wall street nuggets

Monday, October 30, 2006.

EMISPHERE TECHNOLOGIES [EMIS] dropped 23.8% closing at $6.77 after releasing what appeared to be rather promising results from its 90-day Phase 2 study of its oral insulin product for the treatment of Type 2 Diabetes Mellitus. Essentially, the study concluded that the treatment was effective at the 10 mg, four times a day, dosage level without the need to frequently monitor blood glucose levels or to titrate the dose for any reason. At two lower dosage levels (5 mg 4 times a day, and 10 mg 2 times a day) the response was not statistically significantly different from the placebo response. No adverse reactions were noted at any dosage level. On balance, we would have to conclude that the test results should have been received positively and assuming that oral delivery of insulin has a huge advantage over the needle delivery, it seems possible that the poorly worded press releases might have led some casual readers to conclude that the efficacy of the treatment was being called into question. If so, this should be a great opportunity to buy.

TENET HEALTHCARE CORP [THC] tumbled 10.6% closing at $7.42 following an announcement that it expects to report on November 7^th a net loss in the range of $82 to $92 million (or $0.17 to $0.20 per share) for the quarter ended September 30^th. The consensus estimate had been for a loss of $0.01 per share. THC was the weakest member of the Healthcare sector which was down 0.4% for the day.

ALPHA NATURAL RESOURCES INC [ANR] slipped 8% closing at $15.42 on Monday with all kinds of bad news. Not only were oil prices down sharply, but the company points to lower productivity in some of its deep coal mines and rising costs, as it cut its estimate for 2006 earnings from $1.50 to 1.91 per share, to a new range of $0.90 to $1.14 per share. The consensus estimate had been for $1.63 per share.

NUANCE COMMUNICATIONS INC [NUAN] raced ahead 7.8% closing at $10.91 in the heels of PR on the Amazing Race, pitting the human world champion of text messaging against new Mobile Dictation voice recognition technology from NUANCE COMMUNICATIONS. Taking only 16.32 seconds, the software blew away the human record of 42.22 seconds.

STEMCELLS INC [STEM] rose 7.9% closing at $3.15 possibly on a recommendation by Market-Pulse.com. No other events of note.

IOMEGA CORP [IOM] hit a 52-week high moving up 11.9% to close at $4.03 with no news of note other than a continued favorable response to last weeks announcement of quarterly results.

AMERICAN POWER CONVERSION [APCC] surged ahead 26.4% closing at $30.02 on the news that it had agreed to an acquisition by the French company, SCHNEIDER ELECTRIC for $6.1 billion or $31 per share. The deal is expected to close in the first quarter of 2007, pending approval of APPC shareholders and regulatory approval. No need for battery backup here.

TRUSTREET PROPERTIES INC [TSY], a REIT specializing in fast-food restaurant property, was up a sharp 35.7% closing at $16.97 after announcing that it had agreed to an acquistion by GE Capital Solutions valued at $3 billion including debt. Each share of TSY is being valued at approximately $17.05, for a total of $1.15 billion cash.

The Daily Sector Performance Chart

The average gain for Monday in the SI Universe was 0.35% with 59.1% of the members posting positive returns for the day. The big losers for the day were Mining (down 1.8% on average) and Oil & Gas Production (down 1.1% on average).

This was a relatively strong week for the large and mid-cap stocks, with the average of daily returns for the three largest bins (ranks 1-500, 501 to 1000, and 1001 to 1500) all posting cumulative returns of about 1% for the week.

Thursday was best for the micro-caps and of course Friday was grim across the board.

The announcement that the GDP grew only 1.6% in the third quarter (versus 2.1% expected) brought the bears out of hibernation. Also, a Goldman Sachs report claiming motherboard demand was falling off a cliff hit the computer and semiconductor sectors pretty hard. This double whammy on Friday, definitely cooled off the markets. On balance, as the third quarter results roll in, they appear to be encouraging for the most part, and while I personally expect a rather harsh landing in the first half of 2007, most corporate balance sheets should be able to weather the storm. We may not appreciate the bump in the year ahead, but I do believe that the correction will be very much appreciated about 5 years from now.

VERTEX PHARMACEUTICALS INC [VRTX] vaulted up 17.6% closing at $40.66 when it announced some very encouraging results in the treatment of hepatitis C. VERTEX’s investigational hepatitis C virus (HCV) protease inhibitor in combination with pegylated interferon was reported to have reduced HCV RNA below detectable levels in 24 of 26 patients treated in early-stage clinical trials.

VISICU INC [EICU] rose on cue 16.4% closing at $8.75 following a strong third quarter. The company reported revenue of $8.2 million, up 68% over the same quarter last year. The company also reported a swing to profitability, with a GAAP operating income of $2.0 million, compared to an operating loss of $35,000 for the same period last year. Net income for the quarter was $0.07 per diluted share, versus a consensus estimate $0.04 per diluted share.

NETGEAR INC [NTGR] LANded up 16.2% closing at $27.48 following a great quarter. Earnings of $0.37 per share easily topped the consensus estimate of $0.32 per share and third quarter net revenue of $151.6 million beat the consensus estimate of $140.4 million. The company projects fourth quarter net revenue to be in the range of $153 to $160 million, compared to the current estimate of $148.27 million. With 22% quarterly growth (year-over-year) and a forward P/E of 19.4, this still looks like a buying opportunity. I’m probably somewhat influenced also by actual bad experiences with some competitive products.

XM SATELLITE RADIO HOLDINGS INC [XMSR] up a sparking 13% closing at $11.94 on a variety of rumors and speculation and a possible short squeeze. Fundamentals here are still not compelling from my perspective.

DECKERS OUTDOOR CORP [DECK] stepped up 9% closing at $53.87 with strong Q3 results and an upgrade by Cowen & Co. from “Neutral” to “Outperform.” Third quarter earnings of $0.83 per share easily topped the consensus estimate of $0.54 per share. UGG sales continued to outpace expectations. Simple and Teva brands are also showing solid growth. Believe the Piper Jaffray downgrade has not been digested yet, so some downside is likely on Monday. Some downward pressure already in after-hours trading.

INTERSIL CORP [ISIL] slipped 9.6% to close at $22.87, on news of the departure of President and COO, Lou DiNardo, who had just taken on the role of COO in January of 2006. While the public verbiage was polite and gracious, it provided little insight into the reason(s) behind the departure. More transparency is needed before considering this an opportunity in either direction.

SILICON IMAGE INC [SIMG] was battered down 17.1% to close at $11.77 after announcing earnings for the third quarter of $0.09 per diluted share on record revenue of $78.3 million, up 39.9% from the third quarter of 2005 and up 11% sequentially. The consensus estimate for earnings had been $0.21 per diluted share. If we add the stock-based compensation back into earnings but still exclude the other special charges, earnings would have come in at $0.19 per diluted share – still $0.02 below expectations, but not enough in our opinion to justify a 17.1% drop. The company also provided fourth quarter guidance that indicated revenue would decrease approximately 3% to 5% sequentially, due to normal seasonality for semiconductor sales. The company is now projecting that revenue growth for fiscal 2006 should come in at 32% to 34%, which is consistent with earlier guidance of 30% to 35%. Given the current P/E ratio of 32.6, this looks like an excellent buying opportunity.

NEXTEST SYSTEMS CORP [NEXT] tumbled 17.1% closing at $10.78 after announcing fiscal first quarter results that were not bad but providing guidance that failed to justify a high multiple. For the quarter ended September 23^rd, revenue was $26.859 million, up 3% sequentially and up 56% from the same period last year. Earnings for the quarter were $0.25 per diluted share versus a consensus estimate of $0.20 per diluted share. The major cause for concern would be new orders of $15.2 million, which the company interprets as being indicative of a slowing in the business environment. While the company should be able to ride through the slowdown, the dependence on relatively few customers is another cause for concern. About 29% of fiscal 2006 revenues came from a single customer (SANDISK). The new Magnum iCP test system for automated testing of CMOS image sensor devices was introduced earlier in the week and should extend the product line into a hot area, so that it is not so dependent on testing just flash memory. The stock was downgraded on Friday by Needham & Co. from “Buy” to “Hold.” Given the high multiple and customer concentration, this remains very speculative.

GEORGIA GULF CORP [GGC] plunged 18.5% to close at $21.93, hitting a 52-week low, after reporting disappointing earnings for the third quarter. Net sales for the quarter were $576.3 million, compared to $525.2 million for the third quarter of 2005, but well below the consensus estimate of $612.25 million. Earnings for the third quarter were $0.66 per diluted share, down from $0.82 per diluted share in Q3 2005, and once again well below the consensus estimate of $1.06 per share. Earnings shortfalls were attributed to higher raw materials costs and a loss of $0.08 per share attributed to a foreign exchange hedge related to the Royal Group acquisition, which was completed October 3^rd and therefore not yet a major factor in the financial results, except for the FX hedge. The stock was downgraded by BB&T Capital Markets from “Hold” to “Underweight” and by Citigroup from “Hold” to “Sell.”

The Daily Sector Performance Chart

With the wet blankets regarding GDP and motherboards, there was pretty much a 180 degree turnabout from yesterday. The average loss for the day was -0.89% with only 22.7% of the members of the SI Universe posting positive returns for the day. The big loser was Construction (down 1.9% on average). While not much to write home about, Mining was an outlier in the positive direction (up 0.3% on average).

There was strength across all sectors on Thursday (except Railroads, which had a great run yesterday). But what we really like to see is the thick tails in the distribution of market returns – this is where the real opportunities are to be found. And on this particular day, the landscape is littered with opportunities! I have no hope of getting through the whole list, but rest assured, there are nuggets almost everywhere!

RENOVIS INC [RNVS] went into shock, plummeting 75.9% to close at $3.43 after announcing that a pivotal Phase III study of its NXY-059 new drug for the treatment of strokes failed to demonstrate any statistically significant improvement over placebos. While ASTRAZENECA will be discontinuing the development of NXY-059 following the Phase III failure, RNVS also has ongoing partnerships with PFIZER and GENENTECH that have some hope of success. The company is in reasonably sound shape with $104.7 million in cash and cash equivalents, and is deriving some revenue from the PFIZER partnership. For the first 9 months, revenue has been about $8.3 million, resulting in a net loss of $20.4 million. Since no revenues were expected from NXY-059 until 2008, it seems that the 75.9% drop is probably excessive, and that, while very speculative, the research that the company is doing for GENENTECH to discover and develop anti-angiogenesis drugs as well as drugs that promote nerve re-growth will be very exciting if it bears fruit. Also, the R&D for PFIZER into small molecule compounds targeting the vanilloid receptor, focusing on treatments for pain, also appears to be going well given the $1.5 million milestone payment in the second quarter. High risk – but interesting potential.

RED HAT INC [RHAT] tumbled 24% closing at $14.83 on Thursday, and this observer will have to recuse himself from commenting on the situation - at least until some dust settles.

COGENT INC [COGT] dropped another 19.5% closing at $10.37, impacted more today by the downgrade by Stanford Research from “Buy” to “Hold.” Having reached a 52-week low with a P/E ratio of 19.5, it is very tempting, but there is some manipulation and/or leaking news that calls for patience until there is more transparency.

THESTREET.COM INC [TSCM] slipped 14.8% closing at $10.38 after announcing third quarter results that met earnings expectations and beat the revenue expectations. Given some disappointment in the growth of subscription sales, THESTREET.COM is switching more to an ad generated revenue model and also focusing on acquisitions to fuel growth. However, looking at the way the new GOOGLE [GOOG] beta: http://finance.google.com/finance dominates the referral report for www.wallstreetnuggets.com, the whole space is likely to get very intense very soon.  Much more pressure on YAHOO!

TRIQUINT SEMICONDUCTOR INC [TQNT] tumbled 11.8% closing at $4.62 following the release of third quarter results. Revenues from continuing operations for the third quarter were $103.3 million, up 37% from the previous year. Earnings were $0.06 per diluted share, up from $0.02 per diluted share for the same period last year. Revenue guidance for the fourth quarter was projected to be in the range of $108 to $112 million, which is in line with the analysts’ expectations, and earnings were projected to be in the range of $0.06 to $0.08 per diluted share (excluding equity compensation expenses), in line with the consensus estimate of $0.08 per diluted share.

FORMFACTOR INC [FORM] fell 9.2% closing at $38.95 following the release of third quarter results and new guidance. Earnings came in at $0.33 per diluted share (subtracting $0.06 per share for SFAS 123R related expenses), which was in line with expectations, on revenues of $96.8 million, up 55% from the third quarter of 2005. Given the relatively high P/E ratio of 36.9, the opportunity here may not be compelling, but it appears there is some upside potential.

COVANCE INC [CVD] dropped 8.7% closing at $59.42 after reporting third quarter financials. The company reported earnings of $0.55 per diluted share (excluding an income tax gain) compared with $0.45 per diluted share for Q3 2005 (after subtracting SFAS 123R expenses), for a 23.6% increase year-over-year, which was in line with analysts’ expectations. Because the rate of revenue increases has been declining somewhat, the stock was downgraded by Bear Stearns from “Outperform” to “Peer Perform.” With a P/E ratio of 29.4, and a remarkably consistent growth from May 2003 to the present, it appears that Thursday’s drop could represent a good buying opportunity.

The Daily Sector Performance Chart

As noted above, it was a very positive day in the markets. The averge gain in the SI Universe was 0.98% and 71.1% of the stocks posted positive returns for the day. The big winner on Thursday was the Paper & Wood sector (up 2.6% on average), led by CHAMPION ENTERPRISES INC [CHB] (up 10.4%), AMERICAN WOODMARK CORP [AMWD] (up 7.2%), BOWATER INC [BOW] (up 5.9%) and SKYLINE CORP [SKY] (up 5.0%).

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

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

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

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

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

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

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

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

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

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

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

The Daily Sector Performance Chart

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

BRINKER INTERNATIONAL INC [EAT], which either owns, operates or franchises some 1.662 restaurants under the names of Chili’s Grill and Bar, Romano’s Macaroni Grill, Maggiano’s Little Italy, and On the Border Mexican Grill and Cantina, was very much on fire, shooting up 17.6% to close at $46.50 per share. The reason of course was some very hot first quarter (fiscal 2007) numbers. Despite the fact that same store sales were down 2.1% (gasoline prices), smart expansion and controlled costs, generated earnings of $0.57 per share for the quarter, versus a consensus estimate of $0.46 per share.

CENTENE CORP [CNC] shot up 26.6% closing at $23.10 after reporting very strong third quarter results. Third quarter revenue was $631.2 million, easily topping the consensus estimate of $615.63 million and earnings from operations (excluding a non-cash impairment charge related to the loss of a Kansas contract) were $0.31 per diluted share versus the consensus estimate of $0.28 per diluted share. Guidance for the fourth quarter and fiscal 2007 was very bullish. For the fourth quarter revenue is projected to be in the range of $685 to $690 million versus a consensus estimate of $678.05 million. The projection for fourth quarter earnings is $0.38 to $0.43 per diluted share versus the consensus estimate of $0.35 per diluted share. For fiscal 2007 the company is projecting revenue of $2.73 to $2.83 billion versus a consensus estimate of $2.71 billion, and earnings of $1.51 to 1.61 per diluted share versus the consensus estimate of $1.33 per diluted share.

Several Online sector stocks have been reporting very strong fourth quarters. TRAVELZOO INC [TZOO] surged 19.2% closing at $38.62 and NETFLIX INC [NFLX] jumped 18.6% closing at $27.37, after reporting strong third quarters. Of course AMAZON.COM [AMZN] reported after the close but given the pop in after hours trading, it should also do very well tomorrow.

U.S. steel maker, NUCOR CORP [NUE], bolted up 11.7% closing at $61.58 amid rumors of becoming a takeover target.t

TITANIUM METALS CORP [TIE] surged steadily during the day up 9.1% to close at $32.04, apparently in anticipation of strong third quarter results. We’ll see.

COACH INC [COH] charged ahead 7.9% closing at $39.21 on very impressive first quarter (fiscal 2007) results. Earnings were up 40% at $0.34 per share versus a consensus estimate of $0.31 per share. Net sales for the quarter were $554 million compared with $449 million for the same period last year, easily topping the consensus estimate of $542.44 million.

NEUROMETRIX INC [NURO] was hammered on Tuesday, closing down 29% at $14.10, as concerns mounted over insurance coverage for the NeuroMetrix test for nerve damage (e.g. carpal tunnel syndrome), called NC-stat. This led to a downgrade by Susquehanna Financial from “Positive” to “Neutral,” at about 11:30 a.m., which coincided with a drop of about $4 in the price of the stock. The reluctance of insurance companies to cover the test apparently relates more to the issue of using standard billing codes to report the NC-stat treatment. Given FDA approval and high correlations with “gold” standards like EMG and MRI studies, it appears that the device will inevitably find some market equilibrium pricing that is acceptable to the insurers. The diagnosticians must find the speed and ease of the test extremely attractive. Given some compromise being likely, it sounds like the reaction was probably too extreme and that this is probably an interesting buy opportunity (forward P/E of 25.6 with 73% year-over-year quarterly revenue growth).

SIGMATEL INC [SGTL] tumbled 12.9% closing at $4.87 after reporting third quarter results. While the company reported GAAP income of $0.32 per share, this was due to the sale of products in its PC audio line. Excluding special items, there was a non-GAAP loss of $0.30 per share, compared to a non-GAAP profit of $0.18 per share for the third quarter of 2005. The consensus estimate had been for a loss of $0.31 per share, so the actual result was slightly better. The consensus revenue estimate for the third quarter had been for $39.8 million, and actual third quarter revenue was $45.0 million, beating expectations. So of course it was the guidance for the fourth quarter that sent the price tumbling. Fourth quarter revenue is projected to be in the range of $41 to $46 million with a non-GAAP loss of between $0.29 and $0.23 per diluted share (assuming 35.5 million diluted shares outstanding and an effective tax rate of approximately 23%). As a result of the sale of the PC audio products, the company has already reduced headcount and expects to cut another 60 positions in the fourth quarter. Meanwhile, the proceeds of the sale are being invested in new portable multimedia products. We don’t expect any significant upside until July-Oct 2007, once the company reaches break-even and some new products have been released.

ARENA PHARMACEUTICALS INC [ARNA] dropped 10.1% closing at $15.20 after a downgrade by AG Edwards from “Buy” to “Hold.” With 11 “Strong Buy” or “Buy” ratings to only one “Hold,” and some strong new drug candidates: lorcaserin hydrochloride for the treatment of obesity and APD125 for the treatment of insomnia, this stock remains a very strong speculative buy and Tuesday’s drop seems to suggest a buying opportunity.

MICROSEMI CORP [MSCC] yielded 8.4% closing at $16.82 on the news that it was acquiring Israeli based POWERDSINE LTD. in a deal valued at $245 million ($168 million net of cash). MSCC expects the acquisition to be dilutive to earnings for the first 12 months and accretive thereafter.

DEXCOM INC [DXCM] dropped 7.8% closing at $9.03 after reporting disappointing third quarter results. The company reported a loss of $0.48 per share for the quarter compared to a loss of $0.25 for the same period last year. The consensus estimate had been for a loss of $0.41 per share. On the positive side, it might appear the company is close to becoming cash flow positive. Cash and cash equivalents at the end of the third quarter were only about $775 thousand less than at the end of the second quarter. However, with revenues still well under one million, and a net loss of the third quarter of $13.4 million, it appears there is a long way to go before cash flow break-even. The company is aggressively building up its sales force with SG&A up by about $2 million over the second quarter. The fourth quarter should provide some insight into the ramp-up time for new sales folks. The major question is the extent to which continuous glucose monitoring of diabetics is perceived as necessary or worth the added expense. Sequential revenue growth was about 76% for the quarter, which is interesting, but we really need at least one more data point before modeling this.

The Daily Sector Performance Chart

The average loss for the day was a mere .04% for the entire SI universe of 3,565 members, with 43.3% posting positive returns.

The big gainers on Tuesday were the Mining sector (up 3% on average) and Oil & Gas Production (up 2.1% on average).

WM WRIGLEY JR CO [WWY] rose 13.7% to close at $53.23 following the announcement that William D. Perez (formerly President and CEO at Nike) had been chosen at President, CEO and a member of the Board of Directors. This move marks the first time the company has selected someone from outside the family to serve as President and CEO. Bill Wrigley, Jr., will continue as Executive Chairman and Chairman of the Board of Directors. While Mr. Perez has a very strong track record, it is not enough by itself to justify the rise in the stock price. The third quarter earnings announcement was also quite impressive at $0.53 per share ($0.57 excluding restructuring charges and stock compensation expenses) significantly topping the consensus estimate of $0.51 per share and undoubtedly also contributed to the upside. With both announcements coming before the opening bell, we can’t break down the impact of the third quarter results versus the appointment of Mr. Perez. So, at this point, we do not see any inefficiencies in the price.

COGENT INC [COGT] tumbled 11.5% closing at $13.02 amid rumors of not getting an EU contract and possibly poor quarterly results, but unfortunately nothing really convincing. Given the bullish prospects in general for the identity management sector, it appears best to ignore the rumors and wait for COGT to stabilize before establishing a long position.

TALK AMERICA HOLDINGS INC [TALK] slipped 10.7% closing at $7.86 on the news that SUN CAPITAL SECURITIES GROUP LLC would not be making an offer to acquire the company at a price greater than the $8.10 price specified in the September 22^nd agreement with CAVALIER TELEPHONE CORP. Since the latter is still in place, it appears there must still be at least still be a high probability 3% gain at Monday’s closing price.

ARKANSAS BEST CORP [ABFS] fell 7.6% closing at $41.62 after reporting disappointing third quarter results. The company reported third quarter revenue of $507.3 million, compared to $463.3 million for the same period last year. This actually beat the consensus estimate of $503.3 million for the quarter. However, the third quarter income from continuing operations of $1.24 per diluted share was 22% below last years third quarter income of $1.58 per share (which included a gain of $0.38 per share on the sale of properties to G.I. Trucking Co.) and well below the consensus estimate of $1.31 per share. Also of concern, was the comment in the press release that, “Since the end of the third quarter, the percentage change in ABF’s total tonnage per day is running in the mid-to-high single digits below the same period last year.”

FOREST LABORATORIES INC [FRX] fell 5.7% closing at $48.54 and REPLIDYNE INC [RDYN] was crushed, dropping 45.4% to close at $5.59 per share on the news that the FDA had issued a non-approvable letter for REPLIDYNE’s new drug application (NDA) for faropenem medoxomil, a new antibiotic. Apparently the FDA is recommending superiority studies for each of four indications for the new drug.  In the past, this type of study was not usually required for antibiotics. The good news is that no issues regarding safety concerns were raised. FRX and RDYN expect that a minimum of two years will be required for completion of the recommended clinical studies. While the reaction appears extreme, it is unlikely that a near-term event could offset the effect on RDYN so there does not seem to be an upside opportunity in the near to mid term.

HASBRO INC [HAS] was up a brash 8.7% closing at $25.33 after reporting a very strong third quarter. Net revenues were reported at $1.039 billion, compared to $988.1 million for the same period a year ago. The result easily topped the consensus estimate of $963.4 million. Net earnings of $0.58 per diluted share were up 23% over the same period last year and again easily topped the consensus estimate of $0.50 per share. However, this was largely explained by a very aggressive stock repurchase program. Net earnings for the quarter were reported at $99.584 million, representing an 8% increase over net earnings of $92.063 for the third quarter of 2005. Without the stock repurchase, earnings would have come in at $0.50 per share. Also benefiting the price was an upgrade by Wedbush Morgan from “Hold” to “Buy.” Assuming that the reason for the earnings growth was not fully understood, I would be reluctant to view this as a strong long opportunity, although the dividend yield is quite attractive. Too many of the brands in the total package seem to be aging.

AVI BIOPHARMA INC [AVII] drifting higher 10.3% closing at $4.82 driven by speculation concerning some upcoming news at the end of the week or perhaps an actual news leak. Somewhat concerned regarding the percent of insider shares sold in the past six months. However, the price rise over the past 3 days on unusually high volume has been 29%! Someone knows something.

METASOLV INC [MSLV] surged 20.8% closing at $4.01 following its announcement that ORACLE CORP [ORCL] has agreed to acquire METASOLV for $4.10 per share or approximately $219.2 million. It is interesting to note that ORCL also closed up for the day, contrary to the usual market reaction to an acquisition, indicating that the synergy between MSLV and Oracle’s Communications Global Business Unit is apparent to others as well.

CONNETICS CORP [CNCT] jumped 45.8% closing at $17.07 after announcing that it had agreed to be acquired by a privately held pharmaceutical company, STIEFEL LABORATORIES INC., which also specializes in dermatology products. The deal is being valued at $640 million or $17.50 per share, which represents a 49% premium to the closing price of CNCT last Friday and about a 62% premium to the average closing price for the past four weeks. Despite the fact that there are obvious synergies that are very compelling in this acquisition, one is tempted to assume that the premium was too high. However, the P/E ratio at 25.6 is still quite reasonable, leading one to assume there are probably some other very attractive buyout targets in the specialty pharmaceutical area.

The Daily Sector Performance Chart

The average gain for the day across the 3,566 companies in the SI Universe was 0.17%, with a strong concentration of gains in the large cap stocks, and 56.6% of the members posting positive returns for the day.  The big loser today was the Construction sector (down 1.2% on average) and the big winner was Retail (up 1.5% on average).

There was not too much movement across the market cap bins over the course of the past week.  (Note the y-scale is not that large.)  Tuesday and Friday were down-days across the board.  Most interesting was the cumulative effect for the mid-caps (ranks 501-1000) for week, which was actually the only bin that had a negative cumulative return for the week.

SANDISK CORP [SNDK] sank 20.4% to close at $49.15 after reporting third quarter results that beat expectations, but generated concerns regarding pricing pressures that led to downgrades by Citigroup from “Buy” to “Hold” and by Oppenheimer from “Buy” to “Neutral.” Net income of $0.51 per share was reported for the quarter on revenues of $751 million, up 27% from the same period last year. Excluding acquisition charges and the impact of stock compensation expenses, net income would have been $0.61 per share, where the consensus estimate had been $0.57 per share. It appears that concern about the decline in price per megabyte led to the downgrades and rather extreme drop in market value. Increasing price pressure reduced operating income from 27% of revenues in Q3 2005 to 21% of revenue (non-GAAP) in the Q3 2006, but this does not seem to justify the drop in stock price. Once again, this would seem like a good place to buy.

STAMPS.COM INC [STMP] tumbled 19.4% closing at $15.45 following the announcement of third quarter 2006 results. While earnings of $0.18 per share ($0.21 excluding stock compensation) increased 92% versus the same period last year and beat the consensus estimate of $0.19 per share (ex stock compensation), the guidance for the remainder of 2006 and 2007 fellow below analysts’ estimates. The company now projects revenue of $82 to $85 million for fiscal 2006, compared to the consensus estimate of $87.06 million, and revenue of $90 to $100 million for fiscal 2007, compared with a consensus estimate of $104.4 million. Given the projected revenue growth, it would appear the company now enjoys an appropriate valuation.

SENOMYX INC [SNMX] nosedived 16.4% closing at $15.24 after reporting rather distasteful results for the third quarter. The company reported a net loss of $0.17 per share which was slightly better than the consensus estimate of a loss of $0.19 per share. However, the third quarter revenue of $3.2 million fell considerably short of the $3.73 million consensus estimate. The stock was downgraded by First Albany from “Buy” to “Neutral.”

CATERPILLAR INC [CAT] tumbled 14.5% closing at $59.00 after missing third quarter estimates and being one of the first to admit that the housing slow down is likely to continue well into 2007. As we have observed earlier, housing starts are currently near equilibrium, but given the long period of excess inventory build, the full correction could take us a lot lower. Given the international demand and commercial construction needs, the impact of reduced residential construction on CATERPILLAR should be easy to handle and given the very attractive P/E ratio, CAT presents an attractive buying opportunity.

A leading provider of data integration software, INFORMATICA CORP [INFA], dropped 10.5% closing at $12.22, or $0.23 below where it closed on the first trading day of 2006, after reporting third quarter results. The company reported revenue of $78.9 million for the third quarter, up 21% over the same period last year, which was in line with a consensus estimate of $78.93. Net income for the period was $0.10 per share on a GAAP basis, or $0.16 per share, excluding share-based compensation, beating the consensus estimate of $0.14 per share. Apparently fourth quarter and fiscal 2007 guidance covered in the conference call but not in the press release, led to a downgrade by Wedbush Morgan from “Strong Buy” to “Buy.” Unfortunately, I can’t access the conference call through the company’s web site, so it’s hard to assess how far short of expectations (2007 revenue of $372 million = 14% growth) the new guidance is. I’ll reserve final judgment until I can get the new guidance.

RAMBUS INC [RMBS] dropped 8.6% on Friday closing at $16.71, following a press release after the markets closed on Thursday, indicating the internal investigation had determined that “a significant number of the stock option grants were not correctly dated or accounted for.” Apparently the period of greatest impact was 1998 to 2001. Preliminary estimates are that the compensation charges in connection with these stock option grants will be in excess of $200 million. Note that the price drops and trade volumes on Wednesday and Thursday morning are rather suspicious.

SYNAPTICS INC [SYNA] soared 16.5% closing at $28.06 after announcing fiscal 2007 first quarter results. While the revenue and earnings results topped consensus estimates, they were certainly not spectacular. However, the company’s guidance for the second quarter of 2007 called for sequential revenue growth of 25% to 30%, which dramatically topped the consensus estimate of about 8% sequential growth.

VICAL INC [VICL] took wing soaring 9.9% closing at $5.88, following its announcement that a single injection of VICAL’s Avian Flu DNA vaccine provided 100% protection in a population of ferrets against the highly virulent H5N1 virus. Other conventional vaccines under development have so far required two or more doses in humans to provide adequate levels of protection.

GOOGLE INC [GOOG] continues its success in monetizing internet search queries and with the recent acquisition of YouTube is presumably well poised to benefit from the exploding video capabilities of the web. By once again beating consensus estimates the stock advanced 7.9% closing at $459.67 and looks like it should soon take out $600. Hope you’re enjoying our little AJAX experiment with Google maps in the sidebar. GeoFinancial views by sector are usually available by about 6 p.m. Eastern Time – long before this blog goes to bed.  BTW, do you see the real power of the tool when the U.S. map is replaced by another grid?

CONTINENTAL AIRLINES INC [CAL] soared 7.4% closing at $35.05 following a strong third quarter result, beating expectations for earnings and revenues, coupled with a raising of its issuer default credit rating by Fitch Ratings from “CCC” to “B-“ (still junk bond status). A big drop in oil prices was also favorable.

Daily Sector Performance Chart

The markets took a bit of a breather on Friday, posting an average loss of -0.51% for the day, with only 33.1% of the 3,570 stocks in the SI Universe posting a positive return for the day. The generally strong earnings reports in the Airlines sector coupled with lower oil prices led to a strong average return for the sector (up 1.7%) and Mining at the other extreme gave back some of the huge gain seen yesterday (down 2.8%).