wall street nuggets

The Mining sector appears to have a penchant for extreme behavior, being an outlier once again, but this time on the down side. While the SI Universe as a whole was up 0.31%, the Mining sector was down 2.7% on Wednesday. JAMES RIVER COAL CO [JRCC] was the biggest loser dropping 8.2% to close at $8.72. Obviously, one cannot attribute a drop of this magnitude in a single day to just one more mild temperature day, although the cumulative effect of many days of mild temperatures should continue to exert some modest downward pressure on the group. There was no significant news event, so the most likely explanation is another large sell-off by Pirate Capital LLC which last filed a 13D on December 7^th, indicating major sales of JRCC between December 5^th and 7^th, and the ownership of 679 thousand shares. The lack of profitability and long-term debt ($150 million) makes this hard to justify on valuation, but the cash flow from operating activities could make this an attractive buyout opportunity, if they improve on the third quarter result in the current quarter.

Note that the other two big losers in the Mining sector were PEABODY ENERGY CORP [BTU] and HECLA ENERGY CORP [HL] both tumbling 3.5%. We have some concerns regarding the Balance Sheet for PEABODY, but HECLA looks like a interesting buy opportunity.

We need to keep an eye on natural gas inventories tomorrow when the EIA reports its weekly numbers. Given the mild weather, it is likely we will continue to see a significant gap between last year’s storage at this time and the current storage level.

We are sad to see REDBACK [RBAK] being lost as one of our significant growth opportunities for 2007, as it agreed to be acquired by ERICSSON for $2.1 billion or $25 per share - an 18% premium over its closing price on Tuesday.

LODGENET ENTERTAINMENT CORP [LNET] (Communication) jumped 15.3% closing at $26.75 on the news that it had entered into a definitive agreement with LIBERTY MEDIA CORP to purchase all of the capital stock of ASCENT ENTERTAINMENT GROUP INC which in turn is the owner of 100% of the capital stock of ON COMMAND CORP for $380 million – in cash and 2.05 million new shares of LNET to be issued. ON COMMAND, like LNET, provides interactive media services to approximately 830,000 hotel rooms in North America and also owns 80% of HOTEL NETWORKS INC, the distributor of ad-supported, satellite-delivered TV programming to approx. 300,000 hotel rooms in the U.S. The closing price was obviously significantly impacted by an arrangement with PAR CAPITAL MANAGEMENT INC which agreed to buy 1 million LNET shares for $23.35 per share, which is conditional on the acquisition of ON COMMAND going forward. No significant opportunities are visible.

Software provider, CHORDIANT SOFTWARE INC [CHRD] (Software) dropped 10.5% to close at $2.91 following the announcement of preliminary results for fiscal 2006 and new guidance for fiscal 2007. For fiscal fourth quarter 2006, ended September 30^th, the company expects a net loss of $8.4 million and a net loss of $16.0 million for the year, on revenues of approximately $97.5 million, representing an increase of approximately 16% over fiscal 2005. The company of course is one of the tardy late filers with the SEC – referred to as the White Rabbits on this blog, with a current gap of 258 days since the last date covered in an official filing. With losses widening, a lack of transparency and restatements of financial statements likely soon, we see little upside potential here. The only apparent good news is that apparently cash and equivalents should be up for the quarter. Likely to become an acquisition target at some point.

SIRF TECHNOLOGY HOLDINGS INC [SIRF] (Electronics & Semi) tumbled 11.5% closing at $26.20 in response to speculation by a Jeffries & Co analyst that TOMTOM NV [TMOAF] may have signed a deal with a privately held competitor (GLOBAL LOCATE) of SIRF for the GPS chipset. While the correction is probably excessive, the current P/E (385 based on trailing 12 months) is absurdly high and cannot be justified by the expected growth of 47%, assuming 2006 revenues are anywhere near the expected $243 million.

Daily Sector Performance Chart

Some persistence in the good news on the earnings front buoyed the market despite a bump in oil prices and the market seems to have the potential for a year end rally before we see any major corrections.  For the day, the average member of the SI Universe posted a gain of 0.59%, with 66% of the members posting a positive return for the day.  Significant sector moves were posted by Mining (down 0.7%), Network Technology (up 2.3%, led by REDBACK NETWORKS [RBAK] and POLYCOM INC [PLCM]) and Railroads (up 2.1%, led by CSX CORP [CSX] and NORFOLK  SOUTHERN CORP [NSC], but they were all gainers for the day).   Airlines surely wanted to fly higher but were held back by the spike in oil.

KEYSTONE AUTOMOTIVE INDUSTRIES INC [KEYS] was down a stunning 21.2% closing at $30.55 on the news the International Trade Commission had ruled in favor of FORD regarding 7 of 10 design patents dealing with parts of the Ford F-150 truck. Given the almost inconsequential impact of this decision on the KEYSTONE revenues (0.1% for sales on a trailing 12-month basis according to a Reuters story), we are inclined to view this as a definite buying opportunity for KEYS. Also, the ruling will be contested, although we have no estimate for the probability of a reversal at this point. Would suggest a conservative value between 0 and 0.5.

PARLUX FRAGRANCES INC [PARL] was hammered down 14.6% closing at $5.77 on the announcement that it would be selling back the Perry Ellis fragrance brand to Perry Ellis for approximately $63 million, which is well below the $140 million for which PARLUX had agreed to sell the brand to Victory International last summer. Looks like PARLUX has very little control over its brands if this is any indication. Hopefully they can put the $63 million to good use in acquiring some new brands. Given recent performance, we are not optimistic and it appears new leadership is needed.

CREE INC [CREE] tumbled 12.9% closing at $18.39 after revising downward its projections for the second fiscal quarter ending December 24^th. The company now projects sales of just $90 to $92 million for the quarter, well below the consensus estimate of $107.2 million and well below last year’s sales of $105.6 million for the same period. Yuck! Given declining sales, we do not see an opportunity at this time.

REDBACK NETWORKS INC [RBAK] jumped 11.7% closing at $16.94 after announcing that it had won the second phase of a broadband network upgrade by Guangdong Telecom – the largest provincial carrier in China. The carrier will use REDBACK’s SmartEdge® family of multi-service edge routers to deliver broadband internet, IPTV and VPN services for up to 4 million homes and businesses. With more than 50 million broadband customers, China is REDBACK’s second largest market outside the U.S. and it currently has edge routers deployed in 22 of the 32 provinces in China. Despite the high P/E ratio (89.6) and projected revenue growth of just 23% next year, we suspect the actual growth could be a lot stronger because of the international markets and this is still an interesting opportunity.

ON SEMICONDUCTOR CORP [ONNN] was up 10.6% closing at $7.52 following a very strong presentation at the Lehman Brothers Technology conference in San Francisco on Thursday. Given the relatively low P/E ratio (12.4) but only 5% expected growth next year, we do not see a lot of upside potential at this time and the continued selling by TPG is likely to continue to keep downward pressure on the stock.

MOVIE GALLERY INC [MOVI] up once again – this time 10.3% - to close at $4.49. Probably a good time to sell since we see no justification for the 47% increase in price since Monday!

IMMUNOMEDICS INC [IMMU] ramped up 10% closing at $3.09 following the announcement that the company had been awarded a patent for various methods of treating B-Cell lymphomas, leukemias and autoimmune diseases using the company’s monoclonal antibody that binds to a certain antigen present on B-lymphocytes. We need some evidence of execution here. A patent award by itself does not necessarily bring in revenue. Can the company successfully license its patents? The jury is out.

MEDAREX INC [MEDX] shot up 7.5% closing at $15.46 after announcing that the FDA had designated as a Fast Track product the company’s new drug ipilimumab used in combination with chemotherapy in previously untreated metastatic melanoma patients, or by itself in previously treated metastatic melanoma patients.

AKAMAI TECHNOLOGIES INC [AKAM] up 7.4% closing at $53.38 with a trading volume more than double that of the average daily volume for the past 3 months. No real news and the P/E is 143.5 and the consensus estimate is for next year’s revenue growth to be about 34%, which I think is on the aggressive side, so this appears to be considerably over-valued at this point.

Daily Sector Performance Chart

With lots of nervousness on the jobs front, the markets were off with some substantial drops in all ranges of market capitalization. The average stock in the SI Universe posted a loss of 0.33% on Thursday.  Only 32.3% of the members posted a positive return for the day.  Unusual sector moves were Alternative Energy (down 1.7%), Construction (down 1.5%), and Tobacco (up 1.2%).

Wednesday, December 6, 2006:

DIRECTED ELECTRONICS INC [DEIX] (Electronics & Semi) dropped 14.3% closing at $11.28 after lowering guidance fro the 2006 to reflect lower than anticipated sales of satellite radio receivers. Sales for 2006 are not projected to be in the range of $430 to $440 million, compared to earlier guidance of between $440 and $460 million, corresponding to a reduction in growth from about 48% to 43%. Not much of a drop in growth, BUT with a P/E ratio of 389 (good grief!), we do not recommend running out to buy this quite yet.

One of our perennial white rabbits (defined as companies tardy in filing SEC quarterly statements) SIRVA INC [SIR] (Transportation) dropped 11.8% closing at $3.28, after reducing its guidance for 2006 earnings BEFORE interest expense, taxes, depreciation and amortization to between $45 and $55 million, compared to previous guidance of $65 to $80 million. Given the company’s sensitivity to the slowing U.S. real estate market and growing inventory costs within its Global Relocation business, the writing on the wall is pretty grim for SIR. It’s almost two years now since the last 10-Q! Beware.

BLYTH INC [BTH] dropped 11.5% closing at $22.05 after issuing a press release (but not filing an 8-K – Tsk! Tsk!) lowering its outlook for fiscal 2007. For fiscal 2007, the company projects a loss in the range of $2.50 to $2.60 per share. Excluding special items, earnings should be in the range of $1.20 to $1.25 per share. The company apparently plans to continue aggressively paying off the long term debt and eventually the bottom line will benefit from the discontinued operations in Europe, but the biggest upside potential here in the near-term is probably a private equity buyout, given the strong cash flow from operations.

SONICWALL INC [SNWL] (Network Tech) dropped 10.9% closing at $8.81 with an analyst warning from WR Hambrecht based on channel surveys that indicate a soft quarter. Given some less than pleasant experience with the hardware (VERY small sample of ONE!) and a sense that the company really doesn’t position itself well at all for the SOHO environment price-wise, we are inclined not to see any opportunity here.

Another white rabbit, NOVELL INC [NOVL] (Software) dropped 5.4% closing at $5.99 after preliminary announcements of Q4 results in which the fading Netware related sales continue to dangle like an albatross around the rapidly growing Linux platform. Not sure the company is really capable of reinventing itself once again.

ORACLE CORP [ORCL] (Software) dropped 5.2% closing at $17.88 following a warning from an analyst at Lehman suggesting that the company’s fourth quarter sales would likely fall short of expectations. Given the strength of competitive offerings and an appalling lack of innovation, combined with a dizzying pace of acquisition that must be posing significant cultural adjustment problems, it is very likely that investors are in for a rude surprise at some point in the next two quarters. This is not a buying opportunity in our estimation.

MONSTER WORLDWIDE INC [MNST] up 7.5% closing at $45.79 with strong technicals as the price moved above its 200 day moving average and the big staffing companies took some hammering. This looks interesting although the monstrous P/E ratio makes me just want to observe from a distance.

LEADIS TECHNOLOGY INC [LDIS] (Electronics & Semi) up 8.3% closing at $4.71 with no particular news other than a lot of speculation about apparent institutional buying. Relatively low price, but they need to get cash flow positive again soon.

MOVIE GALLERY INC [MOVI] up once again 16% closing at $4.07 apparently on speculation that the company might be close to announcing some relief on the debt front. Since the resolution in our opinion is likely to result in significant dilution and the long-term business prospects for a company that is likely to be hit hard by video-on-demand this is beginning to look a time for extreme caution.

INSPIRE PHARMACEUTICALS [ISPH] (Pharmaceuticals) up an inspiring 16.8% closing at $6.18 with a trading volume that was ten times the average daily trading volume for the past 3 months! Large block trades suggest institutional buying. No immediate upside opportunity, but definitely appears to have a strong balance sheet.

VERSANT CORP [VSNT] (Software) soared 20.3% to close at $14.74 after announcing strong results for the fourth quarter. The company reported revenues from continuing operations or $4.6 million for the quarter, compared to $3.8 million for the same period last year, an increase of approximately 21%. Net income for the quarter was $0.38 per share compared to $0.14 per share for the same period last year. With a P/E ratio of about 15 this company is probably a very strong acquisition target and seems to represent a very strong buy opportunity.

DOCUCORP INTERNATIONAL INC [DOCC] (Software) jumped 30.1% closing at $9.76 announcing it had agreed to a buyout by privately held Skywire Software for about $127 million or $10 per share.

Daily Sector Performance Chart

The average stock in the SI Universe posted a loss of just 0.02%, however the losers significantly outnumbered the winners with only 43.5% of the 3,543 members posting a positive return for the day. The big sector moves were Alternative Energy (down 2.2%), Construction (up 1.3%) and Railroads (down 1.6%).

DYNAVAX TECHNOLOGIES CORP [DVAX] shot up 32.3% to close at $9.79 after announcing highly statistically significant results in Phase 3 trials of its new hepatitis B virus vaccine, HEPLISAV™, comparing its efficacy with a vaccine, Engerix-B® from GLAXOSMITHKLINE. The results show that HEPLISAV provided 100% seroprotection after 3 doses, compared to 73.1% for those receiving Engerix-B (with the probability of a difference that large by pure chance being less than .01% given the trial population sizes). The differences were even more substantial for older subjects who are generally more difficult to immunize. The tests were completed at sites in Singapore, Korea and the Philippines and confirmed earlier Phase 2 clinical test results in Singapore for a younger population. DYNAVAX plans to pursue approval of a two-dose regimen and expects to initiate multi-center Phase 3 safety and efficacy trials in Europe, Canada and the United States before the end of the year. These trials should be completed in 2008. With its acquisition of Rhein Biotech in April of this year, the company claims to have sufficient manufacturing capabilities in Dusseldorf, Germany, to produce both clinical and commercial quantities of the vaccine. In addition, the acquisition included an existing hepatitis B vaccine product called SUPERVAX, which has been tested in more than 600 subjects with 99% seroprotection on a two-dose schedule. Insider buying of the stock has been pretty intense over the last 6 months (about 1.4 million shares), which is clearly encouraging. Currently the company is losing approximately $16 million per quarter from operations and it appears commercial results for both TOLAMBA™, a ragweed allergy drug, and HEPLISAV are probably at least 2-3 years off. In the latest 10-Q, the company claims not to have sufficient data to provide a timeline to registration for either drug. The agreement with ASTRAZENECA for the discovery and development of a treatment for asthma and chronic obstructive pulmonary disease, has put $10 million in deferred revenue on the books, which we take as a positive, and in other respects the balance sheet is reasonably encouraging. On balance, we see DVAX as very speculative buy in the long-term, but expect some short-term pull-back, with too much reaction to the early trial results.

3COM CORP [COMS] tumbled 10.5% closing at $4.02 on the news that it would be purchasing HUAWEI TECHNOLOGIES’s entire stake in their joint venture H-3C for $882 million. The joint venture is a leading IP networking vendor headquartered in Hong Kong, with R&D centers in China and India. HUAWEI TECHNOLOGIES is a leader in next generation telecommunications network products globally, and believes the divestment will enable it to focus on its core business - the IP-based fixed and mobile convergence solutions market. It appears 3COM initiated the bid process in mid-November and that both companies are satisfied with the outcome, but, like some other analysts, we are skeptical that this was the right move for 3COM. The price appears reasonable, given that it appears some private equity groups were offering $1 to $1.5 billion for H-3C back in October. While HUAWEI may have balked at the initial offer, 3COM probably persuaded its partner to sell its share for a slightly richer offer. However, the difficulties of remotely managing H-3C should not be underestimated. The stock was downgraded by Bear Stearns from “Outperform” to “Peer Perform.”

NEW YORK TIMES CO [NYT] jumped 7.5% closing at $24.76 in the wake of significant buying of NYT shares by Maurice “Hank” Greenberg, former CEO of AIG. A number of other media properties were also up, although unrelated. THESTREET.COM INC [TSCM] was up 4.8% possibly on the announcement that Jim Cramer would be ending his radio show to focus on video programming.

ALLEGHENY TECHNOLOGIES INC [ATI] and TITANIUM METALS CORP [TIE] were up 6.8% and 7.7% closing at $88.36 and $30.42, respectively, thanks to comments by the CEO of ALCAN indicating the attractiveness of titanium firm acquisitions to address needs in the aerospace industry.

MSC SOFTWARE CORP [MSCS] was up 7.9% closing at $14.89 with considerable recent insider buying (c 140,000 shares) and/or speculation regarding

GASCO ENERGY INC [GSX] was up 13.5% closing at $2.61. While there is no recent news of note, the company would appear to be a somewhat attractive acquisition target at its current valuation. Despite the rather significant loss reported of $54 million for the first 9 months of 2006, most of this ($51 million is a non-cash impairment charge) and the company generated a positive cash flow from operations of $9.1 million for the first 9 months. The main concern might be the $65 million in 5.5% convertible notes due in 2011, but this appears manageable. We see considerable upside potential here.

SIGMA DESIGNS INC [SIGM] surged another 15.8% closing at $26.45, for a two day gain of about 20%. As expected the quarterly results were impressive, but the P/E ratio is far too extreme at this point.

WINN DIXIE STORES INC [WINNV] jumped 16.8% closing at $14.15, although it is not completely clear what is moving the stock since the company emerged from bankruptcy on November 21^st. On Wednesday, the company announced that there were about 54.5 million common shares outstanding, implying a market capitalization of about $770 million, rather than the $2 billion found on thestreet.com or finance.yahoo.com.

DRESS BARN INC [DBRN] surged 19.3% closing at $24.46 after announcing record results for its fiscal first quarter ended October 28^th. The company reported net sales of $358.4 million, up 12% from the same period last year. Comparable store sales increased 7% for the quarter, although the company also reported November comparable store sales increased only 4%. At the current P/E ratio of about 21.3, we do not see any opportunities, relative to the rest of the Retail Apparel sector.

Daily Sector Performance Chart

Another strong day thanks to some positive macroeconomic news. The average stock in the SI universe posted a gain of 1.11% with 77% of all 3,551 members posting positive returns for the day. The big outlier sectors were Alternative Energy (up 2.8%, thanks to higher oil prices), Mining (up 2.7%), and Oil & Gas Production (up 3.2%).

The announcement that the GDP grew only 1.6% in the third quarter (versus 2.1% expected) brought the bears out of hibernation. Also, a Goldman Sachs report claiming motherboard demand was falling off a cliff hit the computer and semiconductor sectors pretty hard. This double whammy on Friday, definitely cooled off the markets. On balance, as the third quarter results roll in, they appear to be encouraging for the most part, and while I personally expect a rather harsh landing in the first half of 2007, most corporate balance sheets should be able to weather the storm. We may not appreciate the bump in the year ahead, but I do believe that the correction will be very much appreciated about 5 years from now.

VERTEX PHARMACEUTICALS INC [VRTX] vaulted up 17.6% closing at $40.66 when it announced some very encouraging results in the treatment of hepatitis C. VERTEX’s investigational hepatitis C virus (HCV) protease inhibitor in combination with pegylated interferon was reported to have reduced HCV RNA below detectable levels in 24 of 26 patients treated in early-stage clinical trials.

VISICU INC [EICU] rose on cue 16.4% closing at $8.75 following a strong third quarter. The company reported revenue of $8.2 million, up 68% over the same quarter last year. The company also reported a swing to profitability, with a GAAP operating income of $2.0 million, compared to an operating loss of $35,000 for the same period last year. Net income for the quarter was $0.07 per diluted share, versus a consensus estimate $0.04 per diluted share.

NETGEAR INC [NTGR] LANded up 16.2% closing at $27.48 following a great quarter. Earnings of $0.37 per share easily topped the consensus estimate of $0.32 per share and third quarter net revenue of $151.6 million beat the consensus estimate of $140.4 million. The company projects fourth quarter net revenue to be in the range of $153 to $160 million, compared to the current estimate of $148.27 million. With 22% quarterly growth (year-over-year) and a forward P/E of 19.4, this still looks like a buying opportunity. I’m probably somewhat influenced also by actual bad experiences with some competitive products.

XM SATELLITE RADIO HOLDINGS INC [XMSR] up a sparking 13% closing at $11.94 on a variety of rumors and speculation and a possible short squeeze. Fundamentals here are still not compelling from my perspective.

DECKERS OUTDOOR CORP [DECK] stepped up 9% closing at $53.87 with strong Q3 results and an upgrade by Cowen & Co. from “Neutral” to “Outperform.” Third quarter earnings of $0.83 per share easily topped the consensus estimate of $0.54 per share. UGG sales continued to outpace expectations. Simple and Teva brands are also showing solid growth. Believe the Piper Jaffray downgrade has not been digested yet, so some downside is likely on Monday. Some downward pressure already in after-hours trading.

INTERSIL CORP [ISIL] slipped 9.6% to close at $22.87, on news of the departure of President and COO, Lou DiNardo, who had just taken on the role of COO in January of 2006. While the public verbiage was polite and gracious, it provided little insight into the reason(s) behind the departure. More transparency is needed before considering this an opportunity in either direction.

SILICON IMAGE INC [SIMG] was battered down 17.1% to close at $11.77 after announcing earnings for the third quarter of $0.09 per diluted share on record revenue of $78.3 million, up 39.9% from the third quarter of 2005 and up 11% sequentially. The consensus estimate for earnings had been $0.21 per diluted share. If we add the stock-based compensation back into earnings but still exclude the other special charges, earnings would have come in at $0.19 per diluted share – still $0.02 below expectations, but not enough in our opinion to justify a 17.1% drop. The company also provided fourth quarter guidance that indicated revenue would decrease approximately 3% to 5% sequentially, due to normal seasonality for semiconductor sales. The company is now projecting that revenue growth for fiscal 2006 should come in at 32% to 34%, which is consistent with earlier guidance of 30% to 35%. Given the current P/E ratio of 32.6, this looks like an excellent buying opportunity.

NEXTEST SYSTEMS CORP [NEXT] tumbled 17.1% closing at $10.78 after announcing fiscal first quarter results that were not bad but providing guidance that failed to justify a high multiple. For the quarter ended September 23^rd, revenue was $26.859 million, up 3% sequentially and up 56% from the same period last year. Earnings for the quarter were $0.25 per diluted share versus a consensus estimate of $0.20 per diluted share. The major cause for concern would be new orders of $15.2 million, which the company interprets as being indicative of a slowing in the business environment. While the company should be able to ride through the slowdown, the dependence on relatively few customers is another cause for concern. About 29% of fiscal 2006 revenues came from a single customer (SANDISK). The new Magnum iCP test system for automated testing of CMOS image sensor devices was introduced earlier in the week and should extend the product line into a hot area, so that it is not so dependent on testing just flash memory. The stock was downgraded on Friday by Needham & Co. from “Buy” to “Hold.” Given the high multiple and customer concentration, this remains very speculative.

GEORGIA GULF CORP [GGC] plunged 18.5% to close at $21.93, hitting a 52-week low, after reporting disappointing earnings for the third quarter. Net sales for the quarter were $576.3 million, compared to $525.2 million for the third quarter of 2005, but well below the consensus estimate of $612.25 million. Earnings for the third quarter were $0.66 per diluted share, down from $0.82 per diluted share in Q3 2005, and once again well below the consensus estimate of $1.06 per share. Earnings shortfalls were attributed to higher raw materials costs and a loss of $0.08 per share attributed to a foreign exchange hedge related to the Royal Group acquisition, which was completed October 3^rd and therefore not yet a major factor in the financial results, except for the FX hedge. The stock was downgraded by BB&T Capital Markets from “Hold” to “Underweight” and by Citigroup from “Hold” to “Sell.”

The Daily Sector Performance Chart

With the wet blankets regarding GDP and motherboards, there was pretty much a 180 degree turnabout from yesterday. The average loss for the day was -0.89% with only 22.7% of the members of the SI Universe posting positive returns for the day. The big loser was Construction (down 1.9% on average). While not much to write home about, Mining was an outlier in the positive direction (up 0.3% on average).

DISCOVERY LABORATORIES INC [DSCO] climbed an impressive 23.9% closing at $2.64 on a volume that was almost 13 times the average daily volume over the past 90 days. This was in response to a press release indicating a very positive Phase 2 Clinical trial results for its new Surfaxin® for the prevention and treatment of Bronchopulmonary Dysplasia (BPD), a lung disease typically affecting premature infants.

DELUXE CORP [DLX] jumped up 16.9% closing at $21.29, pretty much recovering from the big hit taken at the end of June, when it canceled a project to automate some of its operations and took a pretax charge of $45 million. The company announced before the markets opened on Thursday that it now expected earnings for the quarter ended September 30^th to be in the range of $0.59 to $0.61 per diluted share, compared to its previous guidance of $0.41 to $0.45 per share, due primarily to lower manufacturing costs and lower SG&A expenses. That undoubtedly generated the pop.

TUESDAY MORNING CORP [TUES] rose a remarkable 12% closing at $16.33, with a press release announcing comparable store sales decreased 4.6% for the third quarter, and expected earnings for the third quarter in the range of $0.07 to $0.08 per diluted share. Given the rather low P/E ratio and healthy dividend, this one does look like a reasonably safe investment, although we don’t see much evidence of growth, with only a 1.1% increase in net sales over the same period last year.

BE AEROSPACE INC [BEAV] rocketed up 10.4% closing at $23.75 on no apparent news. Price movements here are somewhat suspicious. BE CAERfull.

SIGMATEL INC [SGTL] was up 9.3% closing at $5.51 with an upgrade by Am Tech/JSA Research from “Sell” to “Neutral.”

YUM BRANDS INC [YUM] was up a tasty 8.3% closing at $59.08 after reporting very positive third quarter results, including strong double-digit operating growth from China (26%) and a 7% reduction in shares outstanding for the quarter. The company raised its earnings outlook from $2.83 per share to $2.89 per share, which represents 14% growth before special items.

There was a huge focus on COSTCO WHOLESALE CORP [COST] which rose 7.6% closing at $53.90 with over 18 million shares traded. The company reported a very healthy 19% increase in net sales for the 17-week fourth fiscal quarter ended September 3^rd, although it should be noted that the comparable period in 2005 only had 16 weeks and therefore the actual increase in net sales was probably closer to 12%. Net income for the 17-week period was $0.75 per diluted share ($355.6 million), compared with $0.73 per diluted share during the 16-week fourth quarter last year. The consensus estimate for earnings for the quarter had been $0.73 per share.

SIRF TECHNOLOGY HOLDINGS INC [SIRF] rode the waves higher 7.3% closing at $21.68. The P/E ratio seems a bit out of whack. Probably a good idea to wait until the third quarter conference call scheduled for October 19, 2006 at 4:30 PM Eastern time.

CB RICHARD ELLIS GROUP [CBG] surged 7.3% closing at $25.99 on the news that it would be added to the S&P 500 index, replacing BellSouth, which is being acquired by AT&T.

FIVE STAR QUALITY CARE INC [FVE], an operator of senior living communities, was down 7.3% closing at $10.34, after announcing that it intended to offer $80 million of Convertible Senior Notes due 2026. Proceeds from the offering will be used for general business purposes, including possible future acquisitions. It is our opinion that the next 10-Q is critical in evaluating whether the termination of the management contracts with SLS have improved the margins as expected. While the demographics argue that the company is well positioned, the rental fees and management challenges in the near term could be a problem.

INTERNAP NETWORK SERVICES CORP [INAP] dropped 9.6% closing at $15.41 on the news that it was buying VITALSTREAM HOLDINGS INC [VSTH] for $217 million. VITALSTREAM provides products and services for storing and delivering streaming digital media over the Internet and would compete against AKAMAI. According to one analyst quoted by Reuters, the “acquisition will be dilutive from an earnings per share perspective probably for a couple of quarters.” While the exchange ratio of 0.5132 implies VSTH shares are being valued an unusually high premium of 36.7% based on Wednesday’s closing prices, which probably explains the unusually large drop for INAP, it does appear that the savings INAP will realize by switching from AKAMAI to VITALSTREAM fully justifies the acquisition.

SYSTEMAX INC [SYX] tumbled another 21.5% closing at $11.80 for a combined two day loss of 37%. Yesterday’s press release at 3:55 pm, apparently did not allow enough time for the full public reaction to the announced delay in the 10-Q filing. Those who sold yesterday morning should perhaps be congratulated for their extraordinary good luck. :-)

It reminded us of the “Perfect Storm.” Except in this case everything came together to send the market higher. The latest Beige Book struck the perfect balance between slowing growth and inflation. Quarterly earnings from COSTCO were encouraging (although probably not read closely enough). Oil prices were up only slightly, with the November futures contract for light, sweet crude oil settling at $57.86 per barrel, up only $0.39 for the day. Despite the pathetically small sample and lack of consistency in what it really represents, the Dow Jones Industrial Average continues to have an amazing psychological impact on the markets that is hard to discount. When it gets into new territory, the herds are likely to stampede on the slightest provocation.

The average gain for the day in the SI Universe of 3,567 stocks was 1.69%, with 83.7% of the members posting positive returns for the day. Rather remarkably, all sectors showed very respectable gains. So forget about using sector rotation to explain some of the gains.

Two very significant news events hit the Entertainment sector on Monday. First, HARRAHS ENTERTAINMENT INC [HET] announced that it had received a $15 billion buyout offer from a pair of private equity firms, Apollo Management and Texas Pacific Group. The proposal is currently valued at $81 cash per share. The second piece of news was the passage on Saturday of the Unlawful Internet Gambling Enforcement Act of 2006, which is aimed at blocking the flow of U.S. funds to online gambling houses. The impact in London on Monday was truly amazing with the market cap of the online gambling companies dropping from $12 billion to $5 billion in a single day. Since most of the collateral damage in the U.S. markets was confined to Canadian companies who have recently reduced their U.S. exposure ([OPMR] and [CRYP]), the response in the online segment seemed tempered. However, the real beneficiaries of the legislation would appear to be the brick and mortar casinos. In the case of HARRAHS, the spike is certainly due almost entirely to the LBO offer, but in the case of other domestic casinos, the spikes presumably are a combined effect of the new legislation and speculation about the prospects of more buyouts in the industry, and there was plenty of speculation regarding those possibilities during the day. Given that both pieces of news hit before the markets opened, it is extremely difficult to assess the relative importance of the two.

Interesting pin action:

HARRAHS ENTERTAINMENT INC [HET] up 13.9% closing at $75.68

MONARCH CASINO & RESORT INC [MCRI] up 7.7% closing at $20.89

LAKES ENTERTAINMENT INC [LACO] up 6.4% closing at $10.28

BOYD GAMING CORP [BYD] up 5.5% closing at $40.55

PINNACLE ENTERTAINMENT INC [PNK] up 4.7% closing at $29.45

STATION CASINOS INC [STN] up 3.9% closing at $60.06

MGM MIRAGE [MGM] up 3% closing at $40.69

BROCADE COMMUNICATIONS SYSTEMS INC [BRCD] surged up 9.9% closing at $7.76 with an announcement of an expanded relationship with EMC involving the Brocade Silkwork® 7500 Switch in EMC’s Select product portfolio of Storage Area Network (SAN) technology.

My, oh, MYOGEN INC [MYOG] was up 46.6% closing at $51.44 after GILEAD SCIENCES INC [GILD] agreed to acquire MYOGEN for $2.5 billion or $52.50 per share. The deal certainly diversifies GILEAD’s pipeline, which mainly deals with HIV drugs, while MYOGEN has focused on hypertension drugs. GILEAD [GILD] dropped 6.5% closing at $64.28.

Vision apparently is not a strength of the eye care industry as LCA VISION INC [LCAV] tumbled 24.7% closing at $31.09 after joining ADVANCED MEDICAL OPTICS INC [EYE] in lowering guidance. Click here for a post on [EYE]’s lowered guidance last week. Earnings per share for fiscal 2006 are now projected to be in the range of $1.60 to $1.70 per share, compared with prior guidance of $1.80 to $1.90 per share. Given the strong Balance Sheet, and now relatively low P/E ratio, we see LCAV as a very strong long opportunity at this point. Today’s reaction appears rather extreme to say the least. Contributing to the drop was the announcement of the resignation of the company’s president, Kevin Hassey, effective October 6^th.

KEANE INC [KEA] was down sharply, dropping 19.6% to close at $11.59 following its lowered guidance for the third-quarter profit to a range of $0.11 to $0.13 per diluted share from previous guidance of $0.13 to $0.15 per diluted share. The IT consultancy company also announced the dismissal “for just cause” of its President of North American Services and Global Business Lines. Apparently the “just cause” involves “compliance with the Company’s policy on travel expenses and unauthorized communications inconsistent with the Company’s interests.”

Although the Dow flirted once again with all time highs, the markets were down, despite a drop in oil prices that helped the Airline sector and lots of bullish news in the Entertainment sector. Trading was light with the Yom Kippur holiday and a rather low ISM manufacturing index fueled the pessimism. The average loss for the SigmaInverse Universe was -.78% across 3,571 stocks, with only 29.2% posting positive returns for the day.