wall street nuggets

VOLT INFORMATION SCIENCES INC [VOL] up 13.8% closing at $54.17 on 62% increase in net income, $0.86 per share compared to $0.54 per share for the fourth quarter last year. However, net sales were only up 3%. Rather high P/E ratio at 33 based on trailing 12 months.

STAGE STORES INC [SSI] jumped 11.5% closing at $33.05 following (1) updated guidance on 2007 earnings that projects a 20% increase over previous guidance, (2) approval of a $50 million Stock Repurchase Program, and (3) a 3-for-2 stock split to be paid as a stock dividend on January 31, 2007 to all holders of record of the company’s common stock at the close of business on January 18, 2007.

INCYTE CORP [INCY] up 11% closing at $7.06 following the announcement of positive clinical results from its HIV and Diabetes programs at the 25^th JPMorgan Healthcare Conference. This was followed by upgrades by UBS from “Neutral” to “Buy” and by Piper Jaffray from “Market Perform” to “Outperform.”

Long standing White Rabbit, CHEESECAKE FACTORY INC [CAKE] jumped 9.9% closing at $26.99 following an announcement that fourth quarter sales had come in at $360.4 million, representing an 18% increase over a comparable 13-week period in 2005. However, earnings continue to be veiled and there is very little visibility into recent operations given the tardiness of the reporting. Comparable restaurant sales were rather unimpressive, increasing only 0.8%.

ALNYLAM PHARMACEUTICALS [ALNY], a leading RNAi therapeutics company, jumped 8.9% closing at $22.22, following the announcement that it had obtained an exclusive worldwide license to a liposomal delivery formulation technology for the discovery, development and commercialization of RNAi therapeutics from a Canadian pharmaceuticals company, INEX PHARMACEUTICALS CORP [TSX: IEX]. RNAi or RNA Interference is a naturally occurring mechanism within cells for selectively silencing and regulating specific genes, and was recognized as a major break through with the award of the 2006 Nobel Prize for Physiology or Medicine. INEX PHARMACEUTICALS has obtained key patents for the development and commercialization of liposomal and/or lipid nanoparticle formulations that are required for systemic delivery of RNAi therapeutics.

APPLE COMPUTER INC [AAPL] soared 8.3% closing at an all time high of $92.57 on extraordinary volume of almost 120 million shares following the announcement of the revolutionary iPhone device due for release in the summer. While we are find the memory options somewhat disappointing, the carrier option (Cingular) disappointing and the price point on the high side, there is much that is compelling and little doubt that it will sell like hot cakes.

SPRINT NEXTEL CORP [S] dropped 11.2% closing at $17.45 on a huge volume of almost 150 million shares. The drop was probably due primarily to the announced decline of 306,000 post-paid subscribers, despite a slight improvement in the post-paid churn rate at 2.3% for the quarter (high compared to other wireless carriers). The planned headcount reduction of about 5,000 in the first quarter may finally reflect some post-merger synergies as the company transitions to a unified customer care, financial systems, device activation, and billing systems. Downgrades by CIBC World Markets, Deutsche Securities, Credit Suisse and HSBC Securities did not help. There is probably an interesting buying opportunity close to this level. The key is probably whether the iDEN network problems are finally solved. Hopefully, they will start to refine the bizarre content of some of the TV ad campaigns based on feedback.

MILLS CORP [MLS] slid 21.8% closing at $14.82 following the announcement that it had completed its investigation into its historical accounting policies and practices. As a result of the adjustments arising in part from the investigation, the company will be restating its financial statements for 2001-2004 and the first 3 quarters of 2005. The expected impact of the corrections is projected to be between $347 and $352 million. It is also noted that the company could be forced to seek protection under Chapter 11 if the company is unsuccessful in its efforts to pay-off the Senior Term Loan by March 31, 2007. See our earlier post:

“And all should cry, Beware! Beware!”

…

And close your eyes with holy dread,

For he on honey-dew hath fed,

And drunk the milk of Paradise.”

From Kubla Khan, by Samuel Taylor Coleridge.

ESCALA GROUP INC [ESCL] tumbled 41.3% closing at $4.54 on the announcement that the company would be delisted by Nasdaq for failure to file financial statements in a timely fashion. There are now about 22 other Nasdaq White Rabbits for which the gap between the last reported period and today is 284 days! (Look at our White Rabbit list for December and focus on the companies for which the Gap value matches that of ESCALA GROUP [ESCL] and the ticker symbol has 4 characters.)

By the way, yesterday’s comments on DYNAVAX TECHNOLOGIES CORP [DVAX] failed to make an important observation. While the failed test of TOLAMBA™ due to the absence of the disease certainly did not provide any evidence that the treatment was not effective, the wasted year of testing probably delayed the final commercialization of the product by that much and probably provided an opportunity for competitors to bring other treatments to market and gain market share – so of course some negative impact on the stock price should be expected. However, the 30% drop still seems a bit excessive for a non-test.

It was a mixed bag on Tuesday but no really strong moves on the part of any one sector. Overall, the average member of the SigmaInverse Universe was up 0.09% with 51.3% of the members posting positive returns for the day. The extremes were Mining, down 1.3% on average. and Restaurants, up 1.5% on average.

ADOLOR CORP [ADLR] could not avoid the pain and anguish of the dreaded FDA “approvable” letter, dropping 44.8% to close at $7.69. The company’s leading New Drug Application (NDA) for Entereg® has been seriously delayed due to the FDA’s request for additional safety studies. The drug is designed to treat both the slow return of gut function that sometimes results from GI or other surgeries as well as opioid-induced bowel dysfunction, resulting from the chronic use of opioid analgesics. While the safety study on Entereg submitted by GlaxoSmithKline in late September 2006 indicated an increase in the reported incidence of serious cardiovascular adverse effects in patients receiving the drug relative to placebo, the increase was not statistically significant, so the FDA is withholding final approval pending 12-month safety data, including an analysis of serious cardiovascular events. We are definitely in the tail of the distribution on daily returns here and it there is likely a very strong buying opportunity UNLESS the company is unable to survive the delays implied by the “approval” letter. In this case, the company has a little over $200 million in cash and short-term investments and a burn rate of about $17 million per quarter for the first 9 months. The company is generating about $5 million per quarter in contract revenue, so with some belt-tightening, survival should be possible. Unfortunately, there does not appear to be much else in the pipeline.

OVERSTOCK.COM INC [OSTK] was crushed, ending down 17.9% to close at $14.59, a new 52-week low, after reporting dismal third quarter results. Revenue for the third quarter was $158.7 million, down 6% compared to the third quarter 2005. The company reported a net loss of $24.5 million or $1.19 per share compared to a net loss of $12.4 million or $0.66 per share for the same period last year. Looking at the online traffic pattern (below), it appears that the steady decline through 2006 has finally stopped, but actually by this time last year the end-of-year seasonal surge had already begun, and yet we see no evidence of a fourth quarter pop on the radar yet! The company appears to have its act together this year in terms of handling traffic and doing a better job of inventory management. It also would appear to be achieving more brand recognition. However, it still seems to be seriously misfiring in targeting and conversion. Perhaps its outsourcing of these functions might lead to better execution, but so far there is no evidence of progress on this front!

ARRIS GROUP INC [ARRS], which provides communications products and services to cable system operators and telecommunications provides, slipped 9.5% closing at $11.49 after announcing that it would be offering $225 million of convertible senior notes due 2026 through a public offering. The proceeds of the offering appear to be intended to fund future acquisitions, although nothing specific is mentioned. Not knowing the target, but assuming future dilution seems likely, we are reluctant to view this as a buying opportunity at this time. Note also that the company appears to have considerable risk associated with customer concentration, having 68.3% of its revenue from four customers (Comcast, Libert Media Intl., Cox Communications, and Time-Warner Cable) in the third quarter.

PALM INC [PALM] slipped 7.6% closing at $14.24 following the announcement that NTP INC had filed yet another patent infringement suit. If it weren’t for the fact that PALM appears to have its hands full with competing with the new Pearl, we would say this a great buying opportunity for PALM since it appears from this vantage point that the patents claimed by NTP are likely to be invalid.

XM SATELLITE RADIO HOLDINGS INC [XMSR] rocketed up 15.6% closing at $13.17 as it beat expectations by posting an $84 million loss for the third quarter, down 36% from the loss posted in the third quarter last year. Revenue was up 57% year-over-year, coming in at $240 million and it ended the quarter with 7.185 million subscribers. The company’s new guidance for subscribers by the end of the year is between 7.7 and 7.9 million!!! I find this once again very disappointing, as the new guidance range slips closer to the bottom end of the previous guidance (7.7 to 8.2 million).

TRAFFIC.COM INC [TRFC] took the fast lane shooting up 20.3% to close at $7.40 on the news that it had entered into an agreement with NAVTEQ [NVT] to be acquired for $179 million ($47 million in cash and the remainder in stock). Given the TRFC financials, it appears it will be a very long time before this deal is accretive to NVT earnings and I would not consider NVT to be a buying opportunity at this time, despite some obvious strengths on other fronts.

OUTBACK STEAKHOUSE INC [OSI] was up a bloomin’ 22.6% closing at $39.75 on the news that it had agreed to a buyout by a private equity group for about $3 billion. The group involved Bain Capital Partners LLC and Catterton Partners, in addition to company founders. The deal involves a buyout price of about $40 per share plus the assumption of about $185 million in debt.

SWIFT TRANSPORTATION CO INC [SWFT] soared 24.1% closing at $29.84 after a press release was issued indicating it had received a letter from Jerry Moyes, the company’s largest shareholder, a current director, and CEO, proposing to acquire all of the company’s outstanding stock in an all-cash transaction at a price of $29.00 per share. More confirmation that the landscape is littered with nuggets… With so many of these buyouts coming from people who obviously know the real value of the company’s, there can be little doubt that significant value opportunities are available in the market today.

FOUR SEASONS HOTEL [FS] jumped 29.2% closing at $82.50 on the news that it had received an offer for $3.7 billion ($82 per share) from a private equity group that includes Isadore Sharp, the hotelier’s chairman and CEO.

KOS PHARMACEUTICALS INC [KOSP] kicked up 53.8% closing at $77.06 on the news that ABBOT LABS [ABT] had agreed to pay $78 per share in cash in a deal valued at about $3.7 billion. KOSP is a pharmaceutical company specializing in the treatment of chronic cardiovascular, metabolic and respiratory diseases. Its major product is Niaspan® which is taken to raise HDL (good cholesterol) levels.

Daily Sector Performance Chart

All sectors were in positive territory for the day, with the average member of the SI Universe posting a gain of 1.2% and significant gains across all size ranges - large to micro-caps.  About 77% of the members in the SI Universe posted positive returns for the day.  The outliers were Restaurants (up 2.6% on average) and Travel (up 2.7% on average).

“And what will poor robin do then, poor thing?” RED ROBIN GOURMET BURGER [RRGB] flew south dropping 26.1% to close at $34.00 after announcing weak third quarter results, revising guidance downward, and then getting hammered by five separate downgrades. The company reported third quarter earnings of $0.36 per share ($0.42 excluding special charges), compared with $0.39 per share for the same period last year. The consensus estimate had been for earnings of $0.43 per share. Revenue for the quarter was $148.6 million, compared with $114.2 million for the same period last year. Basically the income statement for the third quarter wasn’t all that bad. However, the company now projects full-year earnings to be in the range of $1.62 to $1.67 per share on revenue of between $611 and $613 million, down from previous guidance in the range of $1.74 to $1.83 per share and previous revenue guidance in the range of $615 to $618 million. Perhaps this would have justified about an 8% drop in price. But additional pressure came from the analysts. CIBC World Markets downgraded RRGB from “Sector Outperform” to “Sector Perform,” Friedman Billings from “Outperform” to “Market Perform,” Bear Stearns from “Outperform” to “Peer Perform,” Banc of America Securities from “Buy” to “Neutral” and McAdams Wright Ragen from “Buy” to “Hold.” With 30% revenue growth, I would normally be inclined to judge this as a buying opportunity. However, there is one other area of concern. The balance sheet has an awful current ratio - current assets/current liabilities = .32 - compared with a ratio of about 2 that is much more typical. Of particular concern is the “construction related payables” line item of about $21 million under current liabilities with only $4.2 million in cash and cash equivalents. Looks like long-term debt can be expected to balloon even more in the next couple of quarters.

NEUROCRINE BIOSCIENCES [NBIX] fell off another cliff, dropping 30% to close at $7.72, a far cry from its high of $72.14 on the Ides of March. The drop can be attributed to both third quarter financials and an update on the status of the indiplon (the new insomnia drug being developed by the company). While the company had received conditional approval for the 5 and 10 mg capsules back in May, the FDA rejected the application for the extended-release tablets, which analysts felt had greater sales potential. (Personally, I think it has more to do with what the doctor prescribes than the analyst’s belief that the extended-release tablets are more attractive for some reason.) Basically, the FDA wants more long-term safety and effectiveness studies for the 15 mg extended-release tablets. The NDA for the indiplon capsules for the treatment of insomnia, which will include additional clinical studies on safety and efficacy, is currently targeted to be resubmitted in the summer of 2008! The company is in the process of “formulating a strategy to pursue a sleep maintenance claim for indiplon.” The FDA also wants a separate dose for the elderly population. Before we dose off here, let’s take a quick look at the third quarter numbers (which might induce a case of pavor nocturnus). The company reported a net loss of $39.1 million or $1.03 per share compared to a net income of $26.2 million or $0.71 per share for the same period in 2005. Revenues for the third quarter were $1.1 million compared with $64.7 million for the same period last year. The company expects the net cash burn for 2006 will be about $100 million and expects to end the year with about $180 million in cash, cash equivalents and marketable securities. It is projecting the net cash burn in 2007 to be approximately $80 million. Looking at the pipeline, the only fourth quarter expectations seem to involve some early Phase 2 clinical studies, with no significant revenue generators in the next couple of years. Survival is probably going to require a more “well-controlled burn rate” or external funding strategies. Avoid the falling knife.

WHOLE FOODS MARKET INC [WFMI] was crushed 23.1% closing at $46.26 after announcing fourth quarter results that basically met expectations, but revising downward its guidance for 2007. The company reported fourth quarter earnings of $0.28 per share, compared with the consensus estimate of $0.29 per share on revenue of $1.3 billion, up 16% over the same period last year. Comparable store sales increased 8.6% for the quarter. The company is now projecting growth the growth rate for fiscal year 2007 will be in the range of 13% to 17%. Not helping matters was a downgrade by Banc of America Securities from “Buy” to “Neutral.” The company also increased its quarterly dividend payment to $0.18 per share. At this point, we see nothing in the news events that would justify the magnitude of the drop and would have to conclude that this is a buying opportunity.

AQUANTIVE INC [AQNT], an online advertising agency, was down 20.8% closing at $22.73 after announcing third quarter results and revealing turnover issues. The company reported that third quarter revenue was $111 million, up 41% over the third quarter 2005. Net income for the quarter was $13.6 million or $0.16 per diluted share. The consensus estimate for revenue had been $119.15 million and the shortfall was attributed to both a delay in a web project that resulted in the delivery date slipping into the fourth quarter, and some unexpected turnover in the sales force in May. One estimate is that AQNT lost about 5 sales people making up roughly half of its sales force. Downgrades by Merriman Curhan Ford from “Buy” to “Neutral” and by RBC Capital Markets from “Outperform” to “Sector Perform” undoubtedly magnified the hit. Our sense is that the magnitude of the drop is not justified at this time but that the P/E ratio is too high, even given the growth in the online advertising world.

SIX FLAGS INC [SIX] surged 11.2% closing at $6.24 after announcing a strong third quarter. The company reported earnings of $159.3 million or $1.08 per diluted share, compared to $190.2 million or $1.29 per diluted share for the same period last year. Total revenue for the quarter was $540.7 million down 1% from the same period last year, reflecting a decline in attendance that was not quite offset by a rise in revenue per guest. The decline in attendance (12%) was attributed to weather, but presumably also had something to do with the previously indicated increase in ticket prices and higher gasoline prices. The focus on “initiatives designed to foster a family-friendly environment and a more diversified entertainment offering” appear to be bearing fruit in stabilizing attendance during the quarter, but we will have to wait for fourth quarter numbers to be sure. In any case, it is clear that the new initiatives are costing more money. Adjusted EBITDA for the quarter, which excludes the operations of parks planned for closure, was down 7% compared to the same period last year, which does not sound encouraging. On balance, we would like to see one more quarter of results before agreeing that a turnaround is underway.

ELECTRONIC ARTS INC [ERTS] scored big, up 11.8% to close at $59.24 after announcing better than expected second quarter financials. The company announced earnings of $22 million on a GAAP basis, and $65 million or $0.21 per diluted share, on a non-GAAP basis, compared with $0.15 per diluted share for the same period last year, easily topping the consensus estimate of $0.02 per diluted share. Perhaps even more important, the company revised its guidance for the current quarter up slightly, looking for about the same level of sales as last year instead of a 5% drop indicated earlier. Given the record success of Madden NFL 07 and NCAA Football 07, and the NHL® trajectory, it would be hard to miss the lay-up here.

JDS UNIPHASE CORP [JDSUD] jumped up 16.1% closing at $16.58 following the announcement of financial results for the first quarter of fiscal 2007. The company reported a GAAP net loss of $0.22 per share and non-GAAP profit of $0.03 per share, compared to a net loss of $0.34 for the same period last year. The consensus estimate had been for a profit of $0.01 per share (non-GAAP). The stock was upgraded by Deutsche Bank from “Hold” to “Buy” and by Needham & Co. from “Buy” to “Strong Buy.” However, first quarter revenues of $318.1 million falling below the consensus estimate of $322 million. For the second quarter of fiscal 2007, ending December 31^st, the company projects revenues will be in the range of $332 to $352 million, which is in line with the current consensus estimate. Not seeing much more upside potential here.

STELLENT INC [STEL], a global provider of Enterprise Content Management (ECM) software, surged 26.2% to close at $13.40 on the news of yet another ORACLE CORP [ORCL] buyout. The voracious appetite of this orca for enterprise software companies continues to amaze. Given the healthy premiums being paid and concerns about the challenges of assimilating so many different cultures in such a short period of time, some caution should be taken with ORCL. The $74 million in goodwill from STELLENT raised my eyebrows, but when you’ve already got $7 billion in goodwill on the books, what’s another $74 million?

The Daily Sector Performance Chart

Somewhat surprisingly, given the drops in some of the major indices, the average gain in the SigmaInverse Universe on Friday was 0.33% with 53.9% of the members posting positive returns for the day.

The big gainers for the day were Oil & Gas Production (up 2.6%) and Scientific & Technology Instruments (up 1.7%). The big loser was Restaurants (down 1.8%).

TREX CO INC [TWP] was decked, dropping 20.9% to close at $20.90 after announcing third quarter results that fell short of expectations and revising downward its guidance for 2006. Earnings for the third quarter came in at $4.6 million or $0.31 per diluted share, compared to $0.35 per diluted share for the same period last year and well below the consensus estimate of $0.36 per diluted share. The revised guidance for 2006 was for full-year net sales to be in the range of approximately $320 to $330 million, which is well below the current consensus estimate of $348.15 million. P/E ratio is too high to see a buying opportunity yet.

INTERDIGITAL COMMUNICATIONS CORP [IDCC] tumbled 15.7% closing at $30.13 after announcing strong third quarter results. Earnings for the third quarter were $21.7 million or $0.40 per diluted share, which easily topped the consensus estimate of $0.36 and were up 264% over the same period last year. Revenue for the third quarter was $67.2 million, up 38% over the same period last year, and certainly in line with the consensus estimate of $67.82 million. Given the rather high P/E, and lack of revenue growth, there does not appear to be a strong opportunity here yet. The guidance for the fourth quarter calls for operating costs, excluding patent arbitration or litigation costs to grow by 7% to 12%, sequentially. The company does not usually provide revenue guidance until it has received and reviewed royalty reports. Another wild card is the filing yesterday with the Intl. Chamber of Commerce (ICC) by SAMSUNG, seeking to have the ICC establish new retroactive royalty rates based on the NOKIA ruling from June 2005, and thus avoiding complying with the September 2006 Arbitration Award of $134 million to IDCC. To the non-expert, it appears SAMSUNG is unlikely to succeed here and there is relatively little risk for IDCC. I am inclined to view this as a very strong buying opportunity.

PAPA JOHNS INTERNATIONAL INC [PZZA] plunged 11.9% closing at $32.33 after reporting third quarter earnings of $0.40 per share, up 29% from third quarter earnings of $0.31 in 2005. While quarterly same store sales were up 4.5%, the same store sales for the four weeks ended October 22, 2006, were down 1.8%. The company also announced that December 2006 will be the last month that it reports monthly domestic comparable (same-store) sales results. The monthly comps are of course very volatile and few observers recall the previous year’s weather patterns and events well enough to extract a meaningful signal from the data. Starting in 2007, the company will report domestic comparable (same-store) sales results on a quarterly basis, matching the reporting methodology of the competition. Our assessment is that Wednesday’s drop created a strong buying opportunity, and we are very impressed with expansion on the international front – especially in Korea and China.

Clothing brand licenser, ICONIX BRAND GROUP INC [ICON], dropped 11.8% closing at $16.44 following a series of announcements. Third quarter earnings of $0.18 per share beat the consensus estimate of $0.16 per share. Licensing revenue for the quarter increased to $22.1 million, compared to $9.2 million for the same period last year. The company also announced that it would be offering approximately $150 million additional shares of common stock to be used primarily in the repayment of indebtedness incurred with the acquisition of MOSSIMO INC and the pending acquisition of the Ocean Park brand. Given the lack of major movement of CHEROKEE INC [CHKE] regarding the news of the termination fee paid by ICON as a result of the MOSSIMO INC purchase, it appears unlikely that this event had any material impact on ICON.

CVS CORP [CVS] dropped 7.4% closing at $29.06 following the announcement of the acquisition of (merger with) pharmacy benefits manager CAREMARK RX INC [CMX], with an exchange ratio of 1.67 shares of CVS for each share of CMX. With no premium being offered to CAREMARK, there would appear to be a high probability that this acquisition/merger will not go forward.

HUDSON HIGHLAND GROUP [HHGP] surged ahead 28.2% closing at $14.99 and ADMINISTAFF INC [ASF] rose a remarkable 14,4% closing at $39.40 due to strong quarterly results. HHGP reported earnings from continuing operations of $4.0 million or $0.16 per share, compared with $0.00 per share for the same period last year. The consensus estimate had been only $0.05 per share. ASF reported earnings of $0.43 per share, compared to $0.26 per share for the same period last year, easily beating the consensus estimate of $0.39 per share. Note, however, that KFORCE INC [KFRC] was down 11.16%, BARRETT BUSINESS SERVICES INC [BBSI] was down 4.2%, MPS GROUP INC [MPS] was down 3.7% and ON ASSIGNMENT INC [ASGN] was down 3.5%, so the sector was not up uniformly. I believe that the HHGP and ASF surges are assuming the “soft landing” scenario, which seems very unlikely at this time.

The Daily Sector Performance Chart

With generally grim economic news, the average loss in the SI universe for November 1st, was -2.82%, with only 19% of the members posting positive returns for the day. The Tobacco sector was the only contrarian, posting a positive return of 2.4% on average for the day.

CANDELA CORP [CLZR] was burning brightly up 26.5% to close at $13.86, apparently having learned a lesson about the importance of beating estimates from last quarter’s dismal experience. For the first fiscal quarter, the company reported earnings of $0.13 per diluted share after special charges, easily topping the consensus estimate of $0.05 per share. Revenue for the quarter was $33.474 million, which also topped the consensus estimate of $32.26 million. Given current margins, it appears that the opportunity noted in our last post on CLZR is no longer obvious.

YANKEE CANDLE INC [YCC] shot up 17.4% closing at $33.73 on the announcement that it had agreed to a private equity buyout by Chicago based Madison Dearborn Partners LLC in a deal valued at $1.7 billion, including debt. If the deal is approved, shareholders will receive $34.75 per share when the transaction is completed in early 2007.

LIFECELL CORP [LIFC] was showing very few signs of life on Wednesday, dropping 25.2% to close at $23.82 after announcing third quarter results that were slightly below expectations, but revising guidance for the fourth quarter significantly lower. Third quarter earnings of $0.15 per share were only $.01 below the consensus estimate and more than twice the earnings reported in the same period last year. Product revenues for the quarter were $35.1 million, compared to $24.3 million for Q3 2005. The new revenue guidance is for the full year to be in the range of $138 to $140 million, compared with the previously announced range of $143 to $148 million. Operating income is projected to be in the range of $32.5 to $33.5 million, compared to previous guidance of $34 to $36 million. While the P/E ratio of 52 is certainly high, there is probably some upside potential here since even the revised guidance yields a growth rate of about 33%.

SELECT COMFORT CORP [SCSS] provided precious little comfort in the numbers as it dropped 17.1% to close at $20.77 after reporting third quarter results. The stock was downgraded by Piper Jaffray from “Outperform” to “Market Perform.” The numbers were clearly not bad, with earnings at $0.25 per diluted share, up 25% over the third quarter of 2005. Net sales of $208.3 million were up 18% over the same period last year. While the top line was below the consensus estimate of $211.52, the earnings were in line with analysts’ expectations. The company also revised upward its earnings guidance for the full year to a range of $0.95 to $0.97 per diluted share from the previous range of $0.93 to $0.97 per diluted share for fiscal 2006. For fiscal 2007, the company now projects earnings to be in the range of $1.18 to $1.25, corresponding to earnings growth next year between 22% and 32%. At this rate of growth, it appears SCSS represents a buy opportunity with a current P/E of only 23.6.

ENCORE WIRE CORP [WIRE] dropped 13.4% closing at $31.23 following its third quarter report. Net sales for the third quarter came in at $372.9 million compared to $207.5 million for Q3 2005, and net income came in at $1.51 per diluted share compared to $0.48 per diluted share last year. Net sales were in line with expectations and earnings were $0.05 below expectations, but still up more than 3 fold over the previous year. With a P/E ratio of only 6.17 and strong international demand for copper, this appears to be a great opportunity to get WIREd.

TRAVELZOO INC [TZOO] dropped back to earth giving up 12.2% following yesterday’s huge gain, to close at $33.90. Given some deterioration in reach over the past 3 months, I would be cautious here.

AVAYA INC [AV] advanced 8.4% closing at $12.78 after reporting fourth quarter results the beat analysts’ expectations. Earnings for the fourth fiscal quarter were $0.17 per diluted share, excluding special items, versus the consensus estimate of $0.13 per share. Fourth quarter revenue of $1.364 billion was up 5.2% over the same period last year, and also topped the consensus estimate of $1.34 billion. Given the current P/E ratio of 7.46, and strong cash flow, there may still be some upside here, but we don’t see a compelling source of growth at this time.

While we expected AMAZON.COM INC [AMZN] to be up on the basis of beating expectations (however anemic), the actual extent of the pop was an amazing 12.4% closing at $37.68. If you look at AMAZON’s reach in the fourth quarter of last year, and the current trajectory, this stock appears headed for a massive disappointment in Q4.

My last AMZN purchase offered the option of online access to the book while I was waiting for the delivery of the hard copy – for an additional $20. At first I was very impressed with the cleverness of the promotion, being really anxious to start reading and thinking I would have all kinds of cool searching and markup capabilities with the online version that would easily justify the added expense, and yet for AMZN the extra cost of the electronic content should have been insignificant. Unfortunately, the reality of the experience was quite disappointing. The online reading tool is quite flaky and needs a lot of work. I will be sure to hold off on my next online reading option until they fix some of the problems. This is not likely to save the fourth quarter, and just adding another product line isn’t going to do it either.

We’re not sure how they convinced customers that “You have to be here,” but somehow they did and thanks to same-store sales growth of 11.8% at company-owned restaurants, BUFFALO WILD WINGS INC [BWLD] stampeded up 19.2% closing at $49.21. Earnings for the third quarter of $0.40 per share were up 82% over the same period last year.

DIGITAL ANGEL CORP [DOC] jumped 21.5% closing at $3.05 and APPLIED DIGITAL SOLUTIONS INC [ADSX] soared 31.4% closing at $2.22 after announcing that DIGITAL ANGEL had been granted a patent for its syringe-implantable glucose-sensing RFID microchip. DIGITAL ANGEL is majority-owned by APPLIED DIGITAL. While the news is good, it of course must be recognized that much work including development, clinical trials and FDA approval lie ahead. Given the likelihood that it will take several years before we see significant revenues here and the fact that both companies have been losing money, we think it would be prudent to avoid the exposure until the DEXCOM continuous glucose monitoring technology is proven viable and at lease some clinical trial hurdles have been cleared.

The Daily Sector Performance Chart

The average gain for the day across all 3,566 members of the SI Universe was 0.5% with 61.2% of the members posting positive returns for the day. The big gainer for the day was the Railroad sector, which was up 2.8% on average. NORFOLK SOUTHERN CORP [NSC] led the charge, up 10.1%, but GENESEE & WYOMING INC [GWR] and CSX CORP [CSX] also turned in strong performances (up 4.7% and 3.8%, respectively).

The DJIA passing 12,000 is another milestone that we should probably try to ignore - given the small sample (only 30 stocks!) and ill defined population that it represents. However, markets are by nature subject to psychological factors that we may not be able to completely explain - but are nevertheless very real. There can be no doubt regarding the effect of powers of ten on the DJIA - passing 1,000 was like breaking the sound barrier and 10,000 also had a strange mystique. But 12K is now behind us and whatever influence it had yesterday will never be there again.

COSI INC [COSI] fell 22.1% to close at $4.37 following the release of some decidedly sour third quarter results (stocks are like that). The company reported 7% growth in total revenues for the third quarter. However, the growth was due to new restaurant openings, with a decline of 4.2% in sales at restaurants in operation for more than 15 months. Due to the comparable sales decline and expenses associated with the opening of 14 new company-owned restaurants, COSI expects to report a third quarter loss of approximately $0.05 per share, versus a consensus estimate of break even. There’s a lot of room for growth here, and Thursday’s drop seems excessive, so we are inclined to view this as a possible buy at this point. Customer loyalty is high, but something needs to be done to address the frequency of visit issue from the marketing perspective.

EARTHLINK INC [ELNK] tumbled 8.2% closing at $6.92 after announcing a third quarter loss of $0.02 per share compared with the consensus estimate of a loss of $0.01 per share. The company reported 5,303,000 subscribers as of September 30, 2006, compared with 5,325,000 as of September 30, 2005. The composition of the subscriber base is switching to broadband, with the current breakdown being about 35% broadband versus 29% at the same time last year. Given no real growth in the subscriber count, the key to revenue growth appears to be in the area of advertising and other value-added services. While this area has seen growth of about 36% over the course of the last year, it still represents only about 7% of the total revenue picture. The road ahead is not easy, but, given that ELNK is maintaining its subscriber count, there is an opportunity for growth. Not sure why the ELNK employee count should have risen 23% if the subscriber count is flat.

GPS chip maker, SIRF TECHNOLOGY HOLDINGS INC [SIRF], rose 7.5% closing at $22.57, presumably in anticipation of strong third quarter results. The results, released after the close, confirmed the company had met earnings expectations of $0.22 per share for non-GAAP earnings for the third quarter. However, with charges for stock compensation and acquisition related charges, GAAP net income for the quarter was only $0.05 per share. Currently with a P/E ratio of about 79, SIRF seems a bit pricy, given a year-over-year revenue growth rate of about 32%.

EBAY INC [EBAY] jumped 7% closing at $30.59 after reporting very strong Q3 results. While their reach (number of unique visitors at ebay.com per million online users) has been flat for the quarter, it appears that EBAY’s share of wallet has been showing about 20% organic growth year-over-year. Actual net revenues of $1.449 billion represented a growth rate of 31%, thanks to acquisitions and favorable foreign exchange (8% and 3%, respectively). Non-GAAP operating income came in at $0.26 per share, beating the consensus estimate by $0.02 per share. Fourth quarter guidance is for net revenues to grow approximately 14% over the third quarter. While there is a strong seasonal surge in the fourth quarter, this appears somewhat aggressive and I would be more comfortable at this point with 10% sequential revenue growth. Note that sequential revenue growth for the first three quarters of 2006 has been only 2%, 1% and 2%, respectively, for the Marketplaces segment.

Daily Sector Performance Chart

The average gain for Thursday was 0.43% in the SI Universe of 3,570 stocks, with 57.4% posting positive returns for the day. Without a doubt, the two biggest outliers among the sectors were Mining (up on average 4.6%) and Oil & Gas Production (up on average 2.5%).

The Mining group of course was driven by coal given the increased likelihood that OPEC will be cutting production by about 1 million barrels per day. The following table (sorted by percent change from the previous day) provides some detail on the Mining Sector.

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.