Last week I warned you that a market crash was probably in the cards. Despite Tuesday’s move higher, this scenario is still not completely off the table, but so far the bears have not been able to take advantage of the window that opened for them, and the window is now rapidly closing. The old saying is that markets that won’t go down, go up. It could be that the week of October 6 through October 10, which was the worst drop in the history of our stock market, marked the bottom for now. The very volatile daily moves we’ve lived through since then could simply be confirmations of the bottom that will confuse bull and bear alike, before the big fourth-quarter rally I’ve been looking for.
During that week, volume on the New York Stock Exchange hit 11 billion shares one day, a new record. The exchange-traded fund that tracks the S&P500 traded a record 800 million shares in one day and another record-breaking three billion shares for the week. A big drop on big volume certainly sounds like capitulation.
Last Friday, the 79th anniversary of the beginning of the Crash of 1929 and the one-year anniversary of the market’s all-time high, the VIX Fear & Greed Index sailed up to new intraday high at 89.53 and closed at a record 79.13, but the S&P 500 did not sink to new lows. When panic and fear skyrocket while stock prices are little changed, something is up. Unlike 1929, there was no Black Monday or Black Tuesday, even though the VIX set another closing high at 80.06 on Monday. Tuesday, or course, saw a spectacular rally starting at the 845 level on the S&P. There is some resistance at 962, which we saw again today, but the immediate target for this rally is at least 1050, and eventually 1270, a whopping 50% move from Tuesday’s low.
A break below the October 10 low of 7,882 on the Dow Jones Industrials or 839.80 on the S&P 500 would put the crash scenario front-and-center again, but that has become the low probability outcome. If you watched the short squeeze in Volkswagen shares on Monday and Tuesday after Porsche announced they’ve bought up most of the remaining float, you can get a feel for the higher probability outcome. The short sellers, put buyers and cash holders are all going to try to get on this train at once to salvage their 2008 performance statistics, and there aren’t enough doors or seats. Yesterday’s Fed rate cut to 1% convinced at least some of them that the train is departing right now.
By the way, I think the Fed should have cut to 0% if they wanted to exceed expectations, kick-start the credit markets and have some impact on the developing l-o-n-g recession. But Bernanke is not the guy for a dramatic gesture, so his Fed funds cuts will prove to be ineffective. It will take other initiatives to straighten out our economy.
And in the How-Not-To-Do-It Department, Iceland’s once-booming economy has been driven close to collapse by bank failures tied to credit default swaps and collateralized mortgage obligations. Collectively, the banks held assets five times the size of Iceland’s GDP, on extreme margin, of course. Iceland’s central bank cut a deal with the International Monetary Fund for a measly $2 billion loan and agreed to the IMF’s condition to raise their interest rate to 18%! The IMF is a serial assassin of developing country economies, and now they have a shot at wrecking a developed one. Yup, 18% interest rates, that sure will defend the currency — not. Who would want to have money in Iceland as those high interest rates cause a depression?
Now is the time to jump on some bargains served up by this year-long, vicious decline. We sold Omniture (OMTI) in June 2007 at $23.37 for a 226% gain, and here it is back at $11. We sold Energy Conversion Devices (ENER) in June 2008 at $77.98 for a 174% gain, and now it’s trading for $32. We bailed out of Cree (CREE) way back in March 2004 at $28.50 for a 38% gain, and I have mentioned it several times this year as a stock we need to own at a better price. Today’s close at $20.18 is a lot better price. We’ll add all of those picks back to our portfolio today — details below.
Finally, I want to add to our solar exposure [Canadian Solar (CSIQ) and Energy Conversion Devices] with a new recommendation of Suntech Power (STP). On top of that we’ve seen good earnings reports from Harmonic (HLIT), ViroPharma (VPHM) and others, plus the usual news flow. We have a lot of ground to cover, so let’s get started.
Four New Buys
Omniture (OMTR) was a very successful September 2006 recommendation in the New Economy MegaShift, and not much has changed from my original write-up, which you can find here. One thing that has changed is that they are up from 1,000 customers to 5,000 customers in two years, including eBay, AOL, Wal-Mart, Gannett, Microsoft, Neiman Marcus, Oracle, General Motors, Sony and HP. Omniture provides an online service that runs business optimization software for corporate marketing departments that need to manage and integrate online, offline and multi-channel business initiatives. Their SiteCatalyst service collects information on how users interact with their corporate customers’ web sites. This can include how a web user got to the site (Search engine? Pay-per-click? Free publicity?), how they moved around the site, how long they stayed, what they bought, what they almost bought and on and on. All of this can also be related to offline drivers like TV and radio advertising or direct mail, and everything is stored in a data warehouse for easy access by the customer, including the ability to build custom reports.
The customer accesses everything through a web browser — there is no need to buy a huge software package and wait months for it to be installed in-house. This software-as-a-service model, also known as application hosting, is very attractive to me because it provides recurring monthly revenue, instead of the big, lumpy software sales that may come in the last two days of a quarter, or not. I think Wall Street will pay higher price/earnings (P/E) ratios for companies that use this model.
SiteCatalyst just won the ClickZ Interactive Marketing Excellence Award for Best Analytics Platform. A member of the judging committee described the service as “hands down the most innovative, ever-expanding platform in the space.” It has the #1 market share in the industry.
When I recommended the stock in 2006, I was expecting sales to roughly double to $80 million that year and then hit $130 million in 2007. They did $79.7 million and then $143.1 million. They should close out 2008 with another double to $308 million in sales, and even in a rotten economy in 2009 they will hit $400 million. Companies need SiteCatalyst to compete for Internet sales in a worldwide economic slowdown.
As for earnings, back in 2006 I was expecting them to lose 15 cents a share pro forma, and then make 15 cents a share in 2007. They reported an eight cent loss for 2006 and a 20 cent profit for 2007. This year, I am looking for 42 cents, followed by 65 cents in 2009.
When I recommended OMTR in late 2006, the company has a total market capitalization of $345 million, less than 3X the 2007 sales estimate. Today the total market cap is $762 million, or less than 2X the 2009 sales estimate. It should be selling for double or triple that, given the growth rate. Buy OMTR under $11 for a $22 target in 2009. This is a stock we can hold past the April high I am expecting, and let it compound for a few years.
CREE (CREE) was another successful recommendation dating back to March 2004, and the description of their business (which you can find here) and opportunity have not changed. The company makes light-emitting diodes (LED), and also combines them into LED lamp bulbs to replace incandescent and compact fluorescent bulbs. About 19% of our energy bill goes toward lighting, almost all of it for either incandescents that waste heat or fluorescents that contain toxic mercury. Cree’s XLamps can slash our country’s lighting bill, so they fit in the New Energy Technology MegaShift.
Although LED flashlights now cost about the same as a regular flashlight, LED lamp bulbs that contain many more individual LEDs are still much more expensive than incandescents. But governments around the world, as well as several U.S. states, have set deadlines to outlaw incandescents, and rapid increases in LED lamp production are bringing down prices. Cree recently signed a distribution deal with Zumtobel, one of the world’s leading lighting fixture companies, to sell Cree’s LED downlights in Europe, where many legislated deadlines to stop using incandescents are coming up.
Cree used to make only the LED components, but entered the lamp business in competition with many of its customers a few years ago. Angry customers began switching to other suppliers, even though Cree has the best technology and very competitive prices. So the company has been balancing flatness in its components business and a decline in its old businesses against growth in their XLamp LED lamps. The resulting flat revenues and weak earnings brought the stock down.
But the company just announced September first quarter results, and it looks like the breakout quarter. They did record revenue of $140.4 million, up 24%, and 15 cents a share proforma. Their gross profit margin increased to 36% due to higher throughput in their LED chip factory and improved XLamp yields, which resulted in higher XLamp profit margins. XLamp sales showed another double-digit increase, and all their results were at the high end of their guidance. They raised guidance for the December quarter to $142 million to $146 million in sales and 15 to 16 cents a share.
For the June 2009 fiscal year, I’ve raised my numbers to $600 million in sales and 55 cents a share. For June 2010 it looks like $900 million and 75 cents to 80 cents. With the transition to LED lamps just starting, mostly in commercial buildings where there is a significant labor savings from change bulbs only 5% as much, CREE is a stock we can own for many years. The company has $339 million in cash and no debt, so the current turmoil in the financial markets will not affect them. Buy CREE while it is under $22 for my $50 target — that’s 50% higher than the last time we owned the stock.
Energy Conversion Devices (ENER) is yet another prior winner for us in the New energy Technology Megashift — in at $28.40 in February 2007 and out at $77.98 in June 2008. The big change at ENER since that day is a new management team that focused the business on United Ovonic Solar as the best near-term revenue and profit opportunity. They stopped pouring R&D into science projects that will take years to pay off. Their semiconductor memory joint venture with Intel now stands on its own, with Intel doing the heavy lifting in both product development and financing. Their half of the Cobaysis joint venture with Chevron will either be sold to Chevron, or the whole company will be sold to Toyota or a big battery maker like Johnson Controls.
So solar it is. United Ovonic Solar does not make traditional solar panels. They deposit a photovoltaic thin-film coating on a substrate designed to replace roofing materials. So the whole roof is solar-active, and qualifies for renewable energy credits. As a solution for new construction or re-roofing an existing building, it is a no-brainer for any company worried about their energy costs. That’s pretty much everyone these days.
At their recent analyst day, management said they are building a new 120 megawatt solar-cell manufacturing facility. They had planned to have total capacity of 300 megawatts in fiscal 2010 and 600 megawatts in 2011, but they raised that to 420 megawatts and 720 megawatts. They can fund the expansions with cash flow, and don’t need to go to the credit markets. They repeated their commitment to hit 1000 megawatts — one gigawatt — of capacity in fiscal 2012. Capacity is growing about 40% a year, and that’s a good estimate for the growth rate of the company in the near term.
They also discussed a new joint venture with CertainTeed to make next-generation solar residential roofing material by incorporating UNI-SOLAR photovoltaic cells into CertainTeed roofing materials. Products will be commercially available beginning in 2010. This is a very big deal, because CertainTeed dominates the roofing materials business with a great, trusted name and has distribution everywhere.
Thanks to the capacity increases, extended investment tax credits and what I expect will be surging oil prices next year as the dollar falls, I think ENER can report $480 million in sales and $1.75 a share in the current June 2009 fiscal year, followed by $750 million and $3.50 in fiscal 2010. The September quarter results will be reported on November 10, and they should show sales up about 100% from last year and 20 cents to 25 cents a share, compared to a 17 cent loss last year. Buy ENER before the November 10 report up to $32 a share, this time for a $65 target price.
Suntech Power Holdings (STP) is another solar stock that was clobbered in the last week, down 50% before starting to recover Tuesday afternoon, and has fallen from $90 at the beginning of the year to the mid-teens. It is a very volatile stock, but two of the negatives — the confusion over solar installation reimbursements in Europe and the delayed extension of the investment tax credit in the U.S. — are resolved. The third negative, falling oil prices, will be with us for a while, but I don’t think it will affect commercial solar sales, and I expect oil prices to be much higher in 2009.
Suntech is based in China and takes advantage of that country’s low labor and materials costs, but they sell globally through a large distribution network. They have a wide range of traditional solar panel products, including monocrystalline and multicrystalline silicon cells, photovoltaic modules and building-integrated photovoltaic products. They have a large domestic business in China, where they also provide photovoltaic system integration services, such as designing and installing PV systems for lighting outdoor urban public facilities, and telecommunications and transportation systems.
In 2005 they did $226 million in sales. They grew revenues 164% in 2006 to $598.9 million, and then tacked on another 125% in 2007 to $1.35 billion. I expect them to finish 2008 up about 55% to $2.1 billion and then grow another 55% in 2009 to $3.3 billion. It is a remarkable growth rate for a company that went from small to large very quickly, with increasing profitability the whole way. They should report $1.70 a share this year, up from $1.02 in 2007, and hit $2.50 in 2009. It isn’t often you can buy 55% growth for less than 10X coming earnings. Buy STP up to $16 for a $40 target. I may raise that to $50 (20 x $2.50) as we get close.
Avian Flu MegaShift
BioCryst (BCRX) had two good reports this week. On Monday they reported their Phase II trial results in hospitalized influenza patients who were administered peramivir intravenously for up to five days. The drug was well tolerated. Most of the major symptoms disappeared in an average of 25 hours, and patients were discharged in an average of four days, compared to the usual six days. Best of all, there were no deaths at all, whereas normally of the 200,000 people in the U.S. admitted to the hospital with flu, 36,000 or 18% die. After discussing the results with the FDA, I think they could get permission for a pivotal clinical trial using Tamiflu as the control, because it would not be ethical to give these very sick people a placebo. Success in that trial would lead to approval.
On Tuesday, their Japanese partner Shionogi presented data from their Phase II study in non-hospitalized seasonal influenza patients treated with a single intramuscular injection of peramivir. We already knew the top-line results were good. Shionogi said both the low and high doses tested significantly reduced the time to alleviation of symptoms by 32% to 33%, compared to the placebo. The company will proceed with a Phase III study.
There is no antiviral approved for the hospital setting, and practitioners are always interested in new antivirals due to the tendency of the virus to develop resistance to existing approved drugs. I think this data clearly shows that peramivir works, and will eventually be approved. It’s still a long road, but if BioCryst can get the FDA to agree to a pivotal Phase II, at least for avian flu, then we could see the drub commercialized within 18 months or so. From today’s depressed price, this will be a big winner. I am reducing the buy limit to $3 to reflect the current market, but leaving the target price after peramivir is approved at $30 — a 10-bagger.
Biotech MegaShift
eResearch (ERES) reported after the close, with the conference call starting in a few minutes. The company was expected to do $35 million in sales and earn 12 cents a share, and they did $33.9 million and 13 cents. Bookings hit $43.0 million, pushing the backlog to $159.2 million. The company raised guidance for 2008 earnings to 47 cents to 50 cents a share. For the December quarter, they guided to a range of $31 million to $34 million in sales and 10 cents to 13 cents per share. The consensus was looking for $37.3 million and 15 cents, so this is a disappointment. I will focus on this in the conference call, and send you a Flash Alert if my advice changes. For now, ERES remains a Top Buy up to $15 for my $30 target.
QLT (QLTI) reported earnings and results from their punctal plug study, plus some news about their Novartis relationship. To set the stage, they are slimming the company down to focus on Visudyne and their new punctal plug program for glaucoma. The have sold other drugs, sold their corporate headquarters for a big capital gain, and are in negotiations to sell Eligard. They have $2 a share in cash now, although part of that is restricted in a bond put up on a legal appeal. The oral arguments on that appeal are done, and they should hear any day if they won or lost.
On Visudyne, Novartis decided to close down their U.S. sales force, while continuing to sell the drug in the rest of the world. This is not as bad as it sounds, as U.S. sales have been flat and Visudyne has had to pay their share of the expenses of the sales force. There won’t be any negative earnings impact at all. Meanwhile, all the studies on combining Visudyne with anti-VEGF drugs like Lucentis are going forward, and if they are successful we will see U.S. sales grow even without a sales force. Plus, at that time I would not be surprised to see Novartis come back to the U.S. market.
The Phase II puntal plug study essentially tested the ability of the plug to hold a drug inside the eye and get better treatment outcomes. It was quite successful in dropping intraocular pressure by 20% in about two-thirds of all patients. That was good enough to show that this is a commercially viable platform that would be competitive with other glaucoma agents. They will move on to a second Phase II trial using higher doses. I am reducing the buy limit on QLTI to $4 to reflect current market realities, while leaving the target price at $12 after the Visudyne/Lucentis combination trial results are published.
ViroPharma (VPHM) reported a solid September quarter, booking $65.9 million in Vancocin sales, far better than the consensus estimate of $58.5 million. They killed on the bottom line, too, coming in at 32 cents compared to the consensus for 23 cents. Management said Vancocin sales are beginning to benefit from the proposed updated guidelines for the treatment of Clostridium difficile infection, which call for earlier and stronger intervention. They raised guidance for 2008 Vancocin sales again, this time from a range of $220 million to $240 million up to $235 million to $245 million.
After paying for the Lev Pharmaceuticals acquisition, they expect to end the year with about $300 million in cash. Next Wednesday, November 5, they will hold a conference call to discuss the launch plans for Cinryze, the drug they are getting with Lev. They will transition the 100 patients now on the open label trial, and have a list of 800 more interested in evaluating it. The full roll out will start in early 2009 with a newly-hired 20 person sales force. On the call, they also will tell us the pricing — I am expecting $3,500 per dose.
The last dose in the Phase III trial for maribavir for stem cell transplant patients is done, and the last follow-up should be completed by the end of November. We should see top-line results in the March quarter and a new drug application to the FDA in the September quarter. Maribavir also is in a Phase III trial for liver transplant patients, and that trial continues with results expected later in 2009.
I really don’t understand why this well-run company sells at such a low price. The bears who said generic Vancocin would be on the market last year were utterly wrong. The Lev acquisition is an obvious winner already, given the FDA approval of Cinryze. This is a street-smart management that knows how to conserve cash and build shareholder value. VPHM can be bought up to $13 for my $25 target.
Content on Demand MegaShift
Akamai (AKAM) reported September quarter results after the close, and the conference call is about to start. They did $197.3 million in sales and 40 cents a share, better than the consensus for $195.2 million and 39 cents. In the press release, management said they had strong growth in newer offerings like application performance services and dynamic site acceleration, but the environment is getting “increasingly difficult.” I’m sure we’ll explore that statement in depth on the conference call.
Akamai is buying an online shopping data cooperative, acerno, for $95 million in cash. This relatively small deal will close by yearend, and is designed to flesh out a new advertising decision solutions product line that helps online ad companies improve their Web-based marketing. These companies are important customers for Akamai’s web acceleration products. AKAM remains a Top Buy. I am cutting the buy limit to $20, still well above today’s close, and leaving the target price at $60, which is what this extraordinary company is worth.
Harmonic (HLIT) reported record revenues and bookings, and a positive outlook for 2009. Even as major customers like Comcast trim their capital spending budgets, they are spending more dollars with Harmonic because the need to handle video efficiently and competitively is driving their capital budgets.
Sales hit $91.5 million in the quarter, with cable customers accounting for 63% of revenue, satellite 22%, and telcos 15%. Their largest customers were Comcast at 24% of sales, in spite of their cut in their capital spending budget, and EchoStar (DISH Network) at 10%.
They booked about $110 million in orders, for a book-to-bill ratio of 1.2X. That implies 20% growth over the next six months or so. They guided to $92 million to $95 million revenues in the December quarter; the consensus is at $93.1 million. I expect them to hit the high end of the range.
Pro-forma earnings hit 17 cents a share, right on the consensus. The estimate for the December quarter also is 17 cents, bringing them in at 67 cents for the year.
Harmonic has the December quarter in the bag, and management said normally they would say all the trends are in place for strong double-digit growth in 2009. But they are cautious in the current financial environment, even though they are not hearing negatives from customers, and not giving any 2009 guidance yet. At the end of the day, I think they will grow 15% to 20% again next year, with earnings flat as they begin reporting on a fully taxed basis. HLIT remains a Top Buy up to $10 for my $18 target.
Infinera (INFN) reported GAAP revenues of $120.5 million, but their pro forma numbers based on invoiced shipments are more conservative and more accurate. On that basis, they did $80.9 million and 12 cents a share, better than their guidance on the last conference call, and better than the consensus for $77.6 million and a loss of four cents a share. However, they guided conservatively for the current quarter, forecasting $75 million and a loss of seven cents as they start to ship the big Deutsche Telekom order. The Street was looking for $80 million and a two cent loss.
Infinera added five new customers this quarter, including the fifth of the top five cable companies in North America, and two new European companies. That does not include Deutsche Telekom, which will become a new customer this quarter. They are expecting to add four more new customers in the December period.
During the quarter, their photonic integrated circuits passed a milestone: 100 million hours of operation in live networks without a single failure. By designing and building their products from the ground up, instead of assembling other companies’ components, they’ve been able to achieve extraordinary performance at attractive prices. Infinera remains an excellent buy. I am lowering the buy limit to $10, again to reflect current market realities, while leaving the target price at $30.
Motorola (MOT) reported this morning, and it was all bad news. The quarter was disappointing, coming in at $7.5 billion in sales with a pro-forma profit of five cents per share. While that beat the consensus for two cents, they then guided lower for the December quarter, expecting two cents to four cents. They said their plan to spin off the handset division by the third quarter of 2009 is on hold, presumably because (a) it isn’t doing well enough to stand on its own, and (b) MOT won’t have the $4.4 billion in cash they need to complete the separation, including $3.2 billion for the mobile devices operation. Part of the problem is that the recession finally got to cellphones — September quarter sales fell 0.4% from the June quarter and were up a measly 3.2% from last year. The company shipped only 25.4 million handsets during the quarter, several million units short of Wall Street’s forecast, and said that handset sales would be weak in the first half of 2009. The Motorola January 2009 $17.50 LEAP calls (MOTAW) are going to expire worthless, so sell them now or in early January, whichever fits your tax situation better. I apologize for getting us into these — I thought MOT would be out much sooner with their smart phones coming next year to compete with Apple’s iPhone. I still think those smart phones will make a difference, so Hold the Motorola January 2010 $10 LEAP calls (WMA AB) for a reduced $8 target.
New Energy Technology MegaShift
Ocean Power Technology (OPTT) may benefit from the California Public Utilities Commission rejection of a Pacific Gas & Electric contract for a test wave energy installation. The supplier, Finavera Renewables, planned to operate wavepower buoys about 2.5 miles off the coast of Eureka to generate two megawatts of power starting in 2012. The PUC said Finavera’s wave-energy technology is “in a nascent stage” and the system is “not currently viable.” They noted that a prototype buoy deployed by Finavera off the Oregon coast in 2007 sank before its six-week test period was concluded.
PG&E “respectfully disagreed” with the decision. Guys! Call OPTT and get a proven system with Department of Defense testimonials!
A report by Greentech Media and the nonprofit Prometheus Institute found that only about 10 megawatts of ocean power have been installed worldwide so far (mostly by Ocean Power), but that a could grow to 1 gigawatt (1,000 megawatts) by 2015. One megawatt of power is enough to provide electricity for 750 homes. They project that more than $4 billion will be invested in ocean-wave research and the construction of wave farms over the next six years.
Daniel Englander, a co-author of that report, said the PUC decision is not a death blow for wave-energy projects. “PG&E picked the wrong company,” he said. “Finavera isn’t a bad company, it’s just that their technology isn’t at a stage where it’s ready to deliver power commercially.”
OPTT is ready. Buy OPTT up to a reduced buy limit of $10. I am not changing the $40 target.
Next week I will catch up on NetLogic (NETL), QuickLogic (QUIK), Silicon Image (SIMG) and SiRF Technology (SIRF), all of which have reported.




