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Weekly hotline Update #22 – 04-23-07

* The May Monthly Report will be sent Tuesday in place of the Weekly Hotline Update:

Earnings continue to come through strong and stocks are responding favorably. That is key for as long as the market continues responding well to good news the rally should continue on a near-term basis. The indices have come a long way in April and the action bodes well looking forward into the summer months. In this environment, the kind of stocks we follow with the best earnings and relative strength will continue leading the way higher.

From a broad view point, we saw a mild correction in early March. It was dramatically sharp but it was also remarkably short lived. Since the low the rally has also been dramatic, and on the PRS Time Plane we have a recent example of similar action to use as a guide post looking forward. In late 2005 the market dipped and then rallied strongly with the S&P 500 pushing to a new high. The time period is boxed in the chart below. Notice how the PRS_3-90 (blue) line flattened out after the initial surge higher. I expect similar behavior in the weeks ahead.

The correction in 2007 was extremely brief in terms of time. Because of the brevity our favorite metric, the PRS_3-90 line, didn’t have time to fall down in to the ideal buy zone of about 15%. However, during the rally the PRS_3-90 metric has improved with the market. This is where the historical comparison comes in handy. Notice how the PRS_3-90 line moved higher then went flat for a time, as did the S&P 500. This is more or less what are expectations are for the next few weeks. After the big run the major indices should need some time to consolidate and digest the big gains. Then we should additional upside performance return, as we move into the summer months.

During the consolidation period we should see a little bit of a shake out as investors shift from buying just about everything to focusing on the best stocks. And, as more and more investors start chasing the best stocks, they should demonstrate the kind of out performance we always look for. So, while the market may consolidate for a few weeks the prospects for strength into the summer months remains vibrant with the stronger stocks should demonstrating solid performance.

New Stocks

Over the past week seven stocks reached our entry criteria: PHRM, ASIA, ITMN, ITC, CHL, IBN, and MGM.

CHL (China Mobile Ltd Adr) is a Hong Kong based provider of wireless voice/data services in 31 provinces, regions and municipalities in Mainland China. We have all heard of the incredible growth in China and this is a direct play on continued growth in China. With an IBD EPS rank of 86, CHL has proven its ability to grow at a solid and steady rate. The stock peaked in February and it has been consolidating since between about 43 and 47 and is now showing strength.

With a push higher over the past week it managed to break its primary down trend when it moved above the $46 level. CHL is positioned to continue its upward strength. We are adding CHL to the Aggressive Portfolio

ASIA (Asiainfo Holdings Inc) is a leading Chinese provider of software and IT security products for the telecommunications operators in China. Like most of the strong China plays, they are showing great results are aided by a thriving Chinese economy. They continue to announce new contracts and business deals indicating a thriving business. ASIA reports earning on Wednesday morning before the market opens.

Like most Chinese stocks, it peaked in early February and corrected sharply. More importantly, it is recovering very quickly and with some help from a healthy earrings report Wednesday evening, it should continue it impressive price performance.

MGM (MGM Mirage Inc) operates 23 casinos including the famous MGM Mirage hotel and casino in Las Vegas, along with several other very well known resorts along the Las Vegas Strip. IBES Earnings: 2006a $2.06; 2007e $$2.36; 2008e $2.74. MGM has an IBD EPS ranking of 95, which tells us the company is very strong when it comes to its earnings record.

MGM peaked like many in February and has consolidated at a high level. The fall off of its (Red) 3-month PRS line is due to the stock consolidating sideways rather than the price falling, which is considered a healthier setup. MGM broke the obvious down trend line and is clearly working higher, though still within a consolidation formation.

IBN (Icici Bank Ltd Ads) is an India bank providing banking and financial services to corporate and retail customers, including commercial banking, investment banking, and insurance. IBES Earnings: 2006a $1.38; 2007e $1.70; 2008e $2.10. IBN has an IBD EPS ranking of 83. The solid EPS ranking in conjunction with the strong earnings estimates indicates a well established company with excellent forward looking prospects.

IBN is also in the recovery process. The main factor is it has broken its most obvious down trend line from its consolidation, and it is in a clear healthy up trend. Seeing IBN fall back below the 39 – 40 level would be discouraging, but the main focus is maintaining the uptrend. 

ITC (I T C Holdings Corp) is engaged in the transmission of electricity to local distribution facilities from generating stations. ITC has an IBD EPS ranking of 68. According to IBES: 2006a

ITMN (Intermune Inc) is a biopharmaceutical company focused on developing and commercializing innovative therapies in the pulmonology and hepatology, for the treatment of lung conditions and liver disorders. With negative earnings estimates, this is a biotechnology drug play. Recently we have seen a rush into this area as investors search for the next big drug. I personally am not a big fan of betting on FDA approval. When these types of stocks work, they payoff can be huge, but the risk of FDA rejection is tremendous. This is viewed as a very high risk stock.

PHRM (Pharmion Corp) focuses on acquiring developing and commercializing innovative products for the treatment of hematology and oncology patients. On March 22 PHRM presented favorable data for one of their developmental products. The company actually made money in 2005, but according to IBES earnings estimates, the company is not expected to return to profitability until 2009. Of course, with a drug company, that could change at any time. Again, the potential payoff for biotech drug companies is huge; however, the risk of FDA rejection is tremendous. This is viewed as a very high risk stock.

Stocks that look Attractive at this time: ANST (Ansoft); IGLD (Internet Gold-Golden); PSMT (Pricesmart Inc); GROW (US Global Investors Inc) consolidating strong run higher; CLB (Core Laboratories) is positioned to make new highs after reporting strong earnings; CVO (Cenveo); ANAD (Anadigics Inc) positioned for an upside breakout; LTBG (Lightbridge Inc) Consolidating after strong run; BRCD (Brocade Communications Systems) consolidating strong run; ICLR (Icon PLC) breaking out on strong earnings report.  

Stocks Removed from the Open Active Table

7 stocks saw their 12-month PRS rankings fall and have been removed from the Open Active Position Table. The most notable are TIE, which reached our entry criteria on June 2004 and advanced over 1400% during the near three years it held within our criteria. CECE was profiled in Hotline Update #10 on 1-16-07 when the stock was trading at $10.25. It reached our exit criteria on Wednesday the 18^th when it closed at $14, about 35% above its recommendation price. AVCI recently shot up like a rocket until their earnings report when they announced serious corporate changes. AVCI will record an exit price of Tuesday’s close and a gain of nearly 20%. All seven exits this month were for gains.

TIE, CECE, FSYS, VMI, and ZOLT were listed as expected to be removed from the Open Active Table due to challenging performance.

*** GYMB, LDSH, CASS, INAP, LQDT, STKL, are on the bubble and may drop from the Open Active Table over the next one to three weeks.

Open Actives of Interest

The table below shows the top section of the Open Active table, which currently has 150 stocks on it. (See April monthly report for the full list.) Stocks shown are either close to being removed from our open active table (shown in red) or are within our entry criteria and shown in green.

Stocks shown in green of interest: CHINA, RBN, AOB, CHTR, TELN, ZOLL, CNS, JST. Other Open Active Stocks not shown: ANST, GROW, IAAC, JLL, CVO, WFR, ANAD, NUAN, AKS (on a pullback), LTBG, IGLD, GSOL, PSMT.

Model Portfolios

ICLR reported earnings of 42¢ vs consensus of 39¢ and the stock reacted positively.

LVLT (-22¢) and SMSI (17¢) report earnings Thursday after the close.

We will continue holding LVLT through earnings as it remains at the $6 support level.

• We are Closing the GHDX position and adding two new longs, LTBG and JST.
• Buy 300 JST @ 20.91
• Buy 400 LTBG @ 17.26
• Sell 300 GHDX @ 17.63

Our second portfolio is a more aggressive portfolio, which will hold 35 to 45 positions once it is time to get really aggressive. It is based on a $500,000 initial account value and was launched on February 13, just two weeks before the market peaked.

In the aggressive Portfolio, LVLT is viewed the same as in the conservative Portfolio. TWGP saw its PRS_12 fall below 75 and it was removed from the open Active Table on April 9. However, due to the stocks historical tendency to drop briefly we held the stock and it recovered. Its PRS_12 ranking is once again back above 75. If it falls below there again we will move on.

• In the Aggressive Portfolio we are making several changes:
• SELL 350 OMX @ 52.03 to close the position.
• SELL 1000 ACGY @ 21.10 to close the position
• Buy 300 CHL @ 46.34
• Buy 200 MGM @ 69.66
• Buy 3500 CHTR @ 3.26
• Buy 500 ZOLL @ 27.37
• Buy 1000 BRCD @ 10.05

These changes bring our exposure up near 59%.

Our aggressive portfolio was launched on February 13, 2007 and we continue building up towards a full portfolio.

The run higher in April has been tremendous and we have seen a number of our Open Active stocks lead the way higher. Plus, we saw some very nice earnings reports Tuesday morning that gave a couple of our favorite stocks a nice lift. Earnings season continues at a heavy pace for the next few weeks and we continue to expect solid results. When strong stocks report great earnings, it is a powerful combination that often results in new highs.

And if you ever wonder why you ride the carousel
You do it for the stories you can tell.

Jim Patterson