wall street nuggets

It was a fascinating week in the markets as the third quarter ended. The large-caps as expected turned in a strong week (up 2.3%), but with the gains concentrated on Monday and Tuesday, and very little movement toward the end of the week. The mid-caps (ranking 501 to 1000) performed about half as well for the week (up 1.3%), also doing best on Monday and Tuesday. The small-caps (ranking 1001 to 1500) did well at the beginning of the week, but were hit hard on Friday, and were up only slightly for the week (up 0.17%). The micro-caps (ranking above 1500) performed well on Monday, but were down substantially on Friday.

We present two alternative groupings of the bars this week, because both seem to provide interesting insights. The first tends to emphasize the shift in the distribution between Tuesday and Wednesday, and the second gives a better feel for the performance of individual market cap bins.

The bars representing the cumulative returns for the week were incorrect in the original posting, but were corrected on 10/9/2006.

CHEMED CORP [CHE] shed 17.2% closing at $32.26 following a series of announcements dominated by negatives. First, the company announced that its VITAS Healthcare Corporation unit would be exiting the Phoenix Hospice market because of current Medicare hospice reimbursement program limits. The company is projecting a full-year operating loss of $4.3 million for the Phoenix program. Across the company, the company expects that full-year 2006 earnings from continuing operations (i.e. excluding Phoenix), excluding stock-option compensation expenses, will be in the range of $2.00 to $2.10 per diluted share. Previously the consensus estimate had been for $2.13 per diluted share. The stock was downgraded by Deutsche Securities from “Buy” to “Hold.”

PRESSTEK INC [PRST] gapped down $1.25 at the open and for the day was off 13.5% closing at $5.39 on revised downward guidance including an 11% drop in sales in the third quarter. As suspected following yesterday’s 19.1% drop, the bad news probably leaked yesterday and given the fairly illiquid nature of the stock, it didn’t take much selling pressure to drive the price down quickly.

HARTMARX CORP [HMX] slid 12.1% closing at $6.77 following a press release in which the company reported its third quarter results with earnings of $0.01 per diluted share with net sales of $137.7 million, compared to $0.18 per diluted share with net revenues of $152.1 million for the same period last year. The consensus estimate had been for earnings of $0.23 per diluted share and net sales of $160.55 million. Ouch.

A financial services holding company that manages over $11 billion in client assets, SANDERS MORRIS HARRIS GROUP INC [SMHG] dropped 11.7% closing at $12.51 on the announcement of a secondary offering of 5 million shares of its common stock priced at $12.50 per share.

Bearing manufacturer, TIMKEN CO [TKR] plummeted 9.2% closing at $29.78 following a press release in which the company sharply revised downward its earnings estimates for the third quarter from $0.70 to $0.75 per share to an estimated $0.50 to $0.55 per share. The company cited auto industry production cuts as the major driver and indicated that it would be cutting approximately 700 positions (about 5%) in the Automotive Group.

CORINTHIAN COLLEGES INC [COCO] was down 8.8% closing at $10.81 after reporting fourth quarter and year ended June 30^th results and lowering guidance for fiscal 2007. Fourth quarter results were not too bad with the company reporting earnings of $0.10 per diluted share, compared with $0.02 per diluted share for the same period last year. However, the consensus estimate had been for $0.13 per share. Furthermore, net revenues for the quarter were $235.6 million, down from $239.3 million last year, reflecting an approximately 2% decline in total student population.

GLOBAL PAYMENTS INC [GPN] shot up 13% closing at $44.01 after its announcement of first fiscal quarter ended August 31^st results. Revenues for the first quarter grew 16% to $260.3 million compared to $224.5 million for the same period last year. Earnings were $0.51 per diluted share compared with $0.38 per diluted share for the same period last year. To help matters along, the stock was upgraded by Barrington Research from “Market Perform” to “Outperform.”

NII HOLDINGS INC [NIHD] was up 7.3% closing at $62.16 in response to the news of a 5 year extension of a supply agreement between NII HOLDINGS and MOTOROLA involving iDEN handsets and infrastructure. In addition, NEXTEL MEXICO, a subsidiary of NII HOLDINGS, has signed an agreement to acquire a Mexican wireless telecom, COSMOFRECUENCIAS S. A. de C.V. for $200 million. This deal will not only give NII HOLDINGS additional spectrum, but also offers opportunities to save costs and increase revenues.

From the Daily Sector Performance Chart it is clear that we ended the quarter on a sour note, but overall it was a strong week. The average return for the day was -0.56% with only 30.2% of the stocks in the SigmaInverse Universe posting positive returns for the day. Alternative Energy posted yet another impressive gain for the sector - up 1.8% on average.

Modem maker, NOVATEL WIRELESS INC [NVTL] dropped 17.7% closing at $9.64 following the news that Intel and Nokia would partner to provide built-in cellular connectivity for notebook computers as part of the Intel Centrino Duo mobile technology platform, thereby eliminating the need for 3G wireless PC card modems and embedded modems from vendors like NOVATEL and Canadian based SIERRA WIRELESS [SWIR]. Cowen & Co downgraded NVTL from “Outperform” to “Neutral,” which most likely precipitated the selling, but it appears that the impact of the Intel/Nokia partnership is at least a year off and if it weren’t for the high P/E ratio (67), we would be seeing this as a an opportunity on the long side.

ENERGY CONVERSION DEVICES INC [ENER] was up dramatically by 15.3% closing at $38.87, when Intel displayed a prototype 128-megabit Phase Change Memory (PCM) chip, that promises to be the eventual successor to flash memory at the Intel Developer Forum in San Francisco. Apparently ENER receives 40% of the royalties that come from licensing the PCM technology.

PRESSTEK INC [PRST] tumbled 19.1% closing at $6.23 with no apparent news event. Looks like the selling was set off by some very large trades at about 11:30 a.m. The stock has dropped precipitously three times in the last couple of years, 10/27/2005, 7/27/2006 and 9/28/2006. The first two times were associated with the reporting of disappointing quarterly results. In this case, it appears we might expect some revised guidance downward to be released shortly. If so, it looks like a leak. Note that until the full story is known, we won’t know whether the price change was rational or not, so there may still exist an opportunity for those with partial information.

AMERICAN GREETINGS CORP [AM] was down 8.8% closing at $22.83 after reporting disappointing second quarter of fiscal 2007 results. For the quarter, which is generally seasonally weak, the company reported a loss from continuing operations of $0.23 per diluted share, which was worse than the consensus estimate of a loss of $0.16 per diluted share. The company has been very aggressive in its buyback activities (reducing the diluted share count by 27% over the course of the past 18 months) and, when earnings are reported for the seasonally strong final two quarters of the year, they should be very strong indeed.

A perennially volatile stock, ILLUMINA INC [ILMN], lost some luster on Thursday, dropping 8.3% to close at $33.61, with no apparent news. Looks like some profit taking as the quarter ends.

CSK AUTO CORP [CAO], whose stock plummeted on March 27^th, when accounting irregularities were revealed, announced on Thursday that its internal investigation was substantially complete and the company’s CEO would be stepping down as soon as a successor could be found. It was also announced that the Chief Operating Officer, the Chief Financial Officer and several others involved in the irregularities are no longer with the company. The stock was up 8.9% for the day, closing at $13.89.

RESOURCES CONNECTION INC [RECN] was up 13.8% closing at $27.02 after it announced results for the first quarter of fiscal 2007. The company reported earnings of $0.22 per diluted share compared with $0.29 per diluted share for the same period last year. However, excluding stock-based compensation and one-time tax effects, the non-GAAP income for the first quarter was $0.30 per diluted share versus a consensus estimate of $0.24 per diluted share. RECN was upgraded by JMP Securities from “Market Perform” to “Market Outperform” and by Robert W. Baird from “Neutral” to “Outperform.”

ALIGN TECHNOLOGY INC [ALGN] soared up 48.2% closing at $11.56 on the news that it had reached a settlement with OrthoClear Inc. to end all pending litigation. The terms included: (1) Effective immediately, OrthoClear will stop accepting new patient cases, (2) OrthoClear will stop importing its dental aligner products into the U.S., (3) Orthoclear will transfer and assign to ALIGN all intellectual property rights that apply to the treatment of malocclusion, (4) ALIGN will make Invisalign treatment available to current OrthoClear patients at no charge from ALIGN , (5) ALIGN will make a one-time cash payment of $10 million to OrthoClear and an additional $10 million following approval by OrthoClear shareholders of the agreement. This ends a 19 month legal battle between the two companies. This should help ALIGN to focus on the core business issues and the stock was upgraded by Barrington Research from “Market Perform” to “Outperform.” Since the stock was trading for about $11 per share before all the litigation issues arrived on the scene, we don’t see any particular opportunity at this point.

All sectors remained rather stable on Thursday and the average return for the entire SigmaInverse Universe was 0.12%, with 1,761 gainers (49.3%), 1,684 losers (47.1%) and 129 unchanged (3.6%). Like Tuesday, the big winners were concentrated in the large cap area.

RED HAT INC [RHAT] tumbled 23.2% closing at $20.21 after reporting fiscal 2007 second quarter (ended August 31^st) results that were pretty impressive. The company reported 52% revenue growth year-over-year and the 18^th consecutive quarter of sequential growth in total revenue, with total revenue for the quarter of $99.7 million which exceeded the consensus estimate of $97.06 million. JBoss-related (customized development) revenue of $7 million was at the top of previously provided guidance. Net income for the quarter was $0.05 per diluted share which was down from $0.09 per diluted share for the same period last year. However, due to the different treatments of stock compensation expenses and taxes, the two periods are not directly comparable. On a non-GAAP basis, the earnings for the second fiscal quarter of 2007 were $0.11 per diluted share compared with $0.09 per diluted share for the same period last year. The Deferred Revenue item in the Balance Sheet ($211.4 million, and not $284.1 million as reported in the press release text) has increased 30% in the last six months and needs to be explained. The market still seems to fail to understand this stock and despite the high P/E ratio, we once again see this as an attractive stock. The company has to do something with its current assets ($1 billion) and more acquisitions or paying down the long-term debt or stock buybacks all make sense.

WORTHINGTON INDUSTRIES INC [WOR] slipped 8.9% closing at $17.23 after it announced results for the first fiscal quarter ended August 31^st. Net sales of $778.7 million were a first quarter record, up 12% from the same period last year, and first quarter earnings of $0.48 per diluted share were up 52% from earnings of $0.32 per diluted share for the first quarter of fiscal 2006. So why the drop? Without specific guidance, the company’s outlook for the future pointed to softening demand in commercial construction and automotive markets. While the latter is probable, the reaction to the warning seems to be overly emotional and we sense a strong long opportunity here, especially with a relatively low P/E.

CAREER EDUCATION CORP [CECO] was down 8.5% closing at $22.14 following a downgrade by Lehman Brothers from “Equal-weight” to “Underweight,” citing valuation concerns given the price increase in a sloppy response to the management change announced earlier in the week, and the fact that the company is facing a fundamental accreditation issue this fall for its American Intercontinental University (AIU). We tend to agree.

AMKOR TECHNOLOGY INC [AMKR] down 7.9% closing at $5.11 probably due to short sales anticipating bad news. Days elapsed since last filing period = 180. Very little visibility at this point. October 5 puts were active, closing at $0.65, also presaging bad news.

NOVAVAX INC [NVAX] was up 7.8% closing at $4.03 apparently due to a positive reaction to its presentation at the UBS Global Life Sciences Conference.

MAGNA ENTERTAINMENT CORP [MECA] surged 9.7% closing at $4.40 on the news that regulators had approved the first slot-machine licenses in Pennsylvania, one of which went to The Meadows in the suburbs of Pittsburgh, which is owned by MAGNA ENTERTAINMENT.

DIVERSA CORP [DVSA] rose sharply up 16.4% closing at $7.68 also apparently due to a positive reaction to its presentation at the UBS Global Life Sciences Conference on Tuesday. The company is getting some great PR lately as the importance of cellulosic biomass is increasingly recognized as a possible solution to meeting the demand for ethanol without relying just on corn and starving the pigs. DIVERSA specializes in enzyme technologies that convert cellulose into ethanol. Click here for a link to a recently published article on the topic. Click here for a video on the topic.

FOXHOLLOW TECHNOLOGIES INC [FOXH] shot up 20.4% closing at $32.80 following the announcement of an expanded collaboration in atherosclerotic plaque analysis between MERCK and FOXHOLLOW, which includes MERCK purchasing a $95 million stake in FOXH common shares in addition to payments of $60 million for specific research including the removal of atherosclerotic plaque from arteries for analysis and an additional $40 million over four years in exchange for exclusivity in the specified disease area. The $95 million stake will involve the purchase of newly-issued shares priced at $29.629 per share, which represents approximately an 11% stake in the company.

H. B. FULLER CO [FUL] was up 23.4% closing at $25.12 after reporting operating results for the quarter ended September 2^nd. Net revenue came in at $388.9 million, up 8.6% from the same period last year, although removing acquisitions and currency translation effects, revenues would have been down 1.2% year-over-year. However, net income was $0.40 per share compared with $0.26 per share for the same period, an increase of 54% year-over-year, and well above the consensus estimate of $0.33 per share. As we noted on June 28^th, when the price plummeted irrationally (in our opinion), revenue growth is not dramatic at the core, but earnings are solid and with Wednesday’s price correction the stock now appears fairly valued.

The market was still generally in positive territory today, but the center of gravity swung dramatically to the small caps.  The average return for the day was 0.37% with 56.4% of the 3,577 companies in the SigmaInverse Universe posting positive gains for the day.  The big winners for the day in the Daily Sector Performance Chart were Alternative Energy sector which was up 3.6% and Oil and Gas Production which was up 1.97%, both driven by an increase in oil prices, which of course put a damper on most of the other sectors.

CAREER EDUCATION CORP [CECO] advanced 14.4% closing at $24.20 with an upgrade by UBS from “Reduce” to “Neutral,” apparently driven by the announcement that John M. Larson would be stepping down as president and CEO but staying on as Chairman of the Board. In addition, it looks like there was some pressure on the shorts to cover and some speculation on a buyout as well. At this point, it would seem a buyout offer for CECO like yesterday’s buyout offer for EEEE is unlikely, so we don’t see any further upside at this point.

RELIANCE STEEL & ALUMINUM CO [RS] rocketed up 13.1% to close at $33.06 following the announcement that is was revising its guidance upward for the third quarter ending September 30^th. The company is forecasting earnings in the range of $1.35 to $1.40 per diluted share. The consensus estimate for the quarter had been $1.24 per diluted share. The company has been wildly aggressive in acquisitions in 2006, acquiring Yarde Metals, EMJ, Flat Rock, Everest Metals (a metals service company based near Shanghai, China), and American Steel.

NAPSTER INC [NAPS] was up 12% closing at $4.49. It opened at $3.95 and was quiet until about 11:15 a.m. when the volume peaked and the price shot up about $0.20. This was pretty well timed with the release of the analysis by a ThinkEquity analyst, Darren Aftahl, who estimated the core value of the company’s subscription backbone and quick assets at $5 to $5.65 per share, with a fair market value of all assets in the range of $6 to $7 per share. The stock price picked up another $0.20 in the last half hour, possibly due to short covers.

BIOCRYST PHARMACEUTICALS INC [BCRX] mysteriously was up 10.6% closing at $11.35, apparently on rumors of an upcoming announcement in the next couple of days. Always question the reliability of the rumor source. Very suspicious price movements here.

KFX INC [KFX] was up 9.8% closing at $10.18 after the publishing of a press release, which, in addition to some management changes and a name change (EVERGREEN ENERGY INC [EEE] as of Friday), also announced the departure of director, Richard Spencer, to avoid any conflicts of interests as the company pursues a “potential strategic joint venture and financing opportunities with Mr. Spencer’s investment firm.” We believe the last announcement is very bullish for KFX (soon to become EEE).

ALIGN TECHNOLOGY INC [ALGN] rose 9.6% closing at $7.65 with no real market moving news (no matter how good she is, hiring Ms. Clark as VP of HR is not likely to move the market J). Looks like a few large orders moved the price substantially.

LEAR CORP [LEA] was up 9% closing at $19.94 after announcing after the close on Monday that it would be consolidating its North American customer group in order to streamline operations and improve efficiency. This was followed by an upgrade by UBS from “Reduce” to “Neutral.”

JOY GLOBAL INC [JOYG] surged ahead 7.9% closing at $35.38 with no company specific news, but rather buoyed by a tremendous gain in the Mining sector on Tuesday, which was up 3.07% on average. See the Daily Sector Performance Chart below.

SUPERIOR ENERGY SERVICES INC [SPN] was up 7.8% closing at $25.17, recovering much of the ground lost yesterday, after announcing the acquisition of WARRIER ENERGY SERVICES [WARR] for roughly a 100% premium. The reason for the premium came out in an analyst conference in which SPN’s CEO explained that the original deal was concluded back in August when the premium would have been in the 45% to 50% range (circa 4.5 times estimated EBITDA in 2007). Current estimates are that the acquisition will be accretive to earnings in 2007 and hugely accretive in 2008. Click here for the full transcript.

EAGLE MATERIALS INC [EXP] tumbled 10.4% closing at $35.23 after a press release in which it lowered its guidance for the fiscal year from a range of $4.40 to $4.70 per diluted share to a range of $3.80 to $4.20 per diluted share, attributing the revision to the accelerating decline in housing starts.

AVID TECHNOLOGY INC [AVID], which produces software and hardware products for digital media production and is based in Tewksbury, Mass., fell 14.3% closing at $37.59 following a press release in which it revised its guidance for the third quarter. The company reported that it is seeing softness in the audio business, attributed primarily to a more rapid shift from the G5-based Mac computer to the Intel-based Mac than was expected. The company still expects a sequential improvement in both revenue and earnings but now expects revenues in the range of $0.35 to $0.42 (non-GAAP, i.e. excluding acquisition charges, stock-based compensation, and restructuring charges).

ADVANCED MEDICAL OPTICS INC [EYE] retreated 16.3% closing at $38.75 after “refining” its guidance for fiscal year 2006. The company revised its earnings guidance to a range of $1.90 to $1.95 per share, from its previous guidance of $2.05 to $2.21 per share. It also lowered its revenue guidance to $1,010 to $1,020 million from its previous guidance of $1,020 to $1,040 million. Many reasons were given without the numbers to assess the real drivers at this point, but it looks like an inability to forecast the sales-mix, coupled with increasing competition in the laser vision correction market domestically and reimbursement pressures in Japan and parts of Europe on the international scene are the big drivers.

Two competitive printed circuit makers were the big losers in the SigmaInverse Universe. MERIX CORP [MERX] dropped 26.8% closing at $10.29 and TTM TECHNOLOGIES INC [TTMI] sank 17.6% closing at $11.07. The drops were precipitated by a press release in which MERIX lowered its guidance for the first quarter, considerably below its previous guidance and consensus estimates, blaming higher raw material (copper) costs in Asia, outsourcing expenses (also in Asia), unplanned pension costs (Asian) and professional fees incurred in filing SEC documents. MERIX was downgraded by Bear Stearns from “Peer Perform” to “Underperform,” and TTMI was downgraded by from “Outperform,” - do not stop at “Neutral” - to “Underperform.” Ouch. MERX still has a rather impressive P/E ratio of about 140, so beware of the further downside risk there.

Despite the impressive gain for the Dow Jones Industrial average and the S&P 500 on Tuesday, the average gain for the entire SigmaInverse Universe was only 0.44% with 57.8% of the members posting positive returns for the day. The Mining and Railroad sectors were the big gainers, while Entertainment and Tobacco were the big losers.

The really astounding breakdown was by market cap with the large caps posting much greater returns on average as we quickly approach the end of the quarter.

CHIQUITA BRANDS INTERNATIONAL INC [CQB] slipped 14% closing at $13.53 after issuing third quarter warnings, citing the impact of the spinach safety scare, lower banana prices and more difficult rules for importing bananas into the European Union. To help address the expected shortfalls and pay down some of the long-term debt, the company announced what appears to be an indefinite suspension of dividends and is also looking into the possibility of selling its shipping operations. As can be seen from the graphical depiction of the balance sheet for the past year, the long-term debt is significant and there is no apparent growth.

Recall that CA=Current Assets, PPE=Property, Plant & Equipment, OA=Other Assets, CL=Current Liabilities, LTL=Long-term Liabilities, SE=Shareholders’ Equity.

WARRIER ENERGY SERVICES CORP [WARR] charged up 68.9% closing at $24.22 after it was announced that the company would be acquired by Superior Energy Services for approximately $358 million ($175 million in cash and the rest in shares of Superior Energy common stock). SUPERIOR ENERGY SERVICES INC [SPN] sank 10.8% closing at $23.35 on the same news – apparently with the market expressing the opinion that the premium was much too high.

MARITRANS INC [TUG] sailed up 43.4% closing at $36.57 following the announcement of its agreeing to be acquired by Overseas Shipholding Group Inc. for $453 million (or $37.50 per share). Can’t figure out why Cantor Fitzgerald bothered to downgrade the stock from “Buy” to “Hold.”

PHARMION CORP [PHRM] soared up 20% closing at $21.61 with upgrades by Lazard Capital and Friedman Billings

The after-school tutoring center operator, EDUCATE INC [EEEE], soared 15.2% closing at $8.13 following an offer by management to buy out the company for $8 per share. (Apparently a higher offer is expected.)

MICROSEMI CORP [MSCC] dropped another 14% in heavy trading on Monday, closing at $19.59. Given the extent of the reaction, it does not appear that Friday’s drop was related to the company’s revised guidance, which was released after the close on Friday. However, the combined Caris downgrade and Monday’s punishment, does seem to have created a solid buying opportunity at this point.

The average return for the SigmaInverse Universe on Monday, September 25, 2006, was 0.84% with 68.9% of the members posting a positive return for the day. Big losers for the day were Alternative Energy stocks and Tobacco, while Construction was the big winner for the day.

Having attended the Massachusetts Technology Leadership Council (MTLC) Fall Membership Meeting, I am running a little late tonight. The main attraction at tonight’s dinner was “A Conversation with Alan Greenspan,” who shared some of his wisdom and insights with the attendees. The former FRB Chairman was very sharp and entertaining. While there were no dramatically new ideas that surfaced, I enjoyed the rapid paced repertoire between Dr. Greenspan and the moderator, Paul Deninger, of Jefferies & Co., covering a wide range of topics. I’ll hit a sampling of these to give you the flavor of the evening.

When pushed for a forecast, he indicated the third quarter GDP growth would come in around 2% and that the slowdown might last into next year, citing the dramatic decline in construction as one of the key drivers. However, he noted the importance of globalization in producing forecasts today, noting how when he started his career, the only thing you had to was consider U.S. consumption. He also indicated that the economy was incredibly resilient and would find equilibrium on its own, and that the only things we really have to worry about are the one-time shocks. The real dangers are things we can’t see or forecast.

China is key. Not just because of its size, but because of the dramatic shift from a centrally-planned economy to market driven dynamics (capitalism). Key statistics to watch are imports and exports to China.

Math and science education is failing in this country and needs to be fixed. The tests show that by the fourth grade, we’re ahead, but that by the end of high school, we’re at the bottom of the heap. We should open up immigration for high tech people.

China could be a threat militarily, economically, or both in the abstract. But in reality, it can’t be both. It seems well along the path of competing economically, which in the end is good for both the U.S. and China.

Let obsolescent industries fade away. Avoid protectionism.

What we do best is in the conceptual area. Our greatest accomplishment lies in our financial services industry.

We went too far with Sarbanes-Oxley. Getting the CEO’s signature on the financial statements was a good thing, but Section 404 is a nightmare. There is movement afoot for a change but it is very slow.

Alternative energy efforts are important, but corn ethanol alone can’t solve the problem. There isn’t enough of it to keep the trucks running without starving the pigs. Ethanol from cellulose could really contribute to energy independence and enhanced security, IF we presume that rate of improving productivity in this area continues for another ten years.

We should heavily tax gasoline to drive down consumption.

On healthcare costs: With third party payments you have inelastic demand for services. Encrypted medical records will help us to identify best practices, but we don’t know if best practices will lower or increase health costs.

The crash of October 1987 (just a few months after Dr. Greenspan was appointed Chairman) was his most harrowing experience. They were probably within an hour of shutting down the New York Stock Exchange, but thankfully they didn’t because that most likely would have led to a real panic. The Fed’s response at the time was to open the spigots and provide liquidity to the financial markets. He remembers well getting five hours of sleep on October 19, 1987.

From the chart below, we see that Wednesday was the only really bright spot for the week.  Note the downside risk in the micro caps toward the end of the week.

Note also that we have included a set of bars representing the cumulative return for the week by market capitalization.

As we approach the end of the quarter, it will be interesting to observe any shifts in the patterns as institutions engage in the usual window dressing activities.

BOSTON SCIENTIFIC CORP [BSX] tumbled 9.2% closing at $14.85 following its release of revised guidance for the third quarter. The new guidance for net sales for the quarter ending September 30^th is $1.970 to $2.035 billion. The consensus estimate based on previous guidance had been for $2.17 billion. Earnings excluding special charges for the Guidant acquisition were projected to be in the range of $0.06 to $0.10 per share versus a consensus estimate of $0.16 per share, excluding special charges associated with the acquisition. Downgrades by UBS, Prudential, Morgan Stanley and Banc of America Securities, on Friday have yet to be fully assimilated by the market so more downside is likely. It is likely there will be a strong opportunity here at some point in the near future, but I don’t think we’re quite there yet. Ideally the company would report financial results or other news that would justify the price paid for the Guidant acquisition, which was generally assumed to be too high.

ADVANCED ANALOGIC TECHNOLOGIES INC [AATI] retreated 21.3% closing at $5.59 after cutting third quarter guidance on Thursday, after the markets closed. The revenue guidance was cut from $22 to $24 million to a range of $19 to $20 million for a drop of about 20%. The consensus estimate has been for a loss of $0.01 per share, but the company now projects a loss of $0.04 to $0.06 per share. Ouch! Needham & Co downgraded the stock from “Buy” to “Hold.”

MICROSEMI CORP [MSCC] was hammered down 11.2% closing at $22.77 apparently following a downgrade by Caris & Co from “Buy” to “Above Average.” It is interesting to note that the other 8 analog semiconductor makers that Caris downgraded at the same time did not experience similar drops. The others downgraded were: ANALOG DEVICES INC [ADI], EXAR CORP [EXAR], INTERSIL CORP [ISIL], LINEAR TECH CORP [LLTC], MICREL INC [MCRL], MAXIM INTEGRATED PRODUCTS INC [MXIM], NATIONAL SEMICONDUCTOR [NSM] and SEMTECH CORP [SMTC]. Most of these had much lower P/E ratios than MSCC, but EXAR with a P/E ratio of about 63 could have been affected much more but only lost $0.07 on Friday. On the other hand, EXAR is into digital IC’s more than analog semiconductors, although they do make A/D (Analog to Digital) and D/A converters for video and imaging applications. Earlier in the week EXAR had introduced a new generation of UARTs (Universal Asynchronous Receiver Transmitters) that are critical elements of the communications infrastructure. It is also important to note that MSCC cut its guidance for the fourth quarter after the markets closed on Friday. Previously it had set expectations for earnings in the range of $0.29 to $0.31 per share and the consensus analyst estimate was $0.30. However, the new EPS guidance is $0.25 to $0.27 per share which is about 13% lower and consistent with the observed price drop. So we assume the Caris downgrade had relatively little impact and that the street knew the extent of the guidance cut earlier in the day.

TALK AMERICA HOLDINGS INC [TALK] rocketed up 24.8% closing at $8.20 on the announcement that it had agreed to be bought for $8.10 per share or $251 million by privately owned Cavalier Telephone & TV, located in Richmond, Va.

GENESCO INC [GCO], which runs various chains featuring shoes and accessories (e.g. Johnston & Murphy, Journeys, etc.), stepped up smartly 8.1% closing at $34.26 following an upgrade by Wachovia from “Market Perform” to “Outperform.”

KFX INC [KFX] felt the pinch of lower oil prices dropping 9.7% to close at $9.49.

INFORMATICA CORP [INFA] tumbled 10.8% closing at $12.93 following a downgrade by Goldman Sachs from “Neutral” to “Sell” based on the assessment that the stock was too expensive. Given the absence of significant growth in the top line lately, we tend to agree. The P/E ratio is still a bit high, so an acquisition strategy might make some sense here. Too bad it wasn’t done before the downgrade.

EPIX PHARMACEUTICALS INC [EPIX] was depressed on Friday, sinking 18.6% to close at $4.32 following the announcement of results from its Phase 3 trial of PRX-00023, a drug for anxiety disorder. The new drug failed to achieve a statistically significant improvement using the Hamilton Rating Scale for Anxiety over a placebo in the test. However, the new drug did show a statistically significant improvement over the placebo using the Montgomery Asberg Depression Rating Scale, so it appears there may be some hope for the new drug in treating some forms of depression.

The Daily Sector Performance Chart was pretty consistently negative with the exception of Construction, led by HOVANANIAN ENTERPRISES INC [HOV], BUILDING MATERIALS HOLDING CORP [BMHC], NVR INC [NVR], STANDARD PACIFIC CORP [SPF] and KB HOME [KBH]. This was in spite of a gloomy outlook from KB HOME, noting a 43% drop in net new home orders in the third quarter. But of course in this case the bad news is old news and already reflected in the prices. The most remarkable aspect of Fridays negatives is the concentration of the losses in the lower cap stocks as we approach the end of the quarter. Stay tuned for our next post on this topic.

The drop in the Philly Fed Manufacturing Index from 18.5 in August to -.4 in September, had a negative impact on the market, probably fueling fears of additional downward revisions in earnings guidance for the third and fourth quarters. The rebound in oil prices also had a sobering effect on the market.

While of course regional, the Philly Fed Index does seem to be an early warning signal for the whole economy and I expect some further declines in this index before we hit bottom.  Overall, it is generally a good idea to have small earthquakes and relieve the pressure in the system rather than suffer the effects of a major shift in the earth’s crust.   Most cycles are healthy and to some extent inevitable, so we really shouldn’t fear them.

INFOSPACE INC [INSP] (which provides ringtones for several wireless carriers along with an Internet search engine and online yellow pages) imploded  on Thursday, sinking 21.8% to close at $17.68 following the announcement that one of its wireless customers would be bypassing INFOSPACE in the delivery of ringtones and making deals directly with the major record labels. Since ringtones made up about 30% of INSP’s total revenues over the first six months of 2006, and more wireless customers are likely to follow suit, there is considerably more downside risk.

INCYTE CORP [INCY] dropped 12.3% closing at $4.35 following the announcement that it planned to offer about $132 million of 3.5% convertible senior notes due 2011 in a private placement. The company plans to use most of the proceeds from the offering to redeem its outstanding 5.5% convertibles due February 1^st. The new notes will be convertible into common stock at the rate of 89.1385 shares per $1,000 principal, which implies an initial conversion price of about $11.22 per share. INCYTE may redeem the notes beginning February 20, 2007. INCYTE expects to realize about $96 million of the $132 million, after fees and expenses. Basically seems like a prudent move to lock in a lower rate and avoid dilution from the 5.5% convertibles, and the conversion ratio seems reasonable, but the fees and expenses seem a bit high.

FORMFACTOR INC [FORM] slid down 11.2% closing at $41.09 following a downgrade by Citigroup from “Buy” to “Hold.”

Auto supplier, LEAR CORP [LEA], sank 8.7% closing at $18.61 after the company lowered its guidance for 2006 to reflect production cuts by its major customers. Top line impact is only expected to be about $300 million less than its previous guidance of $18 billion (-1.7%). However, the company expects earnings to miss previous guidance of $400 to $440 million by 15%.

CVS CORP [CVS] dropped 8.4% closing at $32.47, WALGREEN CO [WAG] dropped 7.3% closing at $46.28, RITE AID CORP [RAD] dropped 5% closing at $4.52, and FREDS INC [FRED] dropped 7.8% closing at $13.46, following the announcement that their biggest competitor WALMART would begin a new test marketing campaign in Florida, offering about 90 generic prescription drugs at a very aggressive $4 for a 30-day supply – going after the Medicaid customers it may have lost recently and putting intense pressure on the discount pharmacies. It is interesting to observe the lack of symmetry in the market reaction – WALMART [WMT] was also down for the day (but only by 0.83%) apparently reflecting the opinion that the aggressive pricing was generally bad for the sector. One way of reading the WMT reaction, is that the dramatic drops in its competitors’ share prices are in fact overreactions – based more on emotion than reason and that there are some very strong buying opportunities here. Even if the WMT campaign is successful and continues, its competitors are likely to respond with similar campaigns and an equilibrium will be re-established.

AMERICAN AXLE & MANUFACTURING HOLDINGS INC [AXL] also tumbled 8.1% closing at $16.06 following a downgrade by Calyon Securities from “Neutral” to “Reduce,” in anticipation of lowered guidance to be attributed to production cuts by its customers. If it does decide to lower guidance, and there is further downward movement, I would definitely view this as a strong long opportunity. There should be a law against paying for the same information twice.

PALM INC [PALM] branched down 7.1% closing at $14.50 after reporting financial results for the fiscal first quarter ended August 31^st. Net income for the quarter was $0.16 per diluted share compared with $0.18 per share for the same period last year, reflecting SFAS 123R which includes the expensing of stock options, which was in line with expectations. Revenue of $355.8 million was in line with previously lowered guidance.

ORASURE TECHNOLOGIES INC [OSUR], which develops, manufactures and markets tests for HIV, surged up 21.8% closing at $8.54 after the U.S. Centers for Disease Control (CDC) recommended routine HIV testing for all Americans between the ages of 13 and 64. Early detection of HIV infections enables access to life-extending therapy and services designed to limit the transfer of the infection to others.

Online search marketing company, MIVA INC [MIVA], (formerly FindWhat.com) moved up 15.2% closing at $3.26 on the assertion that it expected earnings for the third quarter to exceed its previous guidance of $38 to $40 million, although no forecast has been published at this time.

MILLER HERMAN INC [MLHR] moved higher 14.4% closing at $33.40 after the office furniture maker announced very strong first quarter financial results. Net sales were $449.7 million for the 13 week period ended Sept. 2^nd, compared with $430.9 million for the 14 week period ended Sept. 3, 2005. Earnings were $0.43 per diluted share compared with $0.34 per diluted share last year and versus a consensus estimate of $0.39 per share.

GYMBOREE CORP [GYMB] climbed 12.7% closing at $42.78 following a press release on Thursday morning announcing increased sales and earnings expectations for the third quarter and the full year. Recent better than expected performance from its baby sale and its “Circle of Friends” event, should result in comparable store sales to be in the range of low double-digits, versus previous guidance in the mid-single digit range. I think that translates to 10% to 12%, which is very good.

TELLABS INC [TLAB] jumped 8.3% closing at $11.14 apparently in response to CFO’s optimistic outlook expressed at a Wall Street conference on Wednesday regarding third-quarter sales. There had been a panic reaction to a cautionary announcement toward the end of July.  As we noted there was an interesting long opportunity at that point and we expect there is still some upside potential.

The average return for the day was -0.65% with only 28.5% of the SigmaInverse Universe posting positive returns for the day.  The big outlier today was Mining (up 2.2%), probably being just a bit oversold

The impact on the markets of the announcement of a successful production test at Jack #2, the deep-water drilling site in the Gulf of Mexico, was truly astounding. As we posted on that day, any significant production from the site is many years off, but there are many factors that drive the price of oil, including current geopolitical risk, and expectations for the future. While one might argue that there has been an easing of Mideast tensions over the past couple of weeks, it is hard to say that we have had a really significant break-through - especially as we approach next week’s deadline for a compromise with Iran on nuclear proliferation. The only really significant event in the past 2 weeks has been the successful deep-water test at Jack #2 in the Gulf of Mexico.

As the plot of cumulative returns by sector since May 11th shows, the Mining and Oil & Gas Production sectors have been dropping dramatically since 9/5/2006. We also highlight the Construction sector, which continues to show evidence that it has reached bottom - failing to respond negatively to any bad news.

Click on the thumbnail for full resolution chart of cumulative returns by sector.