequenom ran up almost to my $12 target price and then pulled back. Then, just yesterday, they had an analyst meeting that was so positive the stock jumped almost 22%. Our other winning stock, Energy Conversion Devices, jumped over 43% on May 8, then ran over my $55 target price and is hanging up there, but some little-noticed bad news that I’ll discuss in a minute is making me more nervous about the stock.

I also want to discuss a Harmonic (HLIT) announcement that reminded Wall Street of the unpredictable Harmonic of old. I’ll tell you exactly why this is an unfair characterization.

There’s a bit of other news to share, but things are surprisingly quiet for this time of year. Perhaps the Texas Instruments mid-quarter update call will provide the fireworks for the week.

But first, I want to revisit our winning stock Sequenom, which I recommended last June 14 at $4.50. It hit $11.63 last October, after I raised the target price from $8 to $12, but then backed off in the general aversion to development-stage stocks as investors’ risk appetite vanished. The day before the analyst meeting, the company presented results to the International Society for Prenatal Diagnostics meeting in Vancouver. Their Down syndrome test correctly identified 100% of Down syndrome samples, with no false positives. They have 10 fetal genetic markers now, which cover 93% of all U.S. ethnic groups. Previously, they had eight genetic markets and showed greater than 95% sensitivity (identifying Down syndrome) and greater than 95% specificity (avoiding false positives). That was good enough for approval, as the existing noninvasive prenatal diagnostic techniques are only 70% to 90% accurate. In fact, due to the dangers of amniocentesis before our daughter was born, my wife opted for an x-ray/blood test last year even though it was less accurate. Had the new Sequenom test been available then I know she would have opted for it in a heartbeat.

Going forward, Sequenom will start a multi-site prospective study in the fourth quarter, targeting a launch as a Laboratory Developed Test in the first half of 2009. Their Rh-factor test is available now to partner labs, and they will start a validation trial in the September quarter targeting FDA approval. Also in the September quarter the company’s FetalXY test will be available to partner labs

This was a blow-away presentation, and I expect the stock to consolidate a bit and then march on to my $12 target. Hold SQNM.

Energy Conversion Devices said they will hire 400 people to staff their expanded Greenville, MI United Solar Ovonic factory. With the price of oil so high, solar almost makes economic sense even without tax credits and programs. That’s good, because some of the programs in places like Germany and Spain are likely to be trimmed back. One reason the stock jumped today was a Lehman Brothers report saying ENER will be less affected than other solar companies by the volatility in European solar markets.

The bit of bad news for ENER came from the Cobasys joint venture with Chevron to build batteries for hybrids. Specifically, General Motors said they are behind on their Saturn and Chevy hybrids due to leaking batteries made by Cobasys. Due to this, GM is replacing 9,000 NiMH (nickel-metal-hydride) battery packs in hybrids built last year, before focusing on building the 2008 models. GM’s bigger hybrids like the Chevy Tahoe and GMC Yukon aren’t affected, because they use batteries made by Panasonic, which is a subsidiary of Toyota that pays some royalties to ENER.

The new management team at Energy Conversion Devices is trying to sell their position in Cobasys, either to Chevron or as part of a sale of the whole company to someone else. There is an anonymous bid on the table, and I think Toyota is likely the unknown buyer. In the meantime, Cobasys is running $90 million a year losses, which are being funded by loans from Toyota. Energy Conversion Devices accounts for their position in Cobasys using equity accounting, which means they do not report their share of the revenues and losses on ENER financial statements. Instead, equity accounting normally requires writing up or writing down the value of the investment each quarter. But ENER did not contribute any cash to the Cobasys joint venture, just technology, so they don’t even have an investment to adjust. All the losses have not and will not impact ENER’s income statement. When Cobasys finally is sold, ENER will book a financial gain of some small amount. But the GM battery problem is likely to reduce the amount of any payout to near zero.

That’s the only cloud hanging over this otherwise bright story, and I continue to recommend holding ENER, even though it is $10 over my target price. The stock is in the right place at the right time to stage a further run. Hold ENER for additional gains.

Content on Demand MegaShift

Harmonic (HLIT) announced a marketing agreement with Fujitsu to sell some Fujitsu encoding technology, and Wall Street immediately remembered the bad old days when HLIT sold third party advertising insertion equipment to the cable operators at the typical lower gross profit margins one gets for selling someone else’s equipment. There were a couple of quarters during that time where Harmonic’s revenue growth was OK but earnings faltered due to a product mix weighted towards the third party equipment. Besides, what the heck is the encoding technology leader doing selling someone else’s encoding technology?

The answer is pretty simple. Encoders use a “look ahead” technology to see what video is coming up, allowing them to keep up with the speed requirements for high definition encoding. It introduces a two to four second delay in the program broadcast, called latency. That works well for prerecorded programs, movies, commercials and such. Harmonic is the king of high definition encoding.

However, live events are a different story — there is no way to look ahead to see what is coming. If you want to have some fun during the next football season, watch the game on a HD set with your friends, but also listen to a radio broadcast through an earbud. You’ll be able to call catches, interceptions, touchdowns, field goals and tackles with amazing 100% accuracy.

Encoding is even tougher in mobile video situations, such as when your local TV news decides to cover a live fire, because the reporter has to interact with the anchor in the studio. The two to four second latency makes it very awkward to carry on a conversation. Fujitsu has developed technology for this live interactive broadcast mobile video niche that is optimized for low latency instead of high compression. I’m sure HLIT could develop the same box if they wanted to spend the R&D and management time on such a small niche, but they decided to buy rather than make this box. It will never be a big enough part of their revenues to affect their gross margins, so Wall Street’s worries are unfounded — as is so often the case with Harmonic. HLIT remains a Top Buy up to $12 for my $18 target.

New Energy Technology MegaShift

Gasco Energy (GSX) will benefit from a rip-roarin’ bull market in natural gas futures. High temperatures in many parts of the U.S. this week raised demand from utilities that use natural gas to generate electricity for home cooling. July natural gas futures are up to $12 per 1,000 cubic feet, from $6 earlier this year and $4 at the low in the middle of 2007. Futures for next winter also are around $12, and at these prices GSX makes a ton of money. Buy GSX while it is under $4.50 for my $9 target.