wall street nuggets

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

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

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

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

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

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

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

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

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

Daily Sector Performance Chart

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

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.

Markets appeared to be walking a thin line on Monday. While violence continued in the Mideast, some optimism regarding peace prospects dampened the pressure on oil prices, although light sweet crude still settled above $75 per barrel. The reason that Alternative Energy apparently has not been benefiting from the run-up in oil prices is probably due to the growing recognition that ethanol will never by itself be able to replace oil, and certainly not within the time frame of a Mideast conflict.

SPECTRUM BRANDS INC [SPC] lost a third of its value today, closing at $7.15 per share. The company’s products include Rayovac batteries and Remington electric razors among a rather eclectic array of consumer non-durables. Today’s reaction was due to yet another slashing of earnings estimates for the third quarter and the fiscal year. In its May 2^nd press release, the company had projected fully diluted earnings of $0.90 to $1.00 per share on net revenues of $2.6 billion, and analysts had been expecting $0.95 prior to today’s announcement. While no specific projection was provided, today’s release said 2006 earnings would be “substantially lower” than previous guidance. It was also announced that the company has retained Goldman Sachs to provide advice on possible divestitures and solutions to its long-term debt problem. It would seem that there is probably going to be an opportunity here once the dust settles, but we will at least need to get some better visibility with the upcoming 10-Q, to see the extent of the problem with European battery sales and why dad’s didn’t get their electric razors for Father’s Day.

W W GRAINGER INC [GWW] lost 13.7% closing at $63 after announcing that it would meet second quarter expectations and full-year earnings expectations but that sales growth was being lowered from the range of 8% - 11% to 7% - 9% because of “some softening in certain segments of the North American economies.” The company stepped up its share repurchase program in the second quarter and has now purchased 2 million shares year-to-date (at a cost of $150 million) and has increased its share repurchase guidance from a range of $150 to $200 million to a range of $200 to $300 million. It appears that the Monday’s reaction to the earnings announcement was too extreme (amplified by a Merrill Lynch downgrade and the Mideast uncertainties) and that this company is now entering an attractive range for the long-term investor.

Some interesting defense stocks that might benefit from the turmoil in the Mideast:

MATTEL INC [MAT] reported a strong second quarter and closed up 10.8% at $17.60 per share. While Barbie is getting a makeover, she only slipped 1%. The Hot Wheels core slid off the track down 7%, but the Core Fisher-Price brand (up 10%) and American Girl brand (up 5%) more than made up for the slippage. Also, the company’s entertainment toy lines based on the movies CARS and Superman provided upside momentum for the summer. Overall, the company reported net income of $37.4 million ($0.10 per share) compared to last year’s loss of $0.23 per share (including incremental tax expenses of $112.9 million due to repatriated earnings under AJCA).

ECHOSTAR COMMUNICATIONS CORP [DISH] was up 6.2%, closing at $32.52, apparently on rumors of an acquisition by DIRECTV. While this would seem on the surface to have no hope of overcoming regulatory barriers, given the thwarted reverse acquisition of DIRECTV by ECHOSTAR three years ago, the recent approval of the WHIRLPOOL [WHR] acquisition of MAYTAG makes almost anything imaginable.

The average return was -0.57% for the SigmaInverse Universe with only 38% of the 3,566 stocks showing a positive return for the day. The biggest losing sectors for the day were Mining and Oil & Gas Production.