I thought the 1326 attractor/repeller level had enough power to pull the S&P 500 up from 1300, but instead it was the 1275 level that sucked it back down for one more test. As of today, it’s hard to tell if that test will succeed or fail. If it can’t pull away from the 1275 area quickly, I think the S&P is headed for yet another hard test of the 1210 breakout level.

While the market could turn up from 1235, the typical pattern at this stage would be to retrace all the way to 1210 in order to build up enough energy for the next assault on 1326. The weekly and monthly charts still look like a bull market that wants to get going, but the daily chart is saying we may visit 1210 first. We should get some clarity over the next two or three trading days. As always, we will let the market tell us what to do by showing us where the buying and selling pressures really are.

In this environment, there’s no point in making new recommendations until we get a clearer signal that the bull run I still expect is starting. With more than 450 stocks of the S&P’s 500 reporting earnings, here are the mean year-over-year earnings per share gains by sector:

Information Technology	24.30%
Industrials	20.50%
Utilities	17.20%
Telecommunications Services	17.20%
Healthcare	9.60%
Consumer Staples (mostly soft goods)	8.30%
Energy	7.20%

Not bad, hey? But, of course, there are two other sectors in the S&P Index:

Consumer Discretionary (mostly hard goods)	-53.80%
Financials	-96.80%

So the whole S&P reported earnings down 22.1%, even though only two of the nine sectors had down earnings and the median sector was up 9.6%. The market gurus say it’s no wonder the market is weak when second quarter earnings are down 22.1%. Well, I can see why General Motors (GM) or Washington Mutual (WM) would be weak, but what explains the weakness in Information Technology? Up 24.3% isn’t good enough? At some point, our tech stocks will get paid for their results.

Earnings reports are tapering off, so now is a good time to catch up on some more company news and answer a few of your questions.

Biotech MegaShift

Dendreon (DNDN) will get their interim peek at the data in about six weeks, and Gary B. asked: “Are there DNDN leaps available?”

Yes, there are. The January 2009s have less than six months to expiration, so I assume you would be interested in the January 2010s. With the stock closing at $6 yesterday, the $5 strike price call (WTKAA) was $3.25, the $7.50 strike (WTK AU) was $3.00 and the $10 strike (WTK AB) was $2.55.

The trouble with all of these is that if the interim peek works, we will make a bloody fortune in the stock, and you’ll make about twice as much in the LEAP call. But if the peek is not statistically significant, the trial ends near the end of 2009 and the contract could expire before we get the results. The stock might be stuck at $3 to $4 a share in that scenario, but you’d suffer a 100% loss in the LEAPs. I suppose you could buy a $10 or higher strike now (there’s a $30 strike selling for 90 cents!) and if the peek does not work, buy a 2011 LEAP call next summer when they start trading those contracts. You’ll wind up with $6 invested anyway. I’d rather get into Top Buy DNDN while it is under $8, and let it ride for a $40 target after Provenge is shown to work, whether at the interim peek or after the final data. And, yes, I still think the interim peek will be statistically significant.

Content on Demand

Burst.com (BRST) drew a question from Kevin H.: “What should we be doing about our positions with this holding? I continued to buy it on declines and eventually stopped, but it continues to drip downward. Do they still have as strong a picture with regard to their patents and potential suits against the likes of TIVO? There has been little, if any news from them whatsoever, so should we just sell and absorb our losses and reinvest what we might salvage into something else?”

The last time I wrote about Burst was in March: “In January, Real Networks filed for a declaratory judgment that Burst’s patents are not valid. That means Burst was after them hammer and tongs to pay royalties, so Real Networks decided to file. Because Burst’s patents have been extensively reviewed in this same Federal court, the Northern District of California, I don’t think Real Networks has much chance of succeeding. It appears that they are doing it simply as a negotiation technique.”

That turned out to be right–in May, Real Networks paid Burst $553,500 to license a subset of Burst’s patents on a non-exclusive basis. This was a relatively small win on the way to what I still think is the big target: TiVO. I said in that March write-up that Burst.com is going to sue TiVO, with Apple’s behind-the-scenes support. I am sure they are negotiating with them, and the fact that no lawsuit has been filed may mean the negotiations are going better than I’d anticipated. A TiVO settlement would involve millions of dollars–not $553,500–and a lot more patents.

The company continues to add to its patent estate. On July 11, their fourth network optimization patent issued. The second and third patents issued on March 31. They have 40 million outstanding shares, so at today’s close of 12 cents a share the total market capitalization is only $4.8 million. I would hold what you have, and you can lower your cost basis if you buy BRST at current levels, with a 50 cent buy limit and a $2 target.

QuickLogic (QUIK) has an interesting 21-minute presentation on the Internet in an interview with Tech Media Journal. Ignore the silly intro and softball questions (this is a geek publication), and check out the VEE (Visual Enhancement Engine) technology that QUIK offers to dramatically enhance video on mobile products without killing the battery. This is going to be another big contributor to future revenues. QUIK is “stupid cheap” at today’s close of $1.51, and is a Top Buy all the way up to $4 for my $8 target price.

Telkonet (TKO) was the topic of a question from Julien S.: “In Bloomberg, I found that one of the two analysts following TKO from ThinkPanmure has a 25 cent target. Do you know what his arguments are for this? He seems to be quite right for the last two years.”

That is an old target, predating the change in management. I am not sure he even follows the stock anymore. He was not on the recent conference call, or at least did not ask any questions. I know his last printed forecast for the June quarter was $4.7 million in sales, followed by $5.3 million in the September period. TKO reported $5.6 million for June, beating his September number, and had a smaller loss than he forecast. Maybe he will revisit the company and update his estimates. Since ThinkEquity merged with Panmure, I’m sure they have their hands full working out their research coverage, and the most likely outcome is not that they change their minds on TKO, but that they simply drop coverage. Good riddance.

TKO is doing very well and continues to announce new contract wins. Buy TKO all the way up to $5 for my $15 target.

New Energy Technology MegaShift

In its latest report, OPEC said they now expect the world’s consumption of oil to increase by one million barrels a day this year, down 30,000 barrels a day from their last estimate. They expect even slower growth in 2009 of 900,000 barrels a day, the smallest growth in world demand since 2002.

I am watching China, where they built up oil inventories before the Olympics and then shut down a lot of industrial and transportation use for about six weeks before and during the games. If there is lower demand after the games end, it could pressure oil prices. The saber-rattling with Russia makes no sense, except that it may make John McCain look better.

It will be hard to break $110 until hurricane season is over, but I still expect a peace agreement between Israel and Syria, plus a stand-down between Iran and the U.S., to take oil under $100 over the next few months. That will keep pressure on energy and alternative energy stocks in the near term, but it doesn’t change my buy limits or target prices.

Infinity Energy Resources (IFNY) reported $1.3 million in sales, compared to last year’s $2.5 million when they still operated their Barnett Shale properties. Those properties are now in an operating agreement with Forest Oil. They lost five cents a share, much better than last year’s 90 cent loss, which included write-offs, reserves and a seven cent loss on hedging derivatives.

The sale of most of their properties in Colorado and Wyoming to Forest Oil left them with 100% ownership of their exploratory properties in the Piceance Basin and LaBarge areas in the Rocky Mountains, plus a 20% working interest in any future wells that Forest Oil may drill in the Sand Wash Basin. Infinity needs to spend less than half a million dollars to plug and abandon some wells, and perform required reclamation activities.

In Texas, Forest Oil has started drilling two in a series of up to ten new wells in Erath County, under its farmout relationship with Infinity. Infinity could see some cash flow as early as this quarter if the wells are successful. Forest Oil finances and operates each of the 10 wells in return for a 75% interest, and if they complete all 10 wells (as I expect) they will earn a 50% interest in 25,000 undeveloped net acres and existing infrastructure owned by Infinity. The company may spend another half million to complete two vertical wells for its own account that were drilled last year.

As I’ve previously reported, the company now has both Northern and Southern Regional government approval in Nicaragua to begin exploring their 1.4 million acre offshore oil lease concession. Federal approval should come soon. This is now the major asset of Infinity. It is pledged as collateral to Amegy Bank, and Infinity is in default on that loan due to failing to meet the financial covenants. If Amegy foreclosed it could take possession of all the assets. Negotiations are ongoing, and I don’t think that will happen, but it is a risk.

Basically, I expect the small cash flow from the deals with Forest Oil to fund seismic activities offshore Nicaragua. Infinity can then take that data to a major oil company and cut a deal to have that company pay for exploration and production drilling. There are likely to be two to five billion-barrel oil fields in this concession, and Infinity’s share would propel the stock to my target price and beyond. Until the Amegy Bank negotiations are done, I am moving IFNY to a Hold but keeping the $7 target based on the potential value of their Nicaragua offshore oil and gas leases.

WiMAX MegaShift

Proxim Wireless (PRXM) announced results after the close last Wednesday, and then filed with the SEC to say their $1.5 million bank line has been pulled. The company raised $3 million in debt just after the end of June, perhaps realizing the bank was going to walk away.

For the quarter, Proxim booked $15.1 million in revenues, up 47% from the March first quarter, but down 11% from last year’s June period. They lost one cent a share proforma. Management attributed the sequential sales growth to a revamped sales team. Even in the U.S., they grew 37% and increased their pipeline of potential business. They have decided to sell their Harmonix division that makes military components, and moved it onto the balance sheet as a $2.3 million discontinued business asset.

The bank raised their interest rate and essentially called the loan, with the $1.5 million to repaid in two tranches in September. This sort of thing is happening in the credit crunch; the Fed gives the banks cheap money, and the banks buy Treasury bonds instead of putting the money to work at a better spread. As a result, the Fed is pushing on a string, the bank is losing interest and its reputation, and companies are having to close their doors. I’ve been through Proxim’s balance sheet, and I think they can work through this unexpected blow. Cash will be tight, but not non-existent.

From its current sub-$1 level, it may seem like PRXM is a hopeless case, but they are accelerating revenues and tightening costs. I want to give them another quarter to sell Harmonix and boost their revenues before we think about dumping the stock for a tax loss before the end of the year. Also, if it looks like Obama will win the election, losses taken in 2009 might be more valuable if he raises the capital gains tax rate, as he has proposed. Raising taxes in a recession is about as smart as running on a platform of raising taxes, but you never know.

I expect Proxim to receive a delisting notice from NASDAQ shortly, as their total market capitalization as of August 20 was only half of the required $15 million. The company will appeal the decision, so it should stay on NASDAQ long enough for us to decide what to do. I’m moving PRXM to a Hold until we see the September quarter results.

Towerstream (TWER) reported $2.5 million in sales, up 53% from last year’s June quarter. The company’s revenue growth pattern is showing the acceleration I expected, as they build their sales force and climb the productivity curve:

Quarter	Year-Over-Year
Q2:07	4%
Q3:07	9%
Q4:07	22%
Q1:08	32%
Q2:08	53%
Q3:08(E)	60%	(Guidance: 58%)
Q3:08(E)	65%
Q1:09(E)	70%
Year
2009	60%
2010	50%

During the last 12 months, while the sales force tripled and revenues exploded, the stock fell 55% from $3.08 to today’s close at $1.39. Yet management said it now appears their peak cash burn was in the March quarter, since they grew 20% sequentially in June instead of the 15% they’d expected, and the sales force is pretty well built up. They’ve paused expansion into the next 11 major markets and will use the nine markets they are in to get cash flow positive. It looks like they will be EBITDA positive in the March 2009 quarter, cash flow positive in early 2010 and profitable in the June or September quarters of 2010. Eventually they will have 75% gross profit margins in all markets. They already have the financing to get them through this process.

Their 8MB service for $999 a months is a huge winner, as that is a speed the telephone companies can’t offer for technical reasons, at a price they would never match. The economic slowdown is good for TowerStream because they can save customers money, and deliver more speed with higher reliability. Recently they have signed on marquee names like Intel, Netflix and ESPN.

One of the best parts of this quarter was their low churn rate–only 1.2%. Their 1,100 current customers like the service and “stay sold.” Although the stock is up 37% from its March low, I still don’t understand what it is doing at this low level. The total market capitalization is under $50 million with $31.7 million in cash and only $2.5 million in long term liabilities. They have irreplaceable real estate leases for their antenna locations in probably 12 or 13 cities, with functioning networks in nine of those. It makes no sense. TWER remains a Top Buy at a very depressed price, with a $6 buy limit and a $16 target price. At the target price, the company will have a total market capitalization of $550 million and still be a small cap company. They’ll exit 2010 at a $32 million revenue rate, still growing 50% a year. This is a remarkable opportunity.

Last week I wrote that: “I think we will break through the 50-day moving average at 1302 next week, as our old friend 1326, a key attractor/repeller level going either up or down, pulls the market up. If there’s as much energy available as I think, after a bit of consolidation around 1326 we should see the S&P climb above its 200-day moving average at 1377 and move pretty quickly back to the 1440 level than stopped it on May 19. From there, we will find out if the next stop is new highs and a possible parabolic leg up, or a very serious leg down in an ongoing bear market.”

The S&P broke 1302 the next day, and seems to be headed up in spite of the anguished wails from the bears. Russia invades Georgia and oil slides under $115. Home prices unexpectedly rise in July. Exports unexpectedly rise in July to an all-time high, offsetting the increase in oil imports. Excluding the financials (17% of the S&P Index), corporate earnings are up about 9% year to date. And the market is responding.

• Are we through the bad times? No, there is still a lot of bad news set to hit next year. I think it’s important to name these market ogres now, recognize that they are on their way and then plan to profit around them. Here are the major issues that will impact the U.S. markets in the coming 12 – 24 months: The Alt-A mortgages based on stated income (“liar’s loans”) will reset — a problem 5X the size of the subprime mess.
• The Option ARMs that allowed people to make a minimum payment less than the interest due will blow up in a big way in 2009 and 2010, sinking Washington Mutual and Wachovia.
• Banks are tightening credit and plan to keep squeezing their customers, which will force more and more to cut spending or even stop paying.
• A whole generation is losing its FICO scores for the next three to seven years, so the credit economy is history.
• And I expect General Motors, the quintessential U.S. manufacturing company, to declare bankruptcy before the end of this year.

It is important to not that all of the above problems are set to hit sometime in 2009. but, I think we will see a big bear market starting in April 2009. What we need to focus on is that the next nine months are not likely to get much worse for the economy. That means the stock market is likely to continue its relief rally and offer truly fantastic wealth-building opportunities for smart investors. Of course, the market’s job is to shake off all the bulls now, so it can shoot up and kill all the bears. Just as it always does.

At the San Francisco Money Show last week, “cautious” or “confused” was a lot more common position than “bull” or “bear.” When I gave my Bernanke Portfolio presentation, not a single person raised their hand as bullish. Maybe 10% were bearish. The rest were cautious, confused, and heavily in cash. Since I know that many of you also fall into the camps of cautious and confused, I want to get very specific about what you can do in the very short term to position your portfolio to profit from a near-term rally and defend against a 2009 decline.

I’m going to get very specific here. There is one thing that you should do right now:

Deploy Cash: Take part of that CD money earning 2% and put in into stocks. This is a world of 4%+ inflation and that cash is losing value even as it earns interest. Keep some cash for a rainy day, but buy one or two or three of the very best, very cheapest New World Investor stocks that will thrive in a market rally and should hold strong through a 2009 – 2010 bear market.

Buy One to Three of These Stocks Now

I’ve told you in one easy step what you need to do now. So, is the short list of stocks that you should pick from today to take advantage of current market conditions.

• Akamai (AKAM)
• Alvarion (ALVR)
• eResearch (ERES)
• Harmonic (HLIT)
• Harris & Harris (TINY)
• QuickLogic (QUIK)
• Rochester Medical (ROCM)
• Sandisk (SNDK)
• TowerStream (TWER)

I left off most health care stocks because they are thought of as defensive, and will go up but may underperform the cyclicals in a big upswing. I also left off most energy stocks because one of the big drivers for this bull move is temporarily falling oil prices. As you can see, there are nine companies to choose from here. I recommend that you buy one to three immediately, but I’ve designed this list to be the best nine stocks for the next nine months. If you want to add to these stocks over the course of the next nine months, that will also work to your advantage.

I don’t want you to think that the above nine stocks replace our other MegaShift companies. If you are uncertain of where to start or are too scared to diversify further, that is where you should start. For the rest of our holdings, we’ll continue to watch them closely and buy and sell at favorable prices.

Speaking of our MegaShift companies, we’ve had another round of earnings reports plus some important news from a couple of our companies. And, with all eyes on the Olympics, I’ve been thinking about when we should get back into China. Let’s start there.

China MegaShift

Since we bailed out of our Chinese stocks last year, their market is down 55% to 60%. The whole pre-Olympic rally theory turned out to be dead wrong. We got out at the right time, but now the question is whether there will be a post-Olympic rally, or a resumption of the up market, that we should get back in for. I think the answers are yes and no. The slowdown in industrial production caused by pre-Olympic efforts to clean up the air seems to be lowering current inflation a bit, aided by state price controls and gasoline subsidies. It’s reasonable to expect companies to run down their inventories during this period, and then rebuild them right after the Games end. So a post-Olympic rally based on lower inflation and increasing economic activity makes sense, perhaps lasting into early next year.

But I’m still suspicious about the longer term. China partisans say that the biggest economic driver now is domestic consumption, with domestic investment in the second spot and export growth down to third. But export growth depends on the health of the U.S. and European consumer, and I don’t think the squeeze we’re seeing there will let up for a couple of years. Lower oil prices should keep the squeeze from getting worse for a while, again into early next year, but the housing mess is about to go from bad to much worse as the Alt-A and Option ARM mortgages become a factor in 2009. Without export growth, I don’t think Chinese domestic consumption will stay up — we will export our recession to them — and without domestic consumption growth, domestic investment will weaken.

There are some amazing dislocations already in the Chinese economy due to their overheated growth, and these tend to surface when growth slows or, heaven forfend, a recession starts. The two largest shopping malls in the world are now in China. One of them, the South China Mall, opened three years ago, with spaces for 1,500 stores. After three years, about 12 are occupied. It is a multi-billion dollar financial disaster. There are more stories like this to come.

I am looking at a couple of Chinese companies that do a worldwide business in areas that will not fall into these China traps. Mindray Medical (MR) is a medical equipment manufacturer. The stock has been range-bound for a year, and I will be interested if it heads back towards $26 again. Suntech Power Holdings (STP) is a solar cell manufacturer that is down sharply from its highs with the whole solar group. It would complement our recent position in Canadian Solar (CSIQ). I’m interested on a further breakdown to $30, or a breakout over $37. I’ll let you know when the time comes to pull the trigger on these stocks. For now, enjoy the Olympics!

Avian Flu MegaShift

Crucell (CRXL) reported a decent quarter, but profit margins were squeezed a bit due to the product mix. The company says the upcoming flu season will offset that, and continues to forecast higher margins in 2008 than it posted in 2007, on a 20% growth in revenues.

For the quarter, sales hit $94.2 million, up 51% in euros, and they lost 20 cents a share, a 57% smaller loss in euros. The consensus was looking for a 24 cent loss. Their gross profit margin fell from 39% last year to 36% this year, and also was lower than the 40% they posted in the March quarter. On the conference call, management said that due to a process improvement, they have increased monoclonal antibody production yields from the human cell line vaccine production technology by 800%. This is remarkable news, as it can cost $1,000 a gram to produce a complex monoclonal antibody, and this technology would cut that to $125. I expect their technology licensing revenue to take a good jump due to this breakthrough.

There is more to come soon; the results of U. S. Phase II rabies study are expected in October. They just started a second Phase II study in the Philippines. In avian flu, they have identified a new, novel antibody that provided immediate protection in neutralizing the broadest range of H5N1 strains in all preclinical models. They are setting up a study comparing it to Tamiflu, the current gold standard to prevent or treat bird flu infections.

As countries stock up on seasonal flu vaccine beginning this quarter, CRXL should be able to move revenues up to $117 million and cut their loss to one cent per share, and then turn profitable in the December quarter to the tune of a nickel a share on about $128 million in sales. CRXL remains a buy on dips under $17, as happened briefly on Tuesday, for my $35 target.

Biotech MegaShift

Dendreon (DNDN) reported burning about $14.2 million in cash in the June quarter, and has $127 million left, including the $46 million they raised in April. That anonymous institution paid $5.92 per share, representing a 17.0% premium at the time, for eight million common shares, and got warrants to buy up to an additional eight million shares at $20, exercisable at any time after Oct. 7, 2008, for up to seven years.

The big news will be the interim peek at the current Phase III IMPACT trial data on October 6. The Independent Data Monitoring Committee will complete its interim analysis of overall survival for Provenge versus a placebo in recurrent prostate cancer that has not responded to hormone therapy.

On the conference call, management said: “Let me remind all of you that by design, there is a higher probability of success of the final data analysis than the interim analysis. That said, if the treatment effect at the interim analysis for the IMPACT trial is consistent with the integrated results of the previous two completed Phase III studies, D9901 and D9902A, we would expect to achieve the pre-specified criterion for significance and would amend our BLA submission with the FDA based on these interim results. On the other hand, if the Independent Data Monitoring Committee reports in October that the pre-specified criterion for statistical significance is not met, then we would anticipate continuing the trial with the expectation of reporting final results next year.”

So we wait. I think the interim peek will be successful, and you should buy DNDN up to $8 for my $40 target after Provenge gets FDA approval.

Isolagen (ILE) reported successful Phase III trial results, and the stock shot up and then backed off. Many subscribers asked a version of this question from Joe P.: “Is there further guidance resulting from the ILE developments announced just recently? What is their significance?”

It takes a while to sort through the data and talk to people, but here is the bottom line. The two Phase III studies treating nasolabial folds, or wrinkles, showed highly statistically significant efficacy with positive safety. They met all primary endpoints. These studies were conducted under a Special Protocol Assessment from the FDA, which means: “You hit your numbers, you get approval.”

Remember that the Isolagen Process multiplies a person’s own fibroblasts,or collagen-producing cells, into tens of millions of new cells. These are the basis of a personalized treatment for the patient’s skin. The Process was evaluated in 421 people at 13 clinical trial sites. Nasolabial folds are a cosmetic treatment that will not be reimbursed by most insurance companies, but the Isolagen Therapy label will be expanded. There is an ongoing Phase II/III trial for acne scars, where there is a huge unmet need, with sun damage and burn scars up next. Dermatologists are very aware of these trials, and I expect significant off-label use in these indications soon after approval.

Isolagen will release all the data later this year, and then file for approval early in 2009. It should be approved by the end of the year and on the market in early 2010. There are two bovine collagen wrinkle products on the market, Allergan’s Juvederm and Q-Med’s Restylane. These are quick, temporary ways to reduce wrinkles. But the Isolagen Process actually restores skin, with the results just as good six months after treatment as at two months after treatment. Cosmetic surgeons are looking for a more permanent injectable treatment now that demand for expensive surgery is falling with the economy. (Botox sales jumped 13.5% last quarter, according to Allergan.)

I’ve had Isolagen as a Top Buy under $1 for quite a while. They still have to work through the approval process, get labeling, and finish the acne trial. The stock will be volatile, but in general we should see an up-and-to-the-right chart. They will release data from the full-face clinical trial in the next few weeks. I am keeping ILE as a Top Buy, raising the buy limit to $2 to give you an opportunity to take a second or first bite, and maintaining my $9 target. Once the stock goes over $2, I will remove the Top Buy rating, but I may raise the buy limit again at that point.

Content on Demand

Telkonet (TKO) reported $5.6 million in revenues in the June second quarter, up 53% from last year thanks to good growth in energy management and hospitality applications for broadband over powerline. Excluding the results of their MST subsidiary, which I believe will be spun off before the end of the year, TKO had $4.6 million in revenues, up 44% from last year and up an encouraging 14% from the March quarter. March was up 11% from December, so they are accelerating growth. Energy management products were 39% of sales in the December quarter, 51% in the March period, and 57% in June.

Management reiterated their goals for sequential quarterly revenue growth and to hit cash flow breakeven this year. Excluding MST and non-cash items, they lost $3 million in the March quarter and $1.2 million in June. Even with oil prices down, companies have had a wake-up call to get control of their energy spending, and I think this new management team will hit their goals.

It’s interesting that they now define themselves as “the leading provider of innovative, centrally managed solutions for integrated energy management, networking, building automation and proactive support services.” All of this is built on their powerline communications products, and they continue to work with EDS and their distribution channel to compete in the pure Internet access business. But they really have an advantage where Internet access can be combined with energy management, which is why they are selling so much into the hotel/motel market.

Only one Wall Street analyst was on the call, from UBS. TKO is now growing quickly enough to attract some attention, and each additional quarter of strong results just moves us closer to the day the stock gets some coverage. They are going to raise some money for MST, and I expect that operation to go off their books at the same time. That will make the financials cleaner. I have a lot of confidence in their technology and this new management team, and TKO remains a Top Buy all the way up to $5 for my $15 target.

New Energy Technology MegaShift

At last, the war in Iraq is paying off for someone. Iraq is reinstating a $1.2 billion oil deal that was canceled after the 2003 U.S. invasion. They’ll develop the billion-barrel Ahdab field south of Baghdad, expected to produce 115,000 barrels of oil a day. Unfortunately, this deal will not help U.S. gas prices, because it is with…China! This is the first Saddam Hussein-era oil deal to be honored by the new Iraqi regime. In 1997, Saddam’s government signed an agreement with the state-owned China National Petroleum Corp., despite United Nations sanctions that barred direct dealings with Iraq’s oil industry. So much for UN sanctions, I guess. Let’s see, so far no weapons of mass destruction, 4,141 U.S. soldiers dead, and 115,000 barrels a day of oil headed for China. “Mission accomplished.”

Connacher Oil & Gas (CLL.TO) reported record production, revenue and cash flow for the June quarter. They did $202 million in sales and earned three cents a share. Daily production at Pod One is averaging over 8,000 barrels a day, and they are accelerating steam injection to get to the 10,000 barrels a day design capacity. They have produced over one million barrels cumulatively from Pod One. Pod Two, or the Algar project, will proceed as soon as they have regulatory approval. They were able to lock up the financing for this in the debt market, with no equity dilution.

An independent review of their reserves doubled both tar sands and total corporate reserves. They now have $2 billion of proved and probable reserves ($9.45 a share), and another $1 billion of possible reserves ($4.75 a share), a total of $14.20 per share. On the conference call, management said refinery margins would stay depressed all year, but they make it up in higher prices for bitumen. They also said they are very pleased with the steam injection process, which brings up oil at a better clip than they expected at this point. Due to the falling price of crude, Connacher remains a severely undervalued stock relative to its reserves and production plans. I can’t call it a Top Buy for the upturn ahead, because energy stocks in general probably will underperform technology. But you need to own some energy in a balanced portfolio, and CLL.TO remains an excellent buy up to $4.50 for my $9 target.

Infinity Energy Resources (IFNY) got approval yesterday from the regional government council of the Autonomous Region of the Northern Atlantic, which voted to ratify Infinity’s offshore Nicaraguan exploration and development contracts. The Autonomous Region of the Southern Atlantic ratified these contracts on July 4, so now they can get national government approval and start exploration activities. I think they have three to five billion-barrel oilfields in this concession. IFNY is a buy up to $2 for my $7 target.

Rentech (RTK) lost five cents a share, about the same as last year’s four cents, in their June third quarter. They reported $60.4 million in sales, up 19.8% from last year due to continued strong demand and pricing for nitrogen fertilizer. They raised their guidance for 2008 EBITDA from the fertilizer operation from $40 million to $50 million, and said they expect 2009 to be even higher. Frankly, I think this is an excellent time for them to sell this facility, as their plans have changed and they are going to build their first full-size plant in Natchez instead of Illinois.

The company opened their pilot plant in Commerce City, Colorado, to produce synthetic diesel and jet fuel from natural gas. They will add a gasification unit to convert biomass and coal to a feedstock for transportation fuels. This is the only operating Fischer-Tropsch plant in the country. The 420 gallon per day output will be sent all over the U.S. for testing, including certifying the fuel for commercial airlines industry and the Department of Defense. RTK remains a strong buy up to $4 for my $8 first target.

US Geothermal (HTM) drew a question from Forest: “What is happening to the HTM program to make it seem to lose its steam during the last couple of weeks? Does it have anything to do with MIT finding a way to split water?”

No, the MIT breakthrough I described is a way to bring the cost of solar energy down, but it won’t replace geothermal-based electricity generation. US Geothermal is just caught in the energy stock downturn, and it will pass relatively quickly. I do think oil prices will go under $100, possibly as low as $80 if we get both the Syria/Israel peace treaty and the Iran/U.S. stand-down that I am predicting. I don’t think that would affect HTM’s stock price much from here, and the long-term story is intact. HTM remains a Top Buy up to $4 for my $6 target.

Nanotech & Materials MegaShift

Harris & Harris (TINY) said that their net asset value is $5.95 a share, up 1.5% from the March quarter and up 7.4% year-over-year. The increase was due to the “Cleantech” investments, which now account for over 40% of the portfolio. They need a better Initial Public Offerings (IPO) market to start realizing some big value mark-ups. In the June quarter, there were no venture-backed IPOs for the first time in 30 years. That explains why the stock is selling for only a 20% premium to net asset value, down from the 100%+ premiums it used to sport. It’s also why we were able to buy it around $6.10 after I recommended it in the June 26 Radar Report. TINY usually trades 100,000 shares a day, but on the Friday after my recommendation, it traded 2.4 million shares. Even allowing for NASDAQ’s double counting, you collectively tucked away about one million shares, and we are up 17% on the position in seven weeks. Way to go! Buy TINY on dips back under $6.50, which is less than a 10% premium to net asset value, and hold it for my $10 target.

Security MegaShift

American Science & Engineering (ASEI) reported far below expectations, and the stock went up. They did $39.5 million in sales, down 11% from last year and much worse than the $46.5 million consensus. They reported 30 cents a share, also well below the 53 cent consensus. But the stock went up when ASEI said they booked $100 million in orders in the quarter, compared to $43 million in last year’s June quarter, and ended the period with a $160 billion backlog. Some of the orders came in too late to ship in the quarter, which explains the revenue shortfall.

The $160 million backlog does not include a flurry of deals announced since the quarter closed, totaling about $25 million. So the real backlog is closer to $185 million, which is higher than their revenues for 2007. Finally, on the conference call management said that they are expecting to announce another big order for 66 x-ray vans that were funded in the supplemental defense appropriations bill — that’s another $40 million to $50 million. No wonder the stock went up! I’m taking the stock off the Top Buy list because it has jumped over the buy limit, but we all had plenty of time to establish a position. If you want to add to it, buy ASEI on dips under $59 for my $93 target.

SiRF Technology (SIRF) lost the first round of a patent suit with Broadcom involving six patents on GPS technology. Michael asked: “After losing the Broadcom lawsuit, is it time to dump SIRF? It is getting close to worthless.”

Regardless of the stock price, there is a lot of value in SIRF, and if they can successfully integrate their GPS and processor technology, it could be one of the big winners of 2009. So, no, it is not time to dump the stock. The most likely outcome of a suit like this is a settlement where each side licenses the other to use their patents, and a relatively small amount of money and/or stock changes hands. That’s what almost certainly will happen here. SIRF remains a buy all the way up to $8 for a $20 target after they get some design wins for GPS/processor integrated products.

It’s a rodeo market–if you can stay on the bull more than eight seconds, you win. Rodeo bulls are experienced, tricky animals that twist, jump and drop in explosive ways to unseat their riders as quickly as possible. Sound familiar? Beginning bull markets do the same thing, chasing everyone to the sidelines before they start their big up-move.

Bear markets, in contrast, are like a lazy summer day by a sweet-smelling river, lulling everyone to sleep just before the flash flood comes roaring down to wipe everything out before anyone can get to high ground. A market this frustrating and dangerous almost has to resolve to the upside.

Falling oil prices should continue to help. I still think the Israel/Syria peace deal is on, although an announcement might be delayed past the Israeli elections in September. Prime Minister Ehud Olmert announced he will resign in September due to a corruption probe. The top contender to replace him is Shaul Mofaz, a hard-line former defense minister and retired General of the Army. He can close the deal without any accusations of being weak.

I also think the public quarreling over Iran’s nuclear activities, where six countries including the U.S. agreed to seek new United National sanctions against Iran, is just the usual stuff for public consumption. Vice President–oh, excuse me, Secretary of State Condoleezza Rice needs this win to boost the McCain-Rice ticket into the White House, and President Bush wants some win to end his second term on a positive note.

Iranian President Mahmoud Ahmadinejad said Saturday that his country would not give up its “nuclear rights,” signaling that it would refuse demands to stop enriching uranium or at least not to expand its enrichment work. So now the deal is: You can keep enriching, just don’t increase the level and huge sums of Saudi money will rain down on you. Sounds like a deal to me.

If either of these political deals happens, oil can get down to $100 a barrel. If both happen, we should see $80.

But the market doesn’t care what I think and predict, so let’s check in with the S&P 500 to see what it is telling us. On March 17, right on the expected turn date, the S&P spiked down to an intraday low at 1257, before recovering and heading up for two months to 1440. From that energy level, which I identified for you well in advance, the S&P slid all the way down to a spike low of 1200 on July 15, with a close at 1215. While this was an undercut of the March 17 low due to the extraordinary amount of bad news in the financial sector that day, in retrospect it was a double bottom. Since then we have seen a successful test on July 28 that found buyers at 1234, followed by a steady march up to yesterday’s close at 1289. Then today developed into a another bronco ride back down to successfully test the 1260 level from above.

While there is a lot of energy stored up to move this market higher next week, the next couple of days are likely to show a necessary short-term consolidation. I think we will break through the 50 day moving average at 1302 next week, as our old friend 1326, a key attractor/repeller level going either up or down, pulls the market up. If there’s as much energy available as I think, after a bit of consolidation around 1326 we should see the S&P climb above its 200-day moving average at 1377 and move pretty quickly back to the 1440 level than stopped it on May 19. From there, we will find out if the next stop is new highs and a possible parabolic leg up, or a very serious leg down in an ongoing bear market.

I had a question from Jack S.: “Normally, does the business cycle lead the stock market, or does the market lead the business cycle? What do you think will happen this time?”

Jack, the business cycle always tops after the stock market, and bottoms six to nine months after the market bottoms. The stock market is in the Leading Indicators index you hear about each month, and of the 12 indicators in that index, it is the single best indicator of the economic future. In the last upturn, the market bottomed in June 2002 and again in October 2002, but the economy really didn’t show any signs of turning around until March 2003. If you wait for the economy to get better, you will always miss the bottom. At the top, you will be puzzled by declining stock prices while the economy is strong, and brokers will knock themselves out telling you the low price/earnings ratios mean you have to buy–just before the earnings start to disappear.

I don’t think this cycle will be any different. The market has turned up. Financial sector earnings are terrible, dragging down all the macro forecasts. But non-financial earnings are pretty good, and guidance is OK, if cautious. I’ve been saying that even as the mature economies slow in 2008, emerging nation growth in Asia and the CRIB (China, Russia, India and Brazil) would support decent worldwide growth in 2008. I’ve also been saying that capital spending will slow, but what there is will be tilted towards technology in both mature and emerging economies. That’s essentially what Cisco said this week, confirming earlier reports from Intel, IBM and a host of others.

Biotech MegaShift

The biotech sector has been relatively strong, up about 12% over the last four weeks, as investors look for something that is immune to both the credit mess and a weaker U.S. economy. If we get the rally I am expecting, investors may shift money towards more cyclical areas like computing and communications, but I still think the aging baby boomers pretty much guarantee the future of this MegaShift.

BioCryst (BCRX) reported June quarter results this morning, and missed the consensus on both the top and bottom lines. They did $2.7 million in sales and lost 33 cents a share, well under the $14.3 million and 21 cent loss analysts were looking for. Not only were current peramivir program revenues from Health & Human Services at the low end, due to less activity, but the company took a $4.9 million reserve for monies previously paid by HHS for the Phase III intramuscular program that was discontinued earlier this year. BCRX is in “discussions” with HHS about what the reimbursement will be.

The company still has a comfortable cash level of $74.2 million. They now expect the total 2008 cash burn to be at the low end of their $25 million to $30 million guidance, and that includes getting nothing from HHS on the $4.9 million reimbursement at issue.

We bought this stock for the intravenous clinical trial that would make permavir the leading antiviral to treat avian flu, and that program is on track. We will get an update on the Phase II trial in the December quarter. Another Phase II trial of intramuscular peramivir for seasonal flu is ongoing in the Southern Hemisphere, and we’ll also see results from that in the December quarter. In addition, their Japanese partner had good results in a single-shot, outpatient intravenous Phase II trial for seasonal flu, and is going to start a Phase III trial.

It’s pretty clear that peramivir works well against flu, with the main questions being dosage, needle length, and whether intramuscular can work, or intravenous is the way to go. If it also works against avian flu in the hospital setting, BioCryst can start generating revenues before completing a Phase III trial, simply by getting on government purchase lists. I still think this one is going to work out well, and BCRX remains a buy all the way up to $8 for a $30 target after peramivir is shown to be effective against avian flu.

CombinatoRx (CRXX) reported a 51 cent loss in the June quarter, bigger than the consensus expectation for 41 cents due to lower than expected revenues of $3.4 million. But they did not change their revenue guidance for the year of $15 million to $20 million. They burned $18 million in cash in the quarter, and have $81 million left, plenty to get to mid-2009.

There will be multiple events to drive the stock price up in the second half of 2008. The most important will be the Phase IIb COMET-1 trial for Synavive in knee osteoarthritis is due in October. The trial enrolled 279 patients, a few more than the 250 originally planned. Remarkably, about 80% have elected to continue on into the 12-month active-drug extension trial. All subjects who have reached three or six months in the extension trial have elected to remain in the study. The company has developed an aligned release formulation of Synavive that gets rid of the main side effect, a headache.

In the next four months we also will see Phase IIa data for CRx-401, their Type 2 diabetes medication composed of an anti-cholesterol agent (bezafibrate) and an aspirin derivative (diflunisal). Finally, they will start a Phase IIa trial for CRx-197 in plaque psoriasis and atopic dermatitis before the end of the year.

They are in discussions with prospective dermatology partners for CRx-191 after the good Phase 2a clinical data in plaque psoriasis reported earlier this year. At their recent R&D day they talked about preclinical programs targeting Hepatitis C virus infections and B-cell malignancies. It is a very full plate.

CombinatoRx has a market capitalization around $150 million, or only $70 million net of cash. They have spent over $140 million on R&D in their relatively short life, most of it successful. We can buy the stock today for half of what they’ve spent on R&D, net of cash–an extremely low multiple. I don’t see how we can miss. I am making CRXX a Top Buy, while keeping the buy limit at $7 and my first target at $16.

Dendreon (DNDN) said the Data Safety & Monitoring Board will take their interim peek at the data from the current Phase III Provenge trial in October. If there is a statistically significant survival benefit, the drug will be approved early next year. If not, Dendreon will complete the trial in the second half of 2010.

This could be explosive, because DNDN is one of the most hated stocks in America. A stock screen of the Russell 3000 for a short interest ratio in the top 10% of all stocks, a consensus analyst rating in the lowest 10% of all stocks, and put option open interest relative to call option open interest in the top half of all stocks returns eight stocks, including DNDN. It has a short interest ratio of 28.1, which is how many days of average trading volume it would take to cover all the shorts. It has an average analyst rating of 2.4, which is halfway between “sell” and “neutral.” It has a put/call open interest ratio of 1.4. Also, it has the best performance in 2008 of all eight stocks.

You can see why I use words like “explosive” when describing what will happen to the stock if the results are significant. Remember that this interim peek was powered from the beginning to show statistical significance if the characteristics of the patient population are the same as in the two earlier Phase III trials. DNDN remains a buy up to $8 for a $40 target after Provenge is approved.

eResearch (ERES) reported record transaction volumes, record revenues, record orders, record backlog and very strong margins. I guess that’s why Wall Street only knocked the stock down from $14.90 to $14.00.

Revenues hit $35.5 million, up 43.4% from last year’s $24.7 million and just about on the consensus for $35.7 million. They did 13 cents a share, a penny ahead of the consensus and up 62.5% from last year’s eight cents. Orders were up 42% to $49.0 million, and came from a wide range of customers, including 16 new ones. They booked a record 15 new Thorough ECG study agreements, with an average value just over $900,000 each. Pricing is stable. The backlog is up to $157.9 million, and the book-to-bill ratio was 1.4X. That indicates 40% growth over the next 12 months.

The company is strongly net cash flow positive. Operating activities provided $10.4 million in the quarter, and they added $7.0 million of that to their cash hoard, which is now up to $55.9 million.

So what’s not to like? Guidance, I guess. They said the summer quarter would show revenues between $33 million and $35 million, flat to down with the June quarter due to summer vacations that reduce study activity. They’ll report 10 cents to 12 cents a share. The “consensus” (one published analyst) wanted to see $35 million and 12 cents, and while the company probably will hit the high end of its range, that lone analyst might be about to cut his numbers $1 million and one penny.

eResearch reiterated revenue guidance for the full year, between $133 million and $140 million, and raised the lower end of its earnings guidance from 44 cents to 46 cents, while keeping the top end of the range at 49 cents. The “Lone Analyst” is at $141.4 million and 50 cents, just above management’s guidance, so there was no positive impact on the stock.

On the conference call, management said that if all cardiac safety trials used centralized EKG processing, the market would be about $750 million today, and growing. Only about 30% of the market is centralized today, or around $225 million. ERES has about 61% of that market today, and the rest is split up among numerous small, private competitors. ERES remains a Top Buy up to $16 for my $30 target.

Geron (GERN) reported a couple of hundred thousand in revenues and a 17 cent per share loss. Far more important, they ended the quarter with $187 million in cash. Their gross cash expenses run about $55 million a year and their net cash burn after revenues, interest income, milestones and deal fees runs about $40 million a year. So they have over four years of cash on the balance sheet. It’s hard to tell whether their stem cell program or their anti-cancer program will pay off first, but I expect both of them to pay us eventually. A new administration in Washington will help, too, no matter who wins. GERN is a buy up to $9 for a trade to $18 when Wall Street gets excited about a press release or feature story.

Rochester Medical (ROCM) reported $8.2 million in sales for their fiscal third quarter and six cents a share pro forma. Revenues were down 2% from last year only because Private Label sales are very lumpy and were down 36%. Management said they will bounce back in the September fourth quarter. Branded product sales, which are the company’s future, grew 23% to an all-time quarterly high of $6.0 million and accounted for 73% of total sales. That was the third straight quarter of better-than-20% growth. Earnings were lower only in part due to the low Private Label sales; most of the decline was due to their increased marketing efforts to take advantage of the pending October 1 Medicare reimbursement changes.

Management said the company is seeing strong interest in their infection control products, thanks to the pending change. Another change, already implemented, has Medicare reimbursing patients for up to 200 catheters per month instead of four catheters per month under the previous policy. That is helping growth of intermittent catheter sales, as long term care facilities switch from cleaning catheters to using a new, sterile one every time.

The stock dropped sharply and traded under $10 for a few minutes, and then came right back to the area it was in before the report. On the conference call, management said many hospitals are doing formal evaluations of the Release-NF infection control technology, getting ready for the October 1 Medicare rules. The company recently introduced the anti-infective technology in the U.K. ROCM remains a buy all the way up to $20 for a $40 target after the impact of the new Medicare reimbursement policies become clear.

SXC Health Solutions (SXCI) reported this morning.

They completed the acquisition of National Medical Health Card Systems on April 30, so the results include two months of contribution from the acquisition. They now separate pharmacy benefit management activities from health care information technology sales. For the quarter, revenues in millions and gross margins were:

	PBM Segment 2008	PBM Segment 2007	HCIT Segment 2008	HCIT Segment 2007	Totals 2008	Totals 2007
Revenue	$204.90	NA	$22.90	$23.10	$227.80	$23.10
Gross Margin	8.2%	NA	56.9%	58.2%	13.1%	58.2%

They earned 21 cents pro forma, clobbering the consensus estimates for $142.8 million and nine cents. To be fair to the analysts, it was difficult to tell in advance what the merged company would look like. Management reconfirmed its objective to generate $6 million to $8 million of cost savings in the first 12 months following the closing of the NMHC acquisition, and $12 million to $14 million of synergies in the subsequent 12 months.

They also increased consolidated revenue guidance to a range of $825 million to $875 million, from $545 million to $600 million, and said pro forma earnings would be at the high end of their 61 cent to 70 cent range. The consensus is way low at $563.6 million and 49 cents. The stock jumped $1.47 or 11% today, but SXCI remains a good buy up to $15 for my $30 target, some time between the end of 2008 and next April.

China MegaShift

UTStarcom (UTSI) reported $633 million in sales, up 18% from last year and well ahead of both guidance and the $603.4 million consensus. While they ran a bottom-line loss of 31 cents a share, that was better than the 51 cent loss last year. They took $22 million out of operating expenses to get there, and they beat their guidance, but were still a few cents worse than the consensus estimate of a 28 cent loss.

After the sale of the Personal Communications Division on July 1, they have about $470 million in free cash ($3.75 a share), another $24 million in escrowed cash related to the sale, and about $29 million in debt. The new CEO is doing a good job of tightening operations and slimming the company down, but this still feels to me like putting lipstick on the pig just before putting the whole company up for sale. They need to get the gross profit margin up from the current abysmal 13% before they can cash out.

On the conference call, they guided for $170 million to $190 million in sales, seasonally lower than about $240 million in the just-reported quarter if you take out the Personal Communications Division results. However, they said the December quarter revenues would be very strong.

UTSI has some real strengths in Internet Protocol TV (IPTV) in China, where they have a 62% market share, but the customer line-up is a bit muddled right now due to recent mergers. They are also growing in India. For the second year in a row, VARIndia named UTStarcom as India’s Most Trusted Company in the areas of IPTV and broadband. Worldwide, their IPTV product now has 956,000 live subscribers, up 100,000 subscribers or almost 13% since the last earnings call.

With $3.75 a share in net cash, improving margins and strong worldwide growth in IPTV and broadband access, I still think you should hold UTSI for my $10 target.

Content on Demand MegaShift

Akamai (AKAM) is now a Top Buy with the stock so depressed. It wasn’t the swiftest move to raise guidance last quarter and then have to lower it this quarter, but the company continues to add customers at a good clip, and drive average revenue per customer up by adding new features to their service. Akamai’s problem is not competition in providing plain-vanilla dispersed servers–AKAM offers far more services than that, and essentially has a monopoly in high-speed, high-throughput managed services. The company’s private network of 36,000 servers running under a patented algorithm carries more than 20% of the world’s Internet traffic. It’s the new “competitors” like AT&T that ought to be worrying about their futures, not Akamai. AKAM is a Top Buy up to $30 for my $60 target.

Harmonic (HLIT) must have been cheering about the Cisco conference call this week. Cisco said their enterprise customers were strong, especially overseas, while their service provider customers were a bit soft. Why? Because some of the service providers that installed first or second generation IP networks during the last few years (when CSCO was reporting 30% year-over-year growth) are now filling up their networks with new revenue-generating services, rather than expanding as rapidly to new customers. And what is the #1 revenue-generating new service? Video! Adding a small amount of video infrastructure equipment to an existing network can dramatically increase its revenue potential. That is really good news for HLIT, although I hope it comes as no surprise to you by now. HLIT remains a Top Buy up to $12 for my $18 target–more than a double from current levels.

Motorola (MOT) named Sanjay Jha, the Chief Operating Officer of Qualcomm, as co-chief executive and head of the handset division. When MOT spins it off in the September 2009 quarter, Jha will be the CEO and own 3% of the business. He’s a skilled engineer, and I expect the very first thing he’ll do is focus Motorola’s platforms on one or two technologies, instead of the mess they have now. After that, he will personally lead the iPhone killer project. Look for a steady flow of Qualcomm engineers to Motorola; Jha gets top marks from almost everyone.

Merrill Lynch flipped their recommendation from sell to buy just because he was hired, but of the 34 analysts covering the company, only nine rate it a buy. 21 say neutral and two still say sell. But the company can earn 55 cents to 60 cents a share next year just by stopping the bleeding in handsets and posting modest 12.6% revenue growth back to the $36.6 billion they booked in 2007.

As I said last week, the Motorola January 2009 $17.50 LEAP call (new symbol: MOT AW) is essentially worthless, and we will sell it in December for a tax loss. I still think you can buy the January 2010 $10 LEAP call (WMA AB) for a new or averaged-down position. They closed at $1.68 today and would be worth $7.50 at a stock price of $17.50. I think we’ll see that price long before expiration.

New Energy Technology MegaShift

There’s a big story from the labs at MIT this week–a cheap way to use solar energy to make oxygen and hydrogen from water, then store the gases to be used in a fuel cell when the sun isn’t shining. Getting hydrogen is easy with a platinum catalyst, but getting oxygen is much harder. MIT researchers developed a catalyst that pulls oxygen easily.

Scientists are excited. Photosynthesis expert James Barber, the Ernst Chain Professor of Biochemistry at Imperial College, London, said, “This is a major discovery with enormous implications for the future prosperity of humankind. The importance of their discovery cannot be overstated since it opens up the door for developing new technologies for energy production thus reducing our dependence for fossil fuels and addressing the global climate change problem.”

The inventor, MIT’s Dr. Daniel Nocera, the Henry Dreyfus Professor of Energy, said, “This is the nirvana of what we’ve been talking about for years. Solar power has always been a limited, far-off solution. Now we can seriously think about solar power as unlimited and soon.”

Pretty heady stuff, but I think this is real. It will be five years before we see house-sized systems with decent efficiency, and they will be expensive. But five years after that, look for economical systems to start supplanting the utility grid. My newest recommendation, Canadian Solar (CISQ) is perfectly positioned to provide the panels for such a system.

Energy Focus (EFOI) reported second quarter sales up 14% to $7.6 million, and lost 11 cents a share compared to 16 cents last year. Swimming pool lighting sales fell 24% with the weak housing situation. EFO, the fiberoptic/LED products, accounted for $4 million of the revenues, almost double the prior quarterly record and more than double last year’s $1.5 million. Operating expenses were down a couple of percent, and will continue falling after a reorganization announced this week. They burned $2.6 million in cash and have $12.2 million on the balance sheet, with a goal of getting cash flow positive in 2009.

They still expect to about double EFO sales this year, and raised their percent-of-sales target from 40% to 50%. The reorganization is to reposition Energy Focus. as a turnkey lighting energy solutions provider that can serve customers’ entire lighting needs. They will provide energy assessments, design and engineering services, energy efficient lighting products, third party financing, installation and on-going service. Obviously, they will have to subcontract most of this, because at the same time they are reducing the size of the company and cutting overhead. They also want to expand from new construction to existing building retrofits, a market at least 10 times as large. They committed to expanding the EFO product line to cover more vertical markets.

Assuming the new strategy is not just a smokescreen to cover the usual layoffs and consolidations that hit companies running losses during a credit crunch, I disagree with it. I think they should focus on developing and providing EFO products to other companies that already provide the rest of the value chain. The record high EFO sales this quarter show the company has the right products for high energy cost environment, and I would rather see them press that advantage than go into a bunch of related businesses with longer sales cycles.

One program they have with zero value to the stock today that could be a very big deal in the future is the Very High Efficiency Solar Cell (VHESC) project funded by the government. Energy Focus is responsible for developing the optics, and on the conference call they said the prototypes are hitting the 40% efficiency target. They expect funding to continue for Phase III development, which is building systems that can be manufactured at commercially feasible costs. Combining that kind of efficiency with LED lighting might be able to cut ongoing electricity costs to zero, by taking a socket completely off the grid. We could see products in as early as 12 months.

All in all, it was a good quarter and a good call. I am going to take the stock off the Top Buy list until we see how the new turnkey solutions strategy works out, but EFOI remains a very strong buy up to $6 for my $16 target.

Gasco Energy (GSCO) reported record oil and gas sales for the June second quarter, hitting $12.6 million, up 146% from last year’s $5.1 million. They had a 16% increase in volume and, of course, higher prices. But they hedged their gas production, and had to report a $5 million loss on their derivatives position, of which $3.6 million is unrealized and could flip back in the current quarter. That brought reported revenue down to $9.1 million, including $1.1 million in gathering revenue. It was still a good quarter compared to the $6.1 million they reported last year, when Rocky Mountain gas prices were so depressed due to a lack of pipeline capacity, but it could have been a blowout. Before the hedges, their realized gas price was $9.25 per thousand cubic feet of natural gas (Mcf), but after the hedge they got $8.10, compared to $4.31 last year. With oil and gas prices now falling, they should be able to get a chunk of those unrealized losses back this quarter. Their average realized price for oil was $98.84 per barrel, double last year’s $49.34. They don’t hedge their crude oil, which accounted for $1.2 million in revenues in the quarter.

For 2008, about 50% of current net production is hedged between $6 and $6.91, compared to the current August price for Northwest Rockies gas of $6.97. In 2009, they have hedged about 60% of their expected production at prices between $7.01 and $7.50. While it is painful to give up the quarterly windfalls, it is safer to run the company at least partly hedged. Given my outlook for energy prices for the next many months (down), I agree with the strategy. But for June, the unrealized derivative losses turned a three cent per share profit into a one cent loss.

Operationally, the company is in great shape. They can now complete a well in 21.9 days, down 5.6 days from last year. They have fine-tuned some recovery techniques that let them revitalize wells to keep gas flow high, and they are going to start using those methods earlier to reduce costs. They’ll be running two drilling rigs through the end of the year, plus partnering some drilling.

Gasco’s stock price has come down with oil, but the company is growing volumes at a rapid clip and seems well-hedged against a lower gas price environment. A cold winter will push gas prices back up. GSX remains a buy under $4.50 for my $9 target, and is very attractive at current levels.

Plug Power (PLUG) reported June quarter revenues of $4.8 million, up from $4 million last year, but that’s where the good news stopped. Product revenue was $1.1 million compared to $0.7 million last year, and the rest was R&D contract work. They shipped 92 units in the quarter, 53 GenCore backup systems and 39 GenDrive systems for forklift trucks. They are negotiating with several utilities to start selling their new GenSys product that drops in to replace a homeowner’s furnace, providing heat and power.

They only got 40 orders in the quarter, bringing the system backlog to 244. They said in the second half of the year they still expect to book 150 to 200 GenDrives and 50 GenCores. They have $127.9 million in cash and are burning about $17 million per quarter, so they need to see a commercial success with GenSys to avoid raising a lot more money. They have reorganized the company to focus on sales and marketing, and I want to see rapid growth in orders and revenues over the next three quarters, or we will be selling the stock next April.

PLUG is an obvious beneficiary of the MIT solar hydrogen breakthrough, but that is some years away from commercialization. This morning, Ardour Capital downgraded the stock from accumulate to hold, knocking it down near $2 Plug Power still has a huge opportunity in backup power for cellphone towers, and PLUG remains a buy up to $5 for a $10 target.

WiMAX MegaShift

Airspan (AIRN) reported June quarter revenues down 3% to $21.4 million, with WiMAX revenues down 10% to $12.7 million. Last year, about 28% of revenues came from the Yozan contract, which has ended. WiMAX grew 25% from the March quarter. Airspan has the largest number of self-installed WiMAX networks in the industry, and more mobile upgradeable commercial WiMAX deployments than any other company. They are the only pure play WiMAX vendor with a Tier 1 mobile WiMAX account.

On the conference call, they said they are negotiating to draw down their bank lines, which probably means changing the covenants, which will be tough in this environment. They have $33 million in cash and they aren’t burning much, but they need to see some of the opportunities in Japan, the Middle East and the U.S. turn into strong revenue growth over the next couple of quarters. At the current sub-$1 price, we should hang in there and give them two or three quarters to perform. AIRN remains a hold for my $5 target, possibly in a buyout.