wall street nuggets

It may come as a bit of a surprise, but, through last Friday, the three SI sectors posting the biggest cumulative gains for the fourth quarter were Airlines (up 23%), Travel (up 22%) and Entertainment (up 17%).

The final week of 2006 opened on a positive note with an average gain of 0.67%.   Approximately 71% of the 3,520 stocks in the SI universe posted a positive return for the day.  The sectors posting unusual returns for Tuesday were (once again) Airlines (up 2.0%), Oil & Gas Production (down 0.7%) and Retail Apparel (down 0.9%).

SIRIUS SATELLITE RADIO INC [SIRI] (Communication) dropped 7.7% closing at $3.85 after the company updated its 2006 subscriber guidance to between 5.9 and 6.1 million, reflecting slower sales since the Thanksgiving weekend than had originally been anticipated. The new guidance, however, does imply total net subscriber additions of approximately 2.6 to 2.8 million for the year, or year-over-year growth of approximately 80% to 85%. We see no near-term opportunity, barring the oft speculated merger with XMSR which continues to appear sub-optimal.

ARQULE INC [ARQL] (Pharmaceutical) up 16.6% closing at $6.40 but not seeing any news.

MOVIE GALLERY INC [MOVI] ramped up aggressively by 14.7% on Tuesday, closing at $3.51, with no encouraging news likely. Curious.

URBAN OUTFITTERS INC [URBN] (Retail Apparel) jumped 7.3% closing at $24.31 with no apparent news and volume up about 60% over the average daily level. Trading pattern looks like some large institutional investor(s) took a major position.

CENTENE CORP [CNC] (Insurance) dropped 9.8% closing at $24.30 following a downgrade by GS from “Neutral” to “Sell,” reflecting the opinion that CENTENE’s medical cost projections are too optimistic based on comparisons with other competitors. Actually, we don’t see that much of a difference in the MCR experienced by CENTENE and WELLCARE GROUP [WCG] in the third quarter, for example (82.5% for Medicaid for WCG and 82.0% for Medicaid and SCHIP for CNC). Looks like a very interesting buying opportunity for CNC.

NASTECH PHARMACEUTICAL CO INC [NSTK] (Pharmaceutical) down 15.6% closing at $16.20 on news that its contract with PROCTER & GAMBLE had been amended and that $15 million expected to be received in 2006 would be deferred to a $5 million payment on the initiation of a Phase 2 study and $10 million on the initiation of a Phase 3 study of the new Parathyroid Hormone Nasal Spray, which is under development for the treatment of osteoporosis. Downgraded by FBR from “Outperform” to “Market Perform.” Looks like a speculative but attractive buying opportunity for NSTK if we are reading the PG comments correctly.

Daily Sector Performance Chart

The week continued on a bullish note with the average stock in the SI Universe gaining 0.31%. Just 53.4% of the members posted a positive return for the day, 42.7% posted a loss and 3.8% were unchanged. The Construction sector was up again 1.9% but couldn’t keep up with the Railroad sector which steamed ahead 2.1%.

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%).

It appears that increasing uncertainty regarding fourth quarter consumer spending and prospects for resolving sectarian violence in Iraq are leading to some erosion of confidence in the markets.  All 42 SI sectors posted significant losses for the day.  The losses were also consistent across all ranges of market capitalization, although the losses for the large caps were considerably less than the mid, small and micro caps.

DISTRIBUTED ENERGY SYSTEMS CORP [DESC] up 7.3% closing at $3.81 on no specific news, but considerable speculation regarding a short squeeze and chart patterns being favorable. Volume was about 3 times the daily average. Given the low price, and likely volatility here, negative cash flow from operations, and unimpressive balance sheet, we definitely do not see an opportunity based on value at this point in time.

J CREW GROUP INC [JCG] dropped 7.1%, giving back a little on last week’s big gains, to close at $40.21 following a downgrade by CIBC World Markets from “Sector Outperform” to “Sector Perform.” With the drop, the price seems less inflated, and has more potential for long-term growth, but no big short-term opportunity.

SIGMA DESIGNS INC [SIGM] dropped 7.7% closing at $22.07, with lots of high expectations for tomorrow’s financial results. Unfortunately, given the extremely high P/E ratio, we do not see a big opportunity here.

POLYONE CORP [POL] slipped 8% to close at $7.84 following a downgrade by KeyBanc Capital Markets / McDonald from “Hold” to “Underweight.” With the upcoming restatements of financial results for 2003 through the present, we draw no conclusions, although based on earnings reports through the first half of the year, the stock would appear undervalued.

BENCHMARK ELECTRONICS INC [BHE] down 8.3% closing at $24.40 after reporting financial results for the quarter ended September 30^th. Net income was $29.3 million or $0.45 per diluted share, compared to $0.32 per diluted share for the same period last year. Sales of $770 million for the quarter were up 37% over the same period last year. This appears to be a very strong buying opportunity for BHE, given the very low P/E, and very strong growth, with a very healthy balance sheet.

LUMINEX CORP [LMNX] lost some luster, dropping 11.9% to close at $12.12 after announcing financial results for the third quarter ended September 30^th. The company reported net income of $111,000 or $0.00 per share, compared with a net loss of $0.02 per share for the same period last year. Revenue for the quarter was $12.5 million, a 16% increase over the same period last year, but below the consensus estimate of $13.7 million.

NYSE GROUP INC [NYX] was down 6.6% closing at $101.11 as it took a bit of a breather from its mad climb from $56.35 on August 23^rd to its current price, just as it was announced that a U.S. regulator had cleared the way for its acquisition of the Euronext stock exchange. The biggest hurdle involves a group of European regulators who will are expected to decide within the next few weeks.

 Daily Sector Performance Chart

The average loss in the SI Universe was (-2.05%) across 3,547 stocks, with only 9.2% posting positive returns for the day.  The sectors taking the hardest hits were Airlines (down 3.8%), Network Technology (down 3.7%) and Brokers (down 3.6%).

MOTHERS WORK INC [MWRK] continued to fade, dropping another 7.4%, to close at $47.10. The two day loss amounts to about 18% and is apparently due to rather heavy insider selling by the founders, Dan and Rebecca Matthias, who have sold more than half of their holdings. The magnitude and suddenness of the selling activity is a cause for concern. On top of the recently announced bonuses and salaries for the two, the extent of the selling is hard to explain.

SYSTEMAX INC [SYX] surged 17.2% closing at $14.20 after reporting results for the company’s second quarter ended June 30^th. With this report, the company is actually still one of the White Rabbits (tardy SEC filers) tracked by Wall Street Nuggets because it still hasn’t filed its third quarter results, although it is not quite as tardy as it was when we last published our White Rabbits list. Net sales for the second quarter were $547.2 million, up 8.1% from the same period last year. Net income for the quarter was $24.7 million or $0.67 per diluted share, and increase of 493% over the same period last year, which includes $0.12 per diluted share from the sale of a warehouse facility. Excluding special items, income would have been $0.56 per diluted share. It appears at this time that the delayed filings are due primarily to delays in engaging another independent registered public accounting firm and not to any internal investigations into stock option timing or other issues that are likely to require restatements. However, with the lack of transparency resulting from the delayed filings, we are reluctant to identify any opportunities.

IMMUNOGEN INC [IMGN] rose another 16.3% to close at $5.58 following the initiation of coverage by Cantor Fitzgerald with a “Buy” rating. Currently, there are four analysts covering the stock with three “Buy” ratings and one “Sector Perform” rating. The Cambridge, Massachusetts, based company researches and develops antibody-based anticancer therapeutics using its Tumor-Activated Prodrug (TAP) technology, with several candidates in Phase I and Phase II clinical tests. The company also licenses its technology to other biotech and pharmaceutical companies, including Millennium Pharmaceuticals, Sanofi-Aventis, Genentech and Amgen Inc. It appears IMGN may still have some upward momentum, and that it would be prudent to wait for a leveling off, before assessing the opportunity.

ENCYSIVE PHARMACEUTICALS INC [ENCY] was up 9% closing at $6.88 following comments by Phil Nadeau (with Cowen & Co.) expressing some optimism with regard to the approval of the company’s new drug candidate, Thelin, based on the company’s filing of a response to the FDA’s request for additional information. We remain convinced that this is a buy opportunity, up to a level of about $9 per share.

Daily Sector Performance Chart

We are adding a new sector called Security today. This sector reflects a wide range of medical technology, information technology, and other industries focused on providing goods and services to address homeland security. The abbreviated trading day following the holiday saw relatively light volume and with some concerns regarding a weakening dollar, slipped into negative territory for the day. The average stock in the SI Universe lost 0.02% with only 41.8% of the members posting a positive return for the day. The outlier sectors were Automobiles (down 0.7%) and Mining (up 1.1%).

Wednesday, November 22, 2006

COLDWATER CREEK INC [CWTR] ran out of steam on Wednesday, slipping 8.2% to close at $28.40 after announcing third quarter results and same store sales. While comparable store sales increased a very respectable 9.9%, earnings of $0.17 per share matched the consensus estimate, and revenue growth of 37% continued to justify a rather pricy P/E ratio, the market did not react well to future guidance. The company’s guidance for the fourth quarter was $0.26 to $0.27 per share which fell short of the consensus estimate of $0.28 per share. A simple time series forecast of about $372 million for the fourth quarter, is considerably above the company’s guidance of $335 to $345 million, which leads us to believe this could actually be a good buying opportunity despite a P/E ratio of about 53. The big question is whether the fourth quarter seasonal effect this year will be as strong as it was last year (51%) or whether the sequential growth seen in the fourth quarter of 2004 (36%) is more typical. By averaging the two, we arrive at about $372 million.

BLOCKBUSTER INC [BBI] surged 16.6% closing at $5.26 probably due primarily to a reaction to the very large purchase of stock by Chairman and CEO (John Antiocho) on Tuesday (over $1 million!). Other possible factors might be either some short covering or speculation about the sale of some BLOCKBUSTER stores in Taiwan, although it appears very unlikely that either of these factors could have generated the impact or timing observed. Given (i) offline rentals are close to flat for the year, (ii) Wednesday’s insider purchase by the CEO tends to offset sales by insiders on November 7^th, and (iii) the long-term view is pretty bleak with real video on demand on the horizon, we would be inclined to view Wednesday’s surge as unjustified, and likely to see some pull-back.

J CREW GROUP [JCG] jumped 14.6% closing at $40.52 after announcing very strong third quarter results. Revenues were up 23% at $275.6 million and comparable same store sales were up a blistering 19%. Adjusted net income for the third quarter was $17.2 million or $0.27 per diluted share, easily topping the consensus estimate of $0.21 per diluted share. In addition, the company reset its guidance to fiscal 2006 earnings to a range of $0.95 to $0.97 per share, compared to the consensus estimate of $0.89 per share.

PAYLESS SHOESOURCE INC [PSS] stepped up 14.1% closing at $32.29 after announcing a very strong third quarter. The company reported earnings of $0.43 per diluted share for the third quarter ended October 28^th. With revenue growth of only 5.5% year-over-year and a relatively high P/E ratio of about 26 (trailing 12 months of earnings), we would be inclined to judge this as being over valued. However, the new deals announced with Nike and Disney clearly offer some opportunity for growth. Prudence would suggest waiting for some early evidence as to whether the new brands are generating results and then re-examining the opportunity.

DELL INC [DELL] jumped 9.3% closing at $27.13 in response to a preliminary delayed announcement of third quarter results that beat expectations. While the news beat expectations, the lack of transparency and increased competition from Apple, lead us remain skeptical in the long term.

 Daily Sector Performance

The day before the holiday, saw some continued strength in the large and mid-cap range of stocks, but not elsewhere.  The average stock in the SI universe posted a gain of 0.17%, with pretty much an even split between the winners and losers for the day (1701 positive returns and 1711 negative returns).  The outlier segments were Brokers (up 1.4%) and Network Technology (up 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%.

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%).