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nsomniyak

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nsomniyak

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Re: None

Friday, 09/14/2007 8:43:21 PM

Friday, September 14, 2007 8:43:21 PM

Post# of 971
Taking my own challenge, here is why I like my PSL7 picks...

First of all, I think there are two macro issues related to PSL7.

The first is earnings reporting. By far, the fiscal cycle with most companies reporting has fiscal calendars ending on calendar quarter end--March, June, September, December. That means that for PSL purposes we will see quarterly (but very few annual) reports hitting around Nov 15 for the quarter ending September 30. In PSL terms that means that there will be a month of play in stocks acquired just before or just after those earnings come out--way more than was the case in PSL6, when then Aug 15 reports came out right around the "trading deadline" 2 weeks before the end of the contest.

More importantly, I think a LOT of VMC and ZCC stocks are going to get hit be merciless tax selling, which will certainly have an impact on the contest. There are a number of stocks I really like, and own, but am avoiding in PSL7 given the strong possibility of tax selling driving them down. So, while in real life I am looking to raise funds and add to stocks like PTSC and NTRZ and ANSW and DIGF if and when tax selling hits them, they are not on my list for PSL7. Linking this to the earnings season above, I think any stock that misses earnings reported in mid-November will get sold off hard.

These two things suggest to me that I want to keep some powder dry for the last 6 weeks of the contest, and perhaps I should select initial stocks I feel can get me to that point in decent shape. In PSL6 I had to burn a couple transactions early just to stop the bleeding on a couple losers I had thought might make an early-contest move.

So--on to my picks.

BWR.TO - with a tip 'o the hat to the metal heads - For me in PSL7, Breakwater is purely a takeover play. There is a lot to suggest that big metals companies have lots of cash and will be doing some Christmas shopping. BWR sits at the top of most lists (among VMC-sized companies, though buyers may be after bigger game). I wanted some exposure to this, with a VMC-eligible stock, as I had another company in mind for my wild card (read on). In real life I plan to re-enter BWR via the warrants for more leverage. If there is a wave of buyouts in the miners BWR should get a rise. However, I expect that the real metal-heads will have 3-4 such candidates in their PSL portfolios so I would be falling behind with only one. Hopefully, BWR will be gone before December 15--that is my PSL thesis. Best case--HBM buys BWR and then a bigger fish buys HBM. Otherwise, there might be some tax selling.

CSKI.OB - China Sky One Medical - All of the numbers on this Chinese medical stock are incredible--except the trading volume and spread. They are increasing revenues 100% y-o-y and earned .34/share last quarter (vs. year ago loss). Annualizing that I get a forward PE under 10 even if there was no further growth. Not very many shares out--the .34 was "per diluted share" which indicates a fully diluted share count of 12-13MM shares. Based on the thin trading the float would be far smaller than that. CSKI recently issued guidance for this quarter--still growing strong. http://biz.yahoo.com/prnews/070822/cnw011.html?.v=35 Similar guidance last quarter ultimately proved to be spot-on when figures were released. Nice biz, so far unrecognized. This is an intentionally un-sheepish pick. I always like to have one or two stocks in my PSL portfolio that are brand new and highly unlikely to be in others' portfolios. I may have mentioned it a while back on the VMC board--not sure. Definitely worth a look. In some ways CSKI reminds me on INRB--profitable, in a big growth area (China vs. tar sands), yet under the radar and thinly traded and with a wide spread. Like INRB, any decent buying could move CSKI pretty sharply. To really help in PSL7, CSKI just needs to get noticed. It is entirely possible that the stock will just sit there while the company makes more and more money this quarter. One other thing--though I really like the CSKI story and numbers as noted above, I should note that CSKI is also something of an act of faith for me, as I have had triple-digit returns on the last 3 stocks I bought from the same source who recommended CSKI to me and I bought CSKI with a portion of those profits. One of those stocks, IRAE (now CTFO) served me very well in a previous PSL contest. CSKI has much better numbers and a more transparent business than IRAE did when I had it in PSLx.

DPDW.OB - I really like Deep Down. It is one of my largest holdings and I continue to add to that position. DPDW is consolidating the recent acquisitions (Electrowave and Mako) and the numbers look very strong. Of not, last contest DPDW started as a wild card, but reported a profitable quarter since then and is now vmc-eligible. DPDW just got a recommendation (with a 1.50 target) from Dahlman Rose, a specialty investment banking and research firm that focuses on offshore. DR has a great track record of attractive financings for companies they get involved with, almost always brining in big-time financial houses as partners. No announcement of a financing imminent here, but that would not surprise me given the high-powered CFO DPDW now has. We have seen some big block trades and other suggestions of institutional accumulation of late. I would not be surprised if DPDW lost that .OB, possibly soon. Operationally this does not look like a bulletin board stock, and DPDW may be one of the highest-quality bbs stocks out there. Last contest DPDW took a run to .90 (I should have frozen it there!) and I think there is a good chance of repeating that--maybe more if DR and DPDW announce a formal relationship. NOTTE: I wrote this earlier in the day, then came home to see that DPDW had moved from .66 to .75 in the last half hour of trading! I have no idea why. I could have uysed that 12% on Monday! Which one of you turkeys bought a teeny position in my favorite stock at 10% over the bid going into the close? :)

EGMI.OB - Electronic Game Card - Very profitable company (last quarter NET margins were around 40%) after being development stage last year. Much like they did last quarter, EGMI should "whomp the comp" when September earnings are posted. Probably will show revenues up 500% y-o-y and a nice profit of 600-700K vs. a $2MM loss. September quarter will not quite give them a ttm profit, but they will be on the cusp (when they report December, look out, as then EGMI will show a black ink bottom line for the trailing 12 months and will hit a lot of screens). I am thinking EGMI will catch some eyes this quarter. Two other things I like about EGMI right NOW. , EGMI recently announced a deal for their game cards to be given away as loyalty awards (by taxfreeshopping.com). Deal size was not announced, and though I suspect this is small, I like the idea of a whole new sales channel (give-aways) and wonder what would ever happen if they could hook up with on one of the top-tier sites. Probably too late to see anything with someone like Amazon or eBay this Christmas season, but maybe if taxfreeshopping.com has good results…? Finally, EGMI is sitting just under a double top at .50 or so--if it DOES get through that there would be clear sailing all the way to a dollar and there is no foreseeable tax selling.

FRPT - Force Protection - I am a little concerned that FRPT will see some tax selling, as it was higher for quite a while earlier this year. That said, I still think there are major MRAP contracts to be awarded and FRPT ahs been expanding production capacity as though they believe they will get a big piece of the pie. My scenario is that those contracts are awarded, the dust settles, and the majors on the inside and outside of those awards go shopping, either to consolidate positions or get in the game. I am hoping (NOT predicting) that FRPT gets bought out during the PSL7 timeframe. It could happen. If it doesn't watch out for that tax selling I mentioned, as FRPT has traded at higher-than-current prices for much of this year. Yahoo shows FRPT at 66% institutional ownership. That reflects a major increase over the last year. Some of those guys think that FRPT will be bought, and almost all of them would support a takeover at a reasonable price.

MRDAF.OB (wildcard) - Meridian Medical. This is my "VMC DD" pick for 2007, and has done very well, tripling from around .50 in January to 1.50 today. Things have been shaping up nicely, and I am looking for two key pieces of news--FDA approval (should be easy, as device is not invasive, though we have been "close" for quite a while--waiting for Godot, as it were) and a black ink quarter. Actually, I am hoping that MRDAF posts a profit during PSL7 (I think it very likely and they are very close) and that would allow me to pull in another wildcard stock--I have a lot of attractive wild card ideas but only one can be in PSL7 at a time. They did announce an endorsement deal with Roberta Flack on the Lipo-Laser, which indicates to me they believe they are very close to FDA endorsement. Hopefully there is more coming in that area--I have been saying for quite a while that they need some ":wide profile" celebrity endorsements. That actually indicates an important point about MRDAF--while they need FDA approval for doctors to use this and to sell through medical device channels in the US, even without FDA approval Lipo-Laser can still be sold into the "vanity" market here and can be sold (and is being sold) through overseas distribution channels, which MRDAF keeps adding. Yahoo shows a 52 week high of 1.75 for MRDAF, but that was intra-day a while back. MRDAF is pretty much at its high in the 1.50-1.60 range. No overhang for tax selling and clear blue sky if it breaks out.




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