wall street nuggets

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%).

HOT TOPIC INC [HOTT] was up a sizzling 17.4% to close at $13.04 after reporting third quarter results that met earnings expectations and reaffirming guidance. Earnings for the quarter ended October 28, 2006, were $7.07 million, or $0.16 per share, compared with earnings of $5.93 million, or $0.13 per share, for the same period last year. The consensus estimate was for earnings of $0.16 per share. Since earnings were up in contrast to most others in the Retail Apparel sector, and also in-line with expectations, the market’s gut reaction was favorable. However, net sales were up a truly tepid 2% year-over-year, despite having opened 45 Hot Topic stores and 15 Torrid stores over the course of the year. To make matters even more depressing, same-stores sales for the quarter were down 6.8% for the quarter. With an extremely high P/E ratio of 41.1, this one is definitely not a buying opportunity!

BEA SYSTEMS INC [BEAS] was beaten down 16.4% closing at $13.11 after announcing third quarter results that were in line with expectations at the top line (up 19%), but raised concerns in the area of higher margin license fees (up only 12%). Because of its ongoing investigation into stock option granting practices, there is now a 200 day gap between the last period covered by a quarterly report and today (in other words, it has the dubious distinction of belonging to our White Rabbits club). The stock was also downgraded by WR Hambrecht from “Buy” to “Hold.”

Convenience store operator, PANTRY INC [PTRY], slipped 11.7% closing at $47.03 after announcing its financial results for its fourth fiscal quarter, ended September 28, 2006. Total revenues for the quarter were $1.7 billion, representing a 22.5% increase over the same period last year and in line with the consensus estimate. Earnings of $26.7 million, or $1.16 per share, represent a 5.2% increase over the same period last year, and slightly better than the $1.15 per share consensus estimate. However, the company’s guidance for 2007 earnings between $2.80 and $3.00 per share were well below the consensus estimate of $3.32 per share.

DENDREON CORP [DNDN] dropped 11% closing at $4.76 after announcing that it had entered into a definitive agreement with some institutional investors to sell 9,890,110 shares of its common stock for gross proceeds of $45 million (about $4.55 per share). No opportunity.

WILLIAMS SONOMA INC [WSM] dropped 9.9% closing at $31.70 after announcing disappointing third quarter results. Net revenues increased only 3% to $852.8 million. Earnings of $0.25 per diluted share were down 19.4% from the previous year.

ZUMIEZ INC [ZUMZ] plummeted 9.6% closing at $28.49 after announcing strong but lower than expected third quarter numbers. The company reported third quarter revenues of $82.3 million, and increase of 43% over the same period last year. Earnings of $0.24 per diluted share were up 33.3% year-over-year but below the consensus estimate $0.27 per diluted share. The company’s guidance for the 2006 fiscal year remains in the range of $0.66 to $0.67 per diluted share, although this is still a bit below the consensus estimate of $0.69 per diluted share. Comparable same-store sales were a very strong 10.7% for the quarter. While the revenue growth of 43% certainly warrants a high P/E ratio, the current P/E ratio of 55.2 is a tad-bit high. Probably less risky than getting on the damn skateboard, but not much.

MENS WEARHOUSE INC [MW] dropped 7.7% closing at $37.00 after announcing third quarter results. Earnings for the quarter were $0.58 per share compared to $0.44 per share for the same period last year. The consensus estimate had been for earnings of $0.54 per share. Guidance for the fourth quarter earnings of $0.68 to $0.72 was below the consensus estimate of $0.79, although it included a special charge of $0.08 per share. Guidance for same-store sales has been pretty good and we see this as a good sign. With a fairly low P/E ratio of 16.7, and revenue growth of 9.5%, this could be an interesting buying opportunity, although there does not appear to be any really significant opportunity for revenue growth at this time – just a relatively attractive entry point for a well run business.

RAMBUS INC [RMBS] soars once again up 30.5% to close at $21.72 on speculation that an upcoming ruling by the FTC will not involve penalties related to at least two of the memory-chip technologies that the company licenses. Meanwhile the company continues to delay its quarterly filing with the SEC due to an ongoing investigation into its stock option grant practices. The gap is now 230 days for RAMBUS since we have had any visibility into its profitability (another White Rabbit). According to a recent 8-K filing, revenues for the third quarter were $45.9 million, up 28% year-over-year, but down 6% sequentially. Given lack of visibility and rampant speculation on muddy legal matters, we would exercise extreme caution here.

ZOLL MEDICAL CORP [ZOLL] rolled up 28.2% closing at $53.06 after announcing very strong results for the fourth fiscal quarter ended October 1, 2006. Net sales for the quarter were $72.3 million, up 26.5% from the same period last year, easily beating the consensus estimate of $64.75 million. Earnings for the fourth quarter were $0.56 per share, more than double the $0.23 per share from the same period last year, and again easily topping the consensus estimate of $0.37 per share. However, with a rather pricey P/E ratio of 64.8, we do not see an additional opportunity at this point.

DYNCORP INTERNATIONAL INC [DCP] up 10.1% closing at $11.47 on unusually large volume (3 times average daily volume) with no particular news. This looks suspicious. Accounts receivable is unusually high. Long-term debt of $629.3 million as of September 29, 2006, is also very high. The cash flow from operations for the first six months of 2006 was about $65.8 million, but the P/E ratio is extremely high, so this does not seem to be a classic private-equity deal candidate. Sounds like some buying taking place in anticipation of a big contract announcement.

READERS DIGEST ASSOCIATION INC [RDA] rose 7.7% to close at $16.70 with the announcement that it had entered into a definitive merger agreement under which it would be going private in a transaction valued at $2.4 billion including debt, or $17.00 per share. Long-term debt at the end of the third quarter was $776.3 million, but the cash flow from operations has turned sharply negative and with declining quarterly revenues, the long-term prospects for the company were rather bleak. We’re not sure what the strategy will be for creating value in this case, but the road ahead will not be easy.

L-1 IDENTITY SOLUTIONS INC [ID] climbed 7% to close at $16.26 after announcing yet another acquisition – this time the target is COMNETIX, a Canadian company, trading on the Toronto Stock Exchange under the symbol [CXI]. The deal is estimated to be worth $12.5 million, or approximately $0.82 per share of COMNETIX to be paid in cash. L-1 expects COMNETIX to add $13 million in revenue next year and to be cash flow positive. Not too surprised to see ID trading higher.

Daily Sector Performance Chart

Despite the strength in the large and midcap stocks, the broader market was generally very mixed, despite the big drop in oil prices. The average member of the SI universe posted a gain of just 0.03% with 53% of the members posting positive returns for the day. The only capitalization bins posting positive gains for the day were the large and midcap bins.

Given the big drop in oil, there was little surprise in the outlier sectors. Alternative Energy was down 1.6%, Mining was down 3% and Oil & Gas Production was down 2.5%.

ILLUMINA INC [ILMN] tumbled 11.7% closing at $38.91 after announcing that it would be acquiring SOLEXA INC [SLXA] in a stock-for-stock deal valued at approximately $600 million. SOLEXA exploded up 29.5% closing at $12.56, which is still significantly below the target price of $13.39 per share (the lower bound of the collaring range has already been triggered, implying an exchange rate of 0.344) . The acquisition is expected to be “modestly accretive” to earnings in 2008. It appears that the combined entity is already cash flow positive, despite the rather low revenues for SOLEXA. It does appear on the surface that there is some great synergy here, and we feel there is a very compelling opportunity. Check out the powerpoint presentation on the acquisition.

ILLUMINA INC [ILMN] tumbled 11.7% closing at $38.91 after announcing that it would be acquiring SOLEXA INC [SLXA] in a stock-for-stock deal valued at approximately $600 million. SOLEXA exploded up 29.5% closing at $12.56, which is still significantly below the target price of $13.39 per share (the lower bound of the collaring range has already been triggered, implying an exchange rate of 0.344) . The acquisition is expected to be “modestly accretive” to earnings in 2008. It appears that the combined entity is already cash flow positive, despite the rather low revenues for SOLEXA. It does appear on the surface that there is some great synergy here, but it would be prudent to wait for at least two quarters before assuming any risk.

ANALOGIC CORP [ALOG] down 9.5% closing at $52.72 on the news that its CEO, John W. Wood, Jr., would be retiring at the end of the year. Assuming that there are no scandals behind the retirement, it would seem that the 9.5% drop is too severe, and that there is an opportunity here, especially given the downgrades by Ryan, Beck & Co. from “Outperform” to “Market Perform,” and by Brean Murray from “Buy” to “Hold.” However, the lack of growth (-7.7%) is a stumbling block and it would be best to wait until the new CEO is named.

EARTHLINK INC [ELNK] dropped 5.9% closing at $6.40 after announcing that it planned to sell $225 million in Convertible Senior Notes due 2026. Proceeds from the offering will be used to fund convertible note hedge transactions that ELNK expects to enter into with one or more financial institutions. Convertible notes of course imply additional risk of dilution, and can be tempting to short sellers, so it appears unlikely that the net change in risk is going to be favorable. This is not an opportunity.

WYNN RESORTS LTD [WYNN] gapped up a winning 7.9% to close at $88.67 after a Barron’s article indicated the likelihood of a big pop following the success of the new casino in Macau, China. Apparently Macau estimates that it has taken 12% market share after only 56 days of operation. The company also announced a special $6 per share dividend distribution payable December 4, 2006, to stockholders of record on November 23, 2006. This still looks like a very undervalued stock, with a P/E of only 14.

As we suggested on Friday, given the hype on Mad Money, MASTERCARD INC [MA] moved ahead 8.2% closing at $96.55. Other good news included the announcement that Sam’s Club, a unit of WAL-MART [WMT] would begin accepting MASTERCARD in addition to its own in-house card and Discover Card.

ALLOS THERAPEUTICS INC [ALTH] was up a healthy 16.5% closing at $4.95 perhaps in a delayed reaction to Thursday and Friday’s news regarding the Phase I/II trials of the company’s new drug, PDX, targeting aggressive lymphomas.

ISIS PHARMACEUTICALS INC [ISIS] was up a sizzling 19.8% closing at $12.43 following the news release on Sunday that its new drug, ISIS 301012, had achieved remarkable reductions in the levels of LDL (bad cholesterol) in a Phase 2 clinical trial involving patients with high cholesterol levels. Patients receiving ISIS 301012 achieved a 51% reduction in LDL beyond the levels achieved with statins (like Lipitor or Crestor). It is possible, given the short duration of the study, that further tests will achieve even more dramatic results. Since cholesterol drugs are the biggest sellers in the industry, the impact on this stock is likely to be even bigger. Currently the drug is administered by injection, so we expect the full potential would not be realized until an oral administration was developed. Probably needs a better name, too.

ANALOGIC CORP [ALOG] down 9.5% closing at $52.72 on the news that its CEO, John W. Wood, Jr., would be retiring at the end of the year. Assuming that there are no scandals behind the retirement, it would seem that the 9.5% drop is too severe, and that there is an opportunity here, especially given the downgrades by Ryan, Beck & Co. from “Outperform” to “Market Perform,” and by Brean Murray from “Buy” to “Hold.” However, the lack of growth (-7.7%) is a stumbling block and it would be best to wait until the new CEO is named.

EARTHLINK INC [ELNK] dropped 5.9% closing at $6.40 after announcing that it planned to sell $225 million in Convertible Senior Notes due 2026. Proceeds from the offering will be used to fund convertible note hedge transactions that ELNK expects to enter into with one or more financial institutions. Convertible notes of course imply additional risk of dilution, and can be tempting to short sellers, so it appears unlikely that the net change in risk is going to be favorable. This is not an opportunity.

WYNN RESORTS LTD [WYNN] gapped up a winning 7.9% to close at $88.67 after a Barron’s article indicated the likelihood of a big pop following the success of the new casino in Macau, China. Apparently Macau estimates that it has taken 12% market share after only 56 days of operation. The company also announced a special $6 per share dividend distribution payable December 4, 2006, to stockholders of record on November 23, 2006. This still looks like a very undervalued stock, with a P/E of only 14.

As we suggested on Friday, given the hype on Mad Money, MASTERCARD INC [MA] moved ahead 8.2% closing at $96.55. Other good news included the announcement that Sam’s Club, a unit of WAL-MART [WMT] would begin accepting MASTERCARD in addition to its own in-house card and Discover Card, but we assume the effect of that announcement was probably not significant. MORGAN STANLEY [MS] was up

ALLOS THERAPEUTICS INC [ALTH] was up a healthy 16.5% closing at $4.95 perhaps in a delayed reaction to Thursday and Friday’s news regarding the Phase I/II trials of the company’s new drug, PDX, targeting aggressive lymphomas.

ISIS PHARMACEUTICALS INC [ISIS] was up a sizzling 19.8% closing at $12.43 following the news release on Sunday that its new drug, ISIS 301012, had achieved remarkable reductions in the levels of LDL (bad cholesterol) in a Phase 2 clinical trial involving patients with high cholesterol levels. Patients receiving ISIS 301012 achieved a 51% reduction in LDL beyond the levels achieved with statins (like Lipitor or Crestor). It is possible, given the short duration of the study, that further tests will achieve even more dramatic results. Since cholesterol drugs are the biggest sellers in the industry, the impact on this stock is likely to be even bigger. Currently the drug is administered by injection, so we expect the full potential would not be realized until an oral administration was developed. Probably needs a better name, too.

Daily Sector Performance Chart

Thanks to lower oil prices, the week got off to a good start. The average gain in the SI Universe of 3,550 stocks was 0.41%, with 59% of the members posting positive returns for the day. The outlier sectors on Monday were Airlines (up 2.0% on average) and Travel (also up 2.0%).

PACIFIC SUNWEAR OF CALIFORNIA INC [PSUN], a leading specialty retailer of casual apparel and footwear targeting teens and young adults, was up a fashionable 7.5%, closing at $18.56, after the company announced OK third quarter results. Total sales for the quarter ended October 28^th were $375.4 million, down slightly from total sales of $377.5 million for the same period last year, and below the consensus estimate of $379.94 million. Same-store sales decreased 6.7% for the comparable third quarter period. Third quarter income was $9.0 million, or $0.13 per diluted share, well below the consensus estimate of $0.25 per diluted share. The company wrote off some slow-selling inventory and is moving to reduce “inventory density” which it expects to improve the bottom line. This apparently resonated well with Friedman Billings Ramsay which upgraded the stock from “Market Perform” to “Outperform.” I’m a little skeptical here and the fourth quarter guidance for same-store sales in the negative mid-single digits isn’t going to cut it. In any case, when the price fails to drop after missing expectations so badly, we can be pretty sure it must have hit bottom. Unfortunately, it will need a lot more than lower “inventory density” to fuel growth.

MERGE TECHNOLOGIES INC [MRGE] submerged 18.9% closing at $6.28 after reporting disappointing third quarter results. The company reported a swing to a net loss of $10.8 million, or $0.32 per share, from a net profit of $9.6 million, or $0.28 per share for the third quarter of 2005. The swing to a loss is due primarily to a decrease in sales for the third quarter. Software sales for the quarter were $6.6 million, a decrease of $20.1 million or 75%, from the same period last year. It now appears that the big Q3 sales number in 2005 was due to a single large sale to an OEM customer. The company is also acknowledging the adverse impact on the sales pipeline of many factors, including a lack of clarity in the market place, delayed filings with the SEC, management changes, problems in assimilating the Cedara acquisition, etc. We assume that sales will probably remain in the range of $15 million per quarter at best. Hopefully the conference call on November 17^th will shed more light on the situation.

STEREOTAXIS INC [STXS] slipped 12.8% closing at $10.47 after announcing third quarter results that were somewhat disappointing. While third quarter revenue of $7.6 million was a dramatic improvement over the third quarter revenue of $1.7 in 2005, the company reported a net loss of $11.4 million, or $0.34 per share, only slightly less that the loss of $11.9 million reported for the third quarter last year. Revenues are derived from the sale of the company’s advanced cardiology magnetic instrument control systems, which apparently sell for somewhere between $1 and $2 million each. In the quarter just closed, the company sold 7 systems. During the first 9 months of 2006, the company has only sold 11 systems, compared to 12 for the same period in 2005. This is probably the best source of a growth estimate and is obviously not encouraging.

NYSE GROUP INC [NYX] ticked up 7.9% closing at 94.48 probably on the heels of Jim Cramer’s comment of it being headed for $250. You might expect a similar pop for MASTERCARD [MA] on Monday.

The staffing agency, ON ASSIGNMENT INC [ASGN], was up a heady 9.1% closing at $11.08 after announcing that its new public offering of 6.65 million shares had been priced at $10 each. By already closing above the offering price, it appears the market is endorsing and optimistic that the company will use the proceeds from the offering to fund future acquisitions.

DOLBY LABORATORIES INC [DLB] was up 33.8% closing at $26.41 after it blew the doors off the fourth quarter and fiscal year ended September 29^th. The company reported fourth quarter revenues of $102.1 million, up 29% from the $78.9 million reported in the fourth quarter of 2005. Fourth quarter net income was $25.2 million, or $0.22 per diluted share, which easily beat the street’s consensus estimate of $0.11 per diluted share. The stock was upgraded on Friday by Ferris Baker Watts from “Neutral” to “Buy.” Probably fairly priced at this point, so we do not see any current opportunity.

TANOX INC [TNOX], a biotech company specializing in the discovery and development of monoclonal antibody drugs, soared up 44.8% closing at $19.75 on the news that it was being acquired by GENENTECH for $20 per share. The two companies have already been working together since 1996 on a drug call Xolair® for the treatment of asthma. Although GENENTECH [DNA] was initially down, it posted a gain of 0.3% on Friday, indicating that, despite the very substantial premium being paid, the perception on the street is that this is a good move for GENENTECH.

Daily Sector Performance Chart

Stocks finished the week on a positive note with the average member of the SI Universe posting a gain of 0.64% on Friday.  About 66% of the members of the SI Universe posted a positive return for the day.  The big outlier sectors on Friday were Retail Apparel (up 2.7%) and Mining (down 2.0%).

FOXHOLLOW TECHNOLOGIES INC [FOXH], which develops innovative technology for removing plaque from arteries, took a beating on Thursday, dropping 19.5% to close at $28.90 after announcing third quarter results and lowering fourth quarter guidance. The third quarter results were actually pretty good, with the company reporting revenues of $53.8 million that were up about 49% over the third quarter of 2005. Earnings were $0.26 per diluted share, compared to a loss of $0.06 per diluted share for the same period last year, and easily topping the consensus estimate of $0.12 per share. On the downside, the company indicated that it expects to lose between $0.05 and $0.09 per share in the fourth quarter on revenues of between $54 and $56 million. This includes a stock-based compensation expense of approximately $3 million and an expected one-time charge of $3.5 million involving the assignment of a facility lease. Excluding the special charges, earnings on a non-GAAP basis are expected to be in the range of $0.15 to $0.19 per share. The stock was downgraded by First Albany from “Buy” to “Neutral” and by Piper Jaffray from “Outperform” to “Market Perform.” This now looks to be a very strong buying opportunity.

JUPITERMEDIA CORP [JUPM] was hammered down almost 36% to close at $5.83, a new 52-week low after announcing third quarter results that failed to meet expectations. Earnings for the third quarter were $0.03 per share compared to earnings of $1.15 from continuing operations in the third quarter of 2005, and well below the consensus estimate of $0.08 per share. Revenues came in at $33.8 million, about 6.3% higher than third quarter revenues in 2005. Long-term debt appears too high and revenue growth potential appears very limited, so we do not see an opportunity at this time.

Mortgage banking company, FIELDSTONE INVESTMENT CORP [FICC], fell 23.1% to close at $5.80 after announcing disappointing third quarter results. Obviously hit hard by the housing downturn, the company reported a third quarter net loss of $45.0 million, or $0.97 per share, compared with a net income of $23.0 million, or $0.47 per share (as restated), in the same period last year. Looking ahead, the company indicated it would be cutting its dividend from $1.60 to $1.80 per share to $1.31 to $1.41 per share, a drop of about 21%. The big factors contributing to the loss, relative to Q2, include a $22.6 million increase in provisions for loan losses which is understandable, but the portfolio derivatives loss of $13.8 million and the increase of $10 million in interest expense should be better explained. We do not see any opportunity here.

ERESEARCHTECHNOLOGY INC [ERES], which provides technology and services to the pharmaceutical, biotech and medical device industries, plummeted 22.6% closing at $6.00, after announcing disappointing third quarter results. The company reported revenues of $22.2 million for the third quarter, compared to $20.9 million for the third quarter of 2005, well below the consensus estimate of $23.5 million. Earnings of $0.05 per share were in line with expectations. However, the company’s guidance for fourth quarter earnings of between $0.02 and $0.04 was well below the consensus estimate of $0.08 per share, and revenue guidance of between $18 and $20.5 million is well below the expected $25.9 million and even below the year ago revenue number of $25.4 million. The stock has been upgraded by Carls & Company from “Above Average” to “Buy,” but we do not see an opportunity.

BMC SOFTWARE INC [BMC] jumped 9.5% closing at $32.94 as it announced a strong second quarter, ended September 30^th, for fiscal 2007. Revenues were up 7% to $387 million over the same period last year – with its Business Service Management (BSM) license bookings up 23%. Earnings for the second quarter were $58 million, or $0.28 per diluted share. Adjusting for amortization of acquired technology, stock-based compensation and one-time tax effects, earnings were $0.37 per diluted share which easily topped the consensus estimate of $0.32 per diluted share. The P/E ratio of 41 strikes us as rather high given the current revenue growth rate of about 18%.

URBAN OUTFITTERS INC [URBN] rocketed up 13.3% closing at $21.53 after announcing a fairly strong third quarter. Earnings for the third quarter were $34.5 million, or $0.21 per diluted share, compared to $0.22 per diluted share for the third quarter of 2005, and topping the consensus estimate of $0.18 per diluted share. Revenue for the third quarter was $308.4 million up 6.8% over the same period last year. Helping matters was an upgrade by Roth Capital from “Hold” to “Buy.” Given the high P/E ratio (30.8) and relatively low growth, we do not see this as a opportunity on the long side.

GOODYEAR TIRE & RUBBER CO [GT] bounced up 15.6% closing at $17.54 after announcing a somewhat deflated third quarter. The company lost $48 million, or $0.27 per share, in the third quarter, largely because of restructuring charges that include the closing of a plant in Tyler, Texas. Discounting special charges, earnings would have been $0.42 per share which easily topped the consensus estimate $0.24 per share. It appears there is some strong cyclicality in this stock that calls for some spectral analysis before passing final judgment.

BRIGHTPOINT INC [CELL], which specializes in the distribution of wireless devices and accessories, surged up 15.9% closing at $13.49 after announcing a swing to profitability in the third quarter. Earnings of $0.17 per share compared to a loss of $0.12 per share for the third quarter of 2005 were in line with the consensus estimate. Revenues for the third quarter were $633.7 million, up 16.3% over the same period last year and topping the consensus estimate. Noting negative free cash flow and the company’s revised downward guidance for the fourth quarter revenue (5% to 7% for sequential growth) and a P/E ratio of 34.3, we do not see a buying opportunity here, despite the new Motorola business.

ESSEX CORP [KEYW], which provides signal processing technology for government intelligence and defense customers, jumped 17.9% closing at $23.55 after it was announced that it had signed a definitive merger agreement with a subsidiary of NORTHROP GRUMMAN CORP. [NOC] according to which the company would be acquired by NORTHROP GRUMMAN for $24 in cash per common share. The deal has been valued at $580 million, which includes the assumption of a very small amount of debt (only about $41 thousand at the end of Q3 in long-term debt). Not sure what the other $60 million covers. The acquisition is not expected to have a positive impact on earnings until 2008. Noting the very low P/E ratio on NOC and it an almost non-existent impact on the price of NOC with the announcement of the acquisition, there does not appear to be any significant opportunity at this point.

Daily Sector Performance Chart

The markets were down on Thursday, probably reacting to the oil price increases which crept back above $61 per barrel and what appeared to be a strange delay in assimilating the impact of the midterm elections on “big pharma.” Thursday saw a median loss of about 3% in the “big pharma” group. From our perspective, the election reaction is creating an interesting opportunity because the long-term secular trends are so compelling (aging baby boomers popping more pills) and even if the Democrats are able to bring about some needed change, the industry should easily be able to preserve profits by spending a little less on lobbying.

Across the entire SI Universe of 3,558 stocks, the average loss was 0.75%, with only 28.2% of the members posting positive returns for the day. The outlier sectors today were: Alternative Energy (up 1.3% in response to the higher oil prices), Mining (up 1.4%), Oil & Gas Production (up 0.7%) and Scientific and Tech Instr. (down 2.2%).

TRUE RELIGION APPAREL [TRLG] was left tattered and threadbare after tumbling 27.3% to close at $15.46 (basically the same price it had at the beginning of 2006) after reporting third quarter results that fell below expectations. Sales for the third quarter were $42.9 million, up 22.6% over third quarter sales for 2005. Third quarter earnings were $8.2 million ($0.35 per share) up 6.3% over the earnings for the same period last year, however the consensus estimate had been for earnings to come in at $0.44 per share. The company’s revenue guidance for the full-year was revised to $138 to $140, well below the consensus estimate of $149.98 million but still implying a growth rate of 35% to 36% over 2005, and earnings guidance for the full-year was revised to $1.11 to $1.12 per share. Three downgrades didn’t help: CIBC World Markets from “Sector Outperform” to “Sector Perform,” Friedman Billings from “Outperform” to “Market Perform,” and Wedbush Morgan from “Buy” to “Hold.” Our sense is that the selling pressure was too extreme and that this is probably a very good time to find faith in TRUE RELIGION. Watch for the full 10-Q filing to get a better sense of how they are doing internationally.

HOLLIS EDEN PHARMACEUTICALS INC [HEPH] dropped 18.7% closing at $5.97 on the news that it would be raising $26 million through the sale of common stock to both new and existing institutional investors. The sale involves 4 million shares at $6.50 per share, with four-year warrants to purchase an additional 800,000 shares at an exercise price of $8.75. At the beginning of November, there were about 25 million shares outstanding. While any price significantly below $6.50 is probably an opportunity, development-stage pharmaceutical companies are very speculative and we would rather have more insight into how the proceeds of the sale are going to be used before assuming any risk in this area.

HOSPIRA INC [HSP] fell 11.9% closing at $33.30 after reporting third quarter revenues that came in well below expectations, although earnings after adjusted for special charges were in line with expectations. Third quarter revenues of $646.6 million actually fell 1.5% from the third quarter 2005, and with a P/E ratio of 24.6 we see no current opportunities.

UTSTARCOM INC [UTSI] slid 8.4% closing at $9.37 after announcing that it would be delaying the release of its third quarter results until it completes a review of its historical stock option award practices. Currently the company does not expect the review to be completed before the extended filing deadline of November 16^th. Given the losses that the company has been piling up over the past two years, we do not see this as a buying opportunity.

HUMAN GENOME SCIENCES INC [HGSI] sank 8.1% closing at $12.71 after reporting a bigger than expected loss in the third quarter. The company reported a loss of $0.46 per share, compared to a loss of $0.42 per share for the same period last year. Adding back in $0.05 per share for stock based compensation, the loss would have been $0.41 per share which is only a penny below the consensus estimate of $0.40 per share.

While the long-term debt of $750.9 million is a serious concern, the increase in long-term debt of about $240 million in the second quarter is associated with the sale and leaseback arrangement involving its facilities space. By selling the facility the company netted about $219 million (not $225,000 as footnoted in the 10-Q) and since it has a repurchase option, the company has chosen to add $225 million to the long-term debt, which seems prudent. We suppose the downgrade by Wachovia from “Outperform” to “Market Perform” was not helpful. There are apparently 8 new drugs in the pipeline, with Albuferon™ for the treatment of hepatitis C, which it is co-developing with Novartis, being the leading candidate. The company expects to initiate Phase 3 trials before the end of 2006.

SOTHEBYS HOLDINGS INC [BID] dropped 7.5% closing at $34.49 apparently only on the news of downgrades by JMP Securities from “Strong Buy” to “Market Outperform” and by Wedbush Morgan from “Buy” to “Hold.” We don’t see much risk here and probably a reasonable entry point with a modest dividend yield. Future growth probably comes from the international bidders and new auction technology.

PLAYBOY ENTERPRISES INC [PLA] hopped up 7.1% closing at $12.15 after announcing that although third quarter earnings were worse than last year, the company was still in the black, with earnings of $0.03 per share versus a consensus estimate of a loss of $0.03 per share. While the company is hopeful regarding advertising revenues both online and with the magazine, we are skeptical and do not see a long opportunity.

VERASUN ENERGY CORP [VSE] up another sunny 9% to close at $20.40

STEMCELLS INC [STEM] surged up 10.4% to close at $3.39 undoubtedly following the big wins for stem cell research in the midterm elections.

ARRAY BIOPHARMA INC [ARRY] rose 11.8% closing at $11.93 on the announcement that preliminary trials of an enzyme inhibitor (AZD6244) being developed by the company have shown that it is capable of producing long-lasting stable disease in patients with advanced solid cancers. Phase II clinical trials have been initiated in patients with skin, pancreatic, lung and colon cancers.

TRIMERIS INC [TRMS] shot up 22.7% closing at $9.73 following a swing to profitability in the third quarter. The company reported third quarter revenues of $9.7 million, which more than doubled its Q3 revenue for 2005 of $4.6 million. Earnings were $0.16 per share compared with a loss of ($0.15) per share for the same period last year. The results were driven by the global sales of the FUZEON, the first in a new class of anti-HIV drugs called fusion inhibitors. Analysts are skeptical about future growth potential given concerns about side effect reactions and competition, but the company is working on a next-generation version of the drug and looking for FDA approval of a needle-less means of administering the drug. So long as they stay in the black, this remains speculative but attractive.

NEUROMETRIX INC [NURO] recovered from most of the damage done on October 24^th, jumping 23.9% to close at $18.69 after announcing strong third quarter results. The company reported earnings of $0.18 per share which easily beat the consensus estimate of $0.10 per share. While the P/E is getting high again at about 50, the third quarter revenue growth of about 68% still points to some more upside potential. See also our previous post:

GREENFIELD ONLINE INC [SRVY] blossomed 26.3% closing at $12.86 after announcing a very strong third quarter and raising its annual guidance. Much of the success seems to be coming from the company’s Ciao comparison shopping site in Europe, which grew net revenues by 93% over the third quarter of 2005. Revenue for the entire company for the quarter was $24.875 million up 7.5% over the third quarter of 2005. The company now projects full-year revenue for fiscal 2006 to be in the range of $93 to $97 million, about 4% higher than previous guidance, with margins in the range of 73% to 75%, which is also about 4% higher than previous guidance. On the negative side, we were not impressed by the year-over-year, 0.7% growth in the North American Internet Survey Solutions segment. The Ciao Internet Survey Solutions segment was also rather weak with growth of only 1.9%. Given the strong growth in the Ciao comparison shopping segment (from $2.6 million in Q3 2005 to $5.1 million in Q3 2006), the company will be faced with some hard decisions. Maintaining an unbiased survey sample AND a comparison shopping service at the same time is not a walk in the park! Be very careful here!

Daily Sector Performance Chart

At first blush it appears that Pharmaceuticals did not take a big hit following the landslide win by the Democrats. However, when you look at the breakdown of the Pharmaceutical segment, it is pretty clear that the traditional big pharma stocks were almost uniformly in negative territory for the day. However, the drops were reasonably modest, ranging from ELI LILLY & CO [LLY] with a drop of 0.88% to MERCK & CO [MRK] with a drop of 3.4% and a median drop in “big pharma” of about 1.6%.

Across the entire SI Universe, the average gain for the day was 0.63% with 65.6% of the members posting positive returns for the day. The outliers on Wednesday were Alternative Energy (up 2.2%), Tobacco (up 2.1%) and Travel (up 2.4%).

As a wise man once said, “He who lives by the crystal ball learns to eat broken glass.” Some significant bumps in the road like the producer price index number and an INTEL downgrade ahead of its earnings announcement, set the tone early and, despite some recovery toward the end of the day, the celebration will have to wait awhile before we cross the elusive 12,000 threshold. However, it was a piece of cake to predict that the U.S. projected population would cross the 300,000,000 mark today!

SAPIENT CORP [SAPE] dropped dramatically 13.1% closing at $5.06 on the news that its CEO and founder, Jerry Greenberg, would be resigning in the wake of an investigation into stock-option grants. It was also announced that the interim CFO had resigned as well. Wisdom says be cautious here.

HOME SOLUTIONS OF AMERICA INC [HSOA] tumbled 12.1% closing at $5.58 following the filing of an 8-K announcing its acquisition of FIRELINE RESTORATION INC. The balance sheet for FIRELINE looks pretty grim, with very high Accounts Receivable, very weak quick ratio, and declining revenues (first 6 months of 2006 vs first 6 months of 2005). Apparently cash flow negative because of receivables problem(s). Can’t solve this problem easily …

A O SMITH CORP [AOS] slipped 11.3% closing at $38.91 following the announcement of financial results for the third quarter. The company reported earnings of $0.55 per share on sales of $564 million, compared with earnings of $0.32 per share for the same period last year. Since the consensus estimate had been for earnings of $0.52 per share on sales of $560.9 million, the results were actually better than expected. However, the company indicated that residential sales of water heaters were higher than normal as consumers purchased ahead of a September price increase implemented to offset higher raw material and freight costs. As a result of this and the slowdown in housing construction, the company expects a slowing of sales for the balance of the year. We assume most people don’t focus on the remaining life expectancy of their water heater or put that together with a pending price increase to drain the sales pipeline. However, the impact of fewer housing starts is real and should be reflected in conservative earnings expectations for the remainder of the year. The decline in earnings in the Electrical Products business is of more concern. While revenues were up slightly (5%), this reflects the acquisition of Yueyang Zhongmin in the fourth quarter of 2005, and without the acquisition, sales in the U.S. were down. The company will be consolidating its motor fabrication plants to reflect the decreased demand and improve earnings. Generally, this company seems to be executing well, expanding in China and somewhat cushioned from housing cycles because of the relatively short lifespan of the average water heater. As a result, it seems today’s drop was excessive and is providing a good buy opportunity.

CALLAWAY GOLF CO [ELY] bogeyed badly dropping 10.6% to close at $12.61. Actually it looks more like a total miss. The company announced a preliminary third quarter loss per share of $0.17 to $0.19 on sales in the range of $193 to $195 million. Excluding special charges for equity-based compensation, restructuring and Top-Flite integration, the loss per diluted share is expected to be in the range of $0.12 to $0.14, which is still well short of the consensus estimate of a profit of $0.08 per share. With a P/E of 40, we don’t sense a great opportunity here. The stock was downgraded by Barrington Research from “Outperform” to “Market Perform.”

JEFFERIES GROUP INC [JEF] dropped 7.7% closing at $29.24 following the announcement of third quarter results that were quite respectable. Net Revenues were up 14% to $341 million and net earnings were up 19% to $0.32 per share. Earnings were in line with analysts’ estimates (consensus was also $0.32 per share), but revenues were below the consensus estimate of $348.4 million. Given the regular quarterly dividend ($0.125 per share) declared today, this could be a good buy opportunity.

TRIAD HOSPITALS INC [TRI] tumbled 7.5% closing at $38.85 after warning that third quarter earnings would not meet expectations because of unpaid medical bills. TRI was downgraded by BMO Capital Markets from “Outperform” to “Market Perform.”

JUPITERMEDIA CORP [JUPM] jumped 12.4% closing at $9.67 with no big news. Looks at first blush like buyers looking for low P/E’s, but with 3.4 times normal volume, it’s probably something else.

PARLUX FRAGRANCES INC [PARL] was up a sweet 12.8% closing at $7.16. But all of the action came in the last 15 minutes of trading. We assume this involves speculation regarding the 13D filing on behalf of Glenn H. Nussdorf, who “has begun to explore the possibility of making an acquisition proposal.”

CBOT HOLDINGS INC [BOT] traded up 13% closing at $151.99 on the news that it was being bought by its arch-rival, the CHICAGO MERCANTILE EXCHANGE HOLDINGS INC [CME] for $8 billion. The transaction is expected to close in mid-2007 and values the CBOT shares at $151.27, and today’s close reflects reasonable confidence that the deal will be approved by the Department of Justice. CME was up 2.6% closing at $516.50, reflecting the market’s perception that there is great synergy here. Given the improved economies of scale, we see this as a very significant buy opportunity for CME.

LEAR CORP [LEA] leaped 15.3% closing at $28.34 on the news that Carl Icahn had signed an agreement to buy a $200 million equity stake in LEAR. The company, which makes auto seats, interiors and automotive electronic components, hit a six month high on the news. Given the amount of long term debt and some skepticism as to whether Icahn can be a catalyst for the change needed here, with so much dependency on domestic manufacturers, we are fail to see this as an opportunity at this time.

ICOS CORP [ICOS] popped up 16.2% closing at $31.50 on the news that it was being acquired by its Cialis partner, ELI LILLY [LLY] for an estimated $2.1 billion or $32 per share. Currently Cialis has an estimated 25% of the ED market.

PEMSTAR INC [PMTR] was up 19.2% closing at $4.35 after announcing that it had signed a definitive merger agreement with BENCHMARK ELECTRONICS [BHE]. Each share of PEMSTAR will be converted into the right to receive 0.16 of a common share of BHE, which values PMTR at $4.63 per share based on the closing price of BHE on October 16^th.

BROADWING CORP [BWNG] soared 19.7% closing at $15.90 following the announcement of that it had signed a definitive agreement to be acquired by LEVEL 3 COMMUNICATIONS INC [LVLT]. According to the terms of the deal, shareholders of BROADWING will receive a combination of cash and stock, worth approximately $15.31 per share. LEVEL 3 COMMUNICATIONS INC [LVLT] in contrast to the usual punishment dealt the acquirer, actually jumped 13.2% closing at $6.02 on an extraordinary volume of almost 165 million shares.

INTERMUNE INC [ITMN], a biotech company specializing in therapies for pulmonology and hepatology, soared 25.5% closing at $21.12 after announcing an exclusive partnership with the Swiss pharmaceutical giant ROCHE HOLDING AG to develop and commercialize hepatitis C treatments based on its line of protease inhibitors. The deal involves an upfront payment of $60 million and up to $470 million in milestone payments. Probably won’t have much of an impact on ROCHE.

The averge loss for the day was -0.49% with only 32.2% of the SI Universe posting positive returns for the day. The big losers today were the Construction Sector (down 1.8% on average) and Mining (also down 1.8%).

No fear of Friday the 13th here! The SI Universe was up 0.64% on average for the day, with 63% of the members posting positive returns for the day. Oil prices explained two of the outlier segments today: Airlines (down 0.87% on average) and Oil & Gas Production (up 2.00%) (see the Daily Sector Performance Chart below). The Construction sector was hammered once again as seen in the following table with news of record cancellations coming from CENTEX CORP [CTX] after the markets closed on Thursday.

HERLEY INDUSTRIES INC [HRLY] jumped 20.2% closing at $15.05 following the announcement before the opening bell that had reached an Administrative Agreement with the OGC Acquisition Integrity Office of the Department of Navy, and that the suspension preventing new contract awards at several of its manufacturing locations had been lifted, allowing it to resume its normal business dealings with the Department of Defense. It also announced that its Israeli facility had received a contract award worth approximately $8.5 million from a Middle Eastern Customer. Click here for a previous post on this company.

ENCYSIVE PHARMACEUTICALS INC [ENCY] surged 18.7% closing at $5.27 with no publicly available news regarding FDA approval. Looks like speculation. Some earlier thoughts on ENCYSIVE can be found here and here.

EZCORP INC [EZPW] gapped up 16.8% closing at $42.47 following a press release after yesterday’s close raising its earnings guidance to $0.61 to $0.64 per share from its earlier guidance of $0.43 to $0.46 per share for the quarter ended September 30^th. Since EZCORP is a provider of pawn loans, we expect that an upward revision in earnings guidance here is bearish news for the economy as a whole.

SITEL CORP [SWW] jumped 10.8% closing at $3.90 after announcing that it has agreed to a buyout by CLIENTLOGIC, another business process outsourcing provider, in a deal valued at approximately $450 million, with each shareholder of SWW receiving $4.05 in cash.

PERFICIENT INC [PRFT] dropped 6.5% closing at $16.73 following a downgrade by AG Edwards from “Buy” to “Hold.” While the P/E ratio of 54.7 on trailing-12-months earnings looks pricy, the view ahead still looks attractive here, with a forward P/E of 26.6 and a quarterly revenue growth rate of 73% (year over year).

IXIA [XXIA] dropped 7.9% closing at $8.98 after announcing it would be delaying the release of its third quarter financial results pending the completion of an internal review of how it recognizes revenue with respect to software upgrade and support practices. In the same press release the company acknowledged that “the third quarter was healthy, as we achieved a sequential increase in bookings.” It is estimated that the company had cash, cash equivalents and investments worth approximately $210 million, with no debt, at the close of the quarter ended September 30^th.

CALAMP CORP [CAMP] dropped 11.8% closing at $7 after reporting non-GAAP earnings of only $0.05 per share for the second fiscal quarter, ended August 31^st, compared to comparable non-GAAP earnings of $0.16 per share for the same period last year. The company also reported a six month loss of $1.41 per share compared to a profit of $0.25 per share for the first months of fiscal 2005. The Cash Flow statement might raise some eyebrows, showing a reduction in cash and cash equivalents of $20.3 million in the first six months but this is due primarily to the Dataradio acquisition in May. The real cause for concern here is the incredibly high concentration of revenues from just two customers. One customer accounts for 48% of consolidated sales and a second customer accounts for 15.2%. This is slightly better than last year, but still represents unacceptable risk from our perspective.

MSC SOFTWARE CORP [MSCS] plummeted 13.1% closing at $13.64 after announcing preliminary results for the quarter ended September 30^th. The software company is a leading provider of enterprise simulation software and services based in Santa Ana, California. The company now expects to report revenue in the range of $58 to $60 million, compared to revenue of $75.6 million for the third quarter last year. The stock was downgraded by Needham & Co from “Buy” to “Hold.” The company estimates that after adjusting for the sale of PLM in March, license revenue decreased by approximately 15% in the third quarter, maintenance revenue was essentially flat and services declined by approximately 28%. Going forward, the company will continue to find it difficult to fill in the missing $2.9 million in PLM fourth quarter revenue, and the “delayed purchase decisions” and “lengthening of sales cycles” are likely to persist into the fourth quarter, so given the relatively high P/E ratio (38), we see some rough sledding ahead.

ADVANCIS PHARMACEUTICAL CORP [AVNC] retreated 19.9% closing at $4.19 after a press release indicating that it was revising its financial guidance for 2006. The new guidance is for a net loss of $1.21 to $1.31 per diluted common share, compared to the previous projection of a loss of $1.05 to $1.25 per diluted common share. The company expects 2006 sales of Keflex to be about $8.5 million, down from earlier expectations of about $16.5 million! The company blames a lower than expected retail pharmacy stocking of Keflex® 750, its recently approved 750mg antibiotic capsule for the new guidance. Since Keflex is currently available in 250mg and 500mg capsules and a daily dose of 1500mg was previously delivered via three 500mg capsules, it would appear that the delay in stocking the 750mg capsules should only have led to a shift in revenues between the various dosages. There is clearly more to the story than we are hearing from the company if they are cutting their total Keflex revenue projections by about 50%.