We will kick off with a review of the charts for gold, silver and the gold bugs index, the HUI, in an attempt to see where we are now and just where we might go from here. However, to put the charts into context we need to take into consideration the surrounding political, economic and investment landscape. These are volatile times with the financial markets in turmoil as what were perceived to be sound and secure governments now toil under the strain of their own excesses. The borrow and spend philosophies are coming back like a bad penny, to haunt not just those who caused this mess, but also for the rest of us, who are expected to clear it up. The follies vary from mis-management to corruption, resulting in people taking to the street to protest the latest craze of austerity and belt tightening.

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Society, in general, has high expectations in terms of their standard of living and the mere thought of it heading lower is not acceptable to them. Take state pensions, for example, millions of people are expecting it to be there for them when they retire, however, the pensions cupboard is empty and therefore the concept of sitting back as the cheques roll in is well and truly dead in the water. We need to start protecting ourselves now, don’t wait, make it the number one priority to put your independence at the top of your ‘To Do’ list.

Taking a quick look at the above gold chart we can see that the sell off in gold prices of $60.00/oz has now steadied and gold appears to be set to continue its rally. Note both the 50 day and the 200 day moving averages are climbing gently in support. The RSI has turned north and the STO has just made a crossover, which is usually a positive sign.

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Next we have the HUI which is making steady progress despite the volatility and is now perched just above the 200dma. Looking at the technical indicators we can see the RSI has turned north just above the ‘30? level and that the STO has also turned up having dipped below ‘20?, again all positive for the gold and silver mining producers.

Turning to silver we can see that the pull back looks to have run its course so we are looking for silver prices to head to higher ground. The technical indicators are now out of the overbought zone thus reducing the selling pressure on silver and allowing it the space to resume its advance.

In conclusion we are of the opinion that the precious metals should once again be bought, gold, silver and their associated stocks. As a word of warning though, its still not clear to us whether or not the stocks will go down in the face of a broader market sell off should it occur. So go gently and make your acquisitions on a ‘layered’ basis. Finally, we are considering the purchase of a number of options trades which should be profitable during the next move up, which we believe to be imminent.

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The IPO was managed by Merrill Lynch / Bank of America (BAC) and Goldman Sachs (GS). With such a diverse retail and institutional platform, one would have expected the shares to be placed in the hands of long-term investors and priced at a discount to allow for an initial increase in the share price.  But the environment for retail stocks has been extremely difficult and institutional investors have been offloading risk at a steady pace this month.  At this point it seems that the selling shareholders got the better end of the deal – liquidating part of their position at $17.00 per share.

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According to the terms of the prospectus, there were roughly 16 million shares sold to the public of which 10.5 million were primary (sold by the company to raise  capital) and 5.5 million were sold by private shareholders.  However, when looking more carefully at the deal, this statistic is a little misleading…

Express essentially DID receive $170 million in proceeds from the deal which it used to reduce outstanding debt.  However, it should be noted that the outstanding debt is actually owed to several subsidiaries of the private equity firm that purchased the brand in 2007.  So after passing briefly through Express’s balance sheet, the funds will then be distributed to the selling shareholders in the form of a debt repayment.  Express will be left with $368 million in long-term debt and roughly $67 million in cash.  The pro-forma balance sheet has stockholders equity at $89 million – which implies a 413% debt to equity ratio – not exactly a solid balance sheet.

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But despite the shaky circumstances with which this stock began its publicly traded days, I expect EXPR to find a floor near $14 and begin to trade higher.  One of the primary reasons is because only a small portion of the stock was actually liquidated in the IPO transaction.  Sixteen million shares were sold to the public, but the number of shares outstanding is closer to 89 million.   That means Limited Brands and Golden Gate Private Equity still hold the majority of the stock and will see the market value of their investment rise and fall with the fortunes of the stock.

Once a private equity firm has begun to liquidate its position, they usually don’t wait too long to follow up by selling the remaining shares.  With the negative reaction to EXPR’s stock there is even more of an incentive for the company to find a “graceful” way of exiting this position.  So it may sound counter intuitive, but one of the best ways for Golden Gate to liquidate the rest of its position is for the company to step in and support the price of EXPR – and if they are going to take this action they need to act quickly!

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Supporting the stock at this time when the market is attempting to rebound will be key.  If EXPR begins to trade back towards the $17.00 IPO price and holds a stable pattern, then Golden Gate stands a better chance of selling its remaining shares in a secondary offering.  But if the stock is allowed to fall from here, there will likely be no market for quite some time.  So the stakes are high and the amount of capital at risk is not trivial.

It may be a little too cute on the trading side, but with retail names showing some relative strength over the past few days, I expect EXPR to be good for a trade higher.  The potential return is somewhere in the neighborhood of 10% to 12%.  But this can be painted against a relatively low-risk backdrop.  If I were to enter the trade later this week, I would place a stop just below $14.75 or so – exiting the trade if the rebound in EXPR doesn’t take place immediately.  Setting up a short-term trade in an improving market with capped risk is one of the better ways to play a short-term rebound and I think the general negative sentiment in the retail area could be temporarily lifted as the illusion of financial stability comes back into this market.

FD: Author does not have a position in any stocks mentioned in this article.

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Typically, when a cash acquisition takes place and the target company is bought out at a price above its current market value, the shares of the acquiring firm trade lower.  This is because the market has placed an expected value on the target company (represented by its former share price) and the acquiring company is paying a premium to complete the purchase.  The only way the market would reward the acquiring firm for paying a premium is if investors believe that the combination will be worth more than the sum of its parts.

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In this case, investors are pleased with the purchase and believe that Gentiva will be able to create a stronger company as a result of the combination.  The deal values ODSY at $912.3 million dollars and is expected to close in the third quarter.  Both of the companies’ boards have agreed to the deal and it is unlikely shareholders will oppose the transaction, given the positive effect it had on both company’s stock.

The Odyssey deal is not the first acquisition Gentiva has made this month.  Last week, the company acquired United Home Care Group – a private home healthcare firm based out of Louisiana.  For competitive reasons, the terms and conditions of this transaction were not disclosed.  UHCC had revenues of $7.8 million in 2009 so it is a relatively small bolt-on acquisition, but could be instrumental in helping GTIV build out its geographic footprint.

The combined company will provide hospice care to an expected 14,000 patients and will be active in 30 states.  Analysts are expecting combined annual revenue of $1.8 billion, and the most recent estimates are for earnings of $2.71 for 2010.  So at this point, shareholders are willing to pay just over 10 times earnings for what appears to be a very stable and well managed practice.

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Challenges To consider

There are two issues that need to be carefully weighed before making an investment in GTIV.

First, the company will need to raise a significant amount of debt capital to complete the transaction.  Since the deal is a cash transaction, GTIV will be borrowing an additional $1.1 billion and already has a guarantee from Bank of America (BAC), Barclays PLC (BCS), and the financing arm of General Electric (GE).  At this point it looks like the financing is a sure thing, but given the turbulence in the market I think investors should at least consider a small chance that the financing dries up if we have a severe dislocation in the financial sector.

Secondly, GTIV was one of four companies that received a letter from the Senate Finance Committee asking for information on the necessity of medical visits.  The implied accusation is that the company could have increased its number of visits in order to qualify for more Medicare reimbursements.  The home health industry is a necessary part of our healthcare system and actually saves money for the Medicare program, but the regulatory issues and the possibility for fines and restrictions should be considered.

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Given these two concerns, I still believe GTIV offers an exceptional value for investors.  If the company is able to complete the transaction, increase growth projections, and prove to regulators that its practices are sound; investors are likely to pay a higher multiple to own the company.  A PE of 15 would increase the stock by 50%, and if earnings projections are revised higher the gains could be even stronger.  Given the potential for growth and knowing the risks involved in owning this company, I will be looking for attractive spots to add a bit of exposure.

FD: Author does not have a position in any stocks mentioned in this article.

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Often, companies in a particular sector are all painted with the same brush for a period of months (or even years) until the dust settles and individual companies with strong business models are able to stand out against their competition.  With regulations regarding loans to students of for-profit education companies likely to be completed this year, investors may get the chance to see which of these companies are likely to continue to thrive, and which carry significant risk.

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At issue is the ability of graduates to find gainful employment and therefore repay student loans which are typically federally insured.  Grand Canyon Education Inc. (LOPE) will likely hold up well under this scrutiny and could rise sharply once the regulatory uncertainty clears.  Low tuition rates keep student loans manageable for graduates, and the fact that the educator has a campus with many of the social draws of a larger university helps student retention and graduate rates (which are likely to be a key measure under regulation)

Earlier this month, the company announced first quarter earnings which appeared to be very constructive.  Revenues grew by 61% to $89.3 million and earnings came in at $0.25 per share.  This is an increase of 127% over earnings from last year as enrollment continues to grow sharply.

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LOPE is in good financial condition with a cash balance of $97.9 million – up a full $34.8 million in just the last quarter.  Looking closer at the balance sheet, the majority of assets are tangible which increases the quality of the financial picture.  On the liability side, the largest current liability is “Deferred revenue and student deposits” which is essentially cash collected from students for services that have yet to be performed.  While properly classified as an accounting liability, the $45 million will almost surely flow to the income statement as the education company enters subsequent quarters.  The only long-term debt is roughly $25 million in notes payable.

The future looks bright for the company as management issued strong guidance.  In the second quarter enrollment is expected to grow to 36,500 to 37,500 – an increase of 32% to 36%.  Revenues should grow by 47% to 49% and EPS should be between 23 and 24 cents.  for the full year, revenue should fall in a range of $397 to $405 million, enrollment should finish the year between 47,000 and 49,000 and management expects to earn $1.21 to $1.27 per share.

We are excited about the future as we continue to match the needs of the changing economy to relevant programs that both traditional and non-traditional students continue to seek out and benefit from. ~Brian Mueller, CEO

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Shares of the stock are not particularly cheap, trading at a forward PE of 21.  But with the exceptional growth rate, analysts expect 2011 income to approach $1.68 per share in 2011 which puts the stock at a 2 year PE of 15.5.  Of course it is difficult to extrapolate growth out for several years, but with an exceptional student retention rate, it is easier to project longer-term earnings for LOPE.  Analysts are typically bearish on the education sector at this point due to the regulatory issues in play.  So it is likely that the current expectations are conservative and future growth could turn out to be much more attractive.

LOPE appears to be ready to break out of a tight range formed in the last few weeks.  Relative strength ratings have been improving as the market has been weak but LOPE has held its gains relatively well.  Buying at the current price near $26 with a stop around $23.50 would allow traders to set up a position with limited risk and the potential for much larger gains.  So despite the uncertainty in the education industry, LOPE looks to be a good trading opportunity.

FD: Author does not have a position in LOPE

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This transaction seemed bound to be a poor deal for investors who were really just funding Apollo’s exit.  And sure enough, the stock dropped from the offering price of $21 down to Wednesday’s closing price of $14.80.  That means investors in the actual IPO lost nearly a third of their capital over just about six weeks.  Of course, the economic weakness and concern in Europe has helped to speed up the decline.

Market conditions continue to improve, as we see increases in customer inquiries and order volumes.  Raw material prices continue to rise and metal prices are following.  ~Lourenco Goncalves, CEO

Analysts are expecting the company to earn $1.16 per share this year compared to a loss of 52 cents last year.  In 2011, the expectations are for earnings of $1.94.  So at the current price below $15.00, investors can pick the stock up for 13 times this year’s earnings and less than 8 times next year’s expectations.  Of course those estimates aren’t a given, but at this point the risks seem more contained with the stock trading at such a discount to the IPO price.

The prospect for the company to be acquired shouldn’t be overlooked.  With MUSA’s market cap now approaching a half billion (from above) the company is well within the reach of larger metal conglomerates wishing to increase their business lines.  Heck, Apollo Group could step in and buy the company again pocketing about $250 million and still owning the same company it started with before the transaction.

Fears of deflation and weak demand cannot be simply overlooked.  But traders who bought on the IPO have likely pressured this stock down to a place where it makes fundamental sense to own.  Investors will have to be patient, but could see a significant return if they weather volatility and hold the stock for 6 to 12 months.

High debt levels may continue to cause concern, but this is standard operating procedure for the capital intensive metal industry.  The company has a healthy level of inventories, productive property and equipment, and has reduced costs to allow for healthy cahs flow into the business.  So despite the macro headwinds, I would cover shorts at this point and consider picking a few spots to add exposure cautiously.

FD: Author does not have a position in MUSA

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The concerns in the solar industry are certainly valid.  Europe has been one of the primary champions of alternative energy and Germany & Spain have been especially beneficial with their generous programs to help defray costs for installing environmentally friendly energy sources.  Without these stimulus programs, the demand for solar products could be significantly cut – and with excess capacity in the industry pricing may continue to suffer…

But how far is too far?  The Claymore Global Solar Index (TAN) pictured below is off 43% from its 2010 high and many individual stocks have experienced much wider losses.  Investors in the sector appear panicked and willing to sell at any price regardless of the fundamental value of the individual companies.

This type of environment can create attractive opportunities for the scrupulous and patient investor.  While the trend is negative and selling  could continue, several stocks are entering a range where it makes sense to allocate a small amount of long-term capital with the possibility of realizing very large returns when the sector rebounds.

Trina Solar Ltd. (TSL) is off more than 40% in just the last three weeks.  At $15 per share, the company looks like a good risk considering earnings are expected at $2.12 for this year and $2.35 for 2011.  Even if these earnings levels were cut in half, the stock would still have a low multiple relative to it’s long-term growth prospects.

In the fourth quarter, the company shipped 163.7 MW of solar product and saw its revenue increase to $313 million (over $216 million in the fourth quarter 2008). Gross margins increased to 32.6% which is impressive given the fact that average sales prices per watt dropped from $3.61 in the fourth quarter of 2008 to $1.90 in Q4 2009.

Debt levels are under control with total debt of $585 million and cash on hand of $478 million.  In 2010, the company expects Germany and Italy to make up less than half of total sales which is an improvement from past years.  However, the dependence on these two countries certainly does pose a risk to investors which is why the stock is so cheap today.

The company will announce first quarter earnings on May 25 before the market opens.  Investors will be listening carefully to understand what trends are in play and what feedback management is getting from customers.  The stock is currently in a place where even bad news could easily spark a rally.  Investors are expecting the worst and so something at or slightly better than “the worst” could quickly drive share prices higher.

Long-term, the entire solar industry could benefit from the wake of BP’s giant oil spill.  Environmental concerns will likely drive tighter regulations for fossil fuels, and generate more demand for alternative means such as solar energy.  Short-term concerns are weighing down the market, but in the long run we could easily look back on the summer of 2010 as an excellent buying point for solar stocks.

FD: Author does not have a position in any stocks mentioned in this article.

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Revenues for the first quarter came in at $282 million which is good for a 22% increase.  Earnings were up 25% at $1.36 per share as the company benefited from strong trading in commodity and energy trading.  ICE has pioneered the concept of “clearing” over-the-counter (OTC) trades – or acting as a third party guarantor to both sides of these trades.

Increasing volatility in equity and fixed income markets in the second quarter should be a benefit to ICE as well with futures on its acquired Russell contracts adding additional revenue.  While weakness in equity markets and investor aversion to risk could be a negative for ICE’s PE multiple, the added revenue and earnings from this volatility should support the stock price and even lead to additional gains for investors.

One of the most exciting opportunities in front of ICE right now is the ability to clear Credit Default Swaps (CDS) for financial institutions.  These transactions will likely face heavy regulations in the coming months as the liabilities and tangled web of counter-parties were instrumental in causing the financial crisis of 2008.  ICE should be one of the front-runners for clearing these transactions, adding stability and confidence to the market while collecting lucrative clearing fees for its services.

In the first quarter, revenues for executing and clearing CDS transactions totaled $43 million.  That figure is only up 13% from 2009, but could grow quickly as dealers will likely soon be forced to clear these transactions through ICE or The CME Group (CME).  Because of the huge capital requirements to participate in the clearance business, barriers to entry are high and ICE and CME should be able to act as a virtual duopoly in the market.

A Culture of Acquisitions

IntercontenentalExchange has been able to put up stellar growth in no small part due to management’s ability to identify attractive acquisition targets, structure exceptional deals, and then effectively integrate its purchases into the ICE fold.

On April 30, the company announced the acquisition of Climate Exchange which is a leader in the trading of emissions market.  Climate Exchange operates the European Climate Exchange (ECX), the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE).  Although the cap and trade bill has taken a back seat as far as media attention is concerned, ICE’s opportunistic acquisition could turn out to be a major revenue driver in years to come.

Emissions trading should fit naturally into ICE’s portfolio of products since the company has built such a strong presence in the energy trading arena.  The acquisition has the feel of a “hedge” as an increase in carbon restrictions could cause some of the company’s energy markets to eventually see lower volumes.  But the emission contracts will likely offset the potentially lower volume and the contracts can naturally be marketed to the company’s existing large clients.

Below is a great graphical representation of the company’s historical revenue growth.  Acquisitions have been an instrumental part of this process, but unlike some conglomerates who have grown at the expense of shareholders, ICE has been disciplined in its process to make accretive purchases – adding to shareholder value At 21 times forward earnings, the stock is not necessarily cheap.  But keep in mind that most analysts do not factor in the effect of acquisitions in their models.  ICE management will almost certainly continue to take advantage of future opportunities, and with a strong balance sheet the company has plenty of flexibility to pursue these options. Increasing volatility in financial markets will likely persist beyond just a few weeks time.  We are living in historical times on many levels.  The financial crisis in Europe threatens to spread to other regions.  BP’s oil spill and the resulting cleanup and regulations could wreak havoc on energy prices.  Political unrest remains a major international threat – and all of these issues should lead to volatile price swings in many different markets. ICE has a broad product offering and should capture significant revenue from traders and hedgers seeking to exploit or protect themselves from these dislocations.  The future looks bright for this exchange and I will be looking for opportunistic price points to once again own this industry leader. FD: Author does not have a position in any stocks mentioned in this article. Enjoy this article? Sign up for the ZachStocks Newsletter, Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

But as it turns out, the multi-country currency experiment is turning out to be a flop with the trillion dollar package to bail out Greece and other distressed countries likely to continue to put pressure on the purchasing power of the euro, and highlights the dangers of fiat currencies around the world.

The package was initially welcomed with the Euro bouncing quickly in hopes that the package would restore order to the beleaguered economical landscape.  But in short order, the euro once again gave up ground to the dollar.  I don’t have a lot of experience trading currencies, but both from a fundamental and technical perspective, the Euro looks to be in real danger.

Gold is Becoming the Currency of Choice

It may sound archaic, but gold is a currency that has been able to stand the test of time, and is once again stepping up as an increasingly accepted storage of value.  From Europe to Asia to the US, investors are becoming less comfortable with the value of paper currencies and looking for ways to protect the purchasing power of nest eggs.  I am seriously considering adding precious metal positions to the ZachStocks Newsletter portfolio as the pattern on gold and silver is very attractive.

Many of the world’s top money managers have been accumulating gold positions in anticipation of this phenomenon and while the “buy gold now” commercials are often cheesy and misleading, individual investors can take positions in gold related securities which may be very beneficial in protecting assets such as retirement accounts, education trusts, or simple investment accounts.

How to take money and emotion out of the gold market.

The most common way for individual investors to gain exposure to gold is by buying the SPDR Gold Trust (GLD).  This is an etf which seeks performance related to the spot price movement of gold bullion.  Alternatively, investors can buy the iShares Silver Trust (SLV) which is hitting a new 52-week high as I write.

For more sophisticated investors, there is the opportunity to buy futures contracts which can offer leverage and allow you to hedge a greater portion of your assets while only putting up a small amount of collateral.  Options are another vehicle which require a thorough knowledge of how the vehicles work, but can give the investor attractive exposure.  Please make sure that you understand the risks and trading dynamics before taking a position in options or futures.

The Relationship to the US Dollar

Several months ago, gold prices were trading with a negative correlation to the US dollar.  This simply means that when the dollar was stronger, gold had a tendency to sell off, and the opposite was true as well.

The relationship makes sense because if investors have less confidence in the dollar, they might hold gold as a storage of value instead.

Today, however, gold is rising in lockstep with the dollar (see chart above).  The US dollar is strong compared to other currencies, primarily because of the weakness of the euro.  At the same time, gold is strong because of a “flight to safety” where investors are looking for the most stable place to protect the value of their savings.

The point is that both the dollar and gold are attracting scared money.  But if and when the dollar begins to fall, that will likely cause even more strength for precious metals.  Right now, metals are rising on their own merit – regardless of currencies.  But if the US dollar weakens, metals (which are priced in dollars) will become even more valuable.

So despite the fact that precious metals are already at historically high levels, it makes sense to have some exposure in today’s uncertain environment.  I would recommend setting aside a particular dollar amount that you are willing to invest in metals, and taking the next few months to slowly put that capital to work.  You won’t get the best price with every purchase, but you could average into a strong position and experience the benefits of holding hard assets whose value is not subject to a printing press.

FD: Author does not have a position in GLD

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So in today’s market with managers taking risk off the table and equities under distribution, it’s encouraging to see Syniverse Holdings Inc. (SVR) making a new recovery high.

Shareholders are celebrating after the wireless voice and data company announced non-GAAP earnings of $0.45 per share for the first quarter.  Income was up over 30% from last year and revenue trends were higher as well.  The company booked revenue of $149 million (a 36.8% increase) helped in part by the company’s acquisition of messaging assets last year.

Syniverse has three primary business lines:

• Roaming Services – accounted for 45% of the first quarter revenue.  SVR has seen increased volumes across several different solutions offered within the division
• Messaging Services – accounted for 32% of first quarter revenue.  The recent acquisition contributed 41.8 million of new revenue
• Network Services – accounted for 23% of first quarter revenue.  This service is experiencing moderate declines as the company focuses on growing the other areas of its business.

Investors appear to be most excited about the 2010 guidance issued with the first quarter report.  Management expects full year revenue to come in between $605 and $625 million compared to just $483 million in 2009.  Cash Net Income is expected to be between $124 million and $131 million.  With the current share count at 69.4 million shares, that leads to a range of $1.79 to $1.89 per share.

Analysts are currently expecting 2010 earnings at $1.83 but we may see that number adjusted over the next few days as analysts update their reports.  Even assuming this conservative number is accurate, the stock is currently trading for less than 12 times forward earnings – a welcome discount in an environment that has experienced arguably too much speculation.

One reason investors might be placing a discount on Syniverse is the somewhat leveraged balance sheet.  The company is sitting on about $600 million in long-term liabilities, while the majority of assets on the balance sheet are goodwill and other intangible assets.  Still, with $95 million in cash, and $180 million in net working capital, the company should have plenty of liquidity.

Competition may be fierce in the telecom industry, but with the low stock price to earnings, Syinverse could turn out to be an attractive acquisition target.  Syniverse operates in 160 different countries, so its geographic footprint would be attractive to a larger wireless service company.  The company’s technology is in high demand and could presumably be integrated into a larger firm’s platform.

Regardless of the long-term destiny for the company, Syniverse is likely to continue to outperform the market as the company is growing earnings and investors are anxious to participate in the strength.  I would recommend buying today’s breakout and placing a stop below $19.  Over the next several quarters, SVR could impress analysts and the stock could benefit from both increases in estimated profits as well as price multiple expansion.

FD: Author does not have a position in SVR

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If the patent is overturned and Peerless is able to more directly compete with Neutral Tandem, the end result would likely cut into margins and pressure what has been a long history of sustained revenue and earnings growth.  Since Neutral Tandem began generating a profit in 2006, the company has grown earnings from 15 cents per share to an estimated $1.30 this year – quite an impressive feat for a period wrought with financial and business risk.

One of the reasons the company has performed so well is that management has approached the business from a fiscally conservative foundation.  The company currently has no debt and at the end of the fourth quarter boasted $161 million in cash.  As part of the fourth quarter earnings press release, the company announced a $25 million share repurchase program which, if traded correctly, could have reduced the share count significantly as the stock traded sharply lower during the first quarter.

TNDM announces earnings on May 5, before the market opens.  In addition to hearing information on the patent issue, I am curious to hear how much the company spent on repurchasing shares and how many shares they were actually able to retire.  I would love to see that the company acquired the shares at an average price between $15 and $16 although that may be a bit too aggressive.  The company did not set an expected period of time in which these shares would be repurchased, but one would think the opportunity in February and early March would allow the company to spend a large portion of the $25 million.

Last quarter, management guided 2010 revenue to be between $185 million and $200 million.  I can only assume that these levels will be decreased after the patent reconsideration, but the big question is whether the market has already priced in the disappointment.  The current earnings consensus (which should include adjustments made after the patent news was announced) still has the company earning $1.30 this year – representing 7% growth over last year.

With a stock price of $17.36, investors are only paying a bit more than 13 times forward earnings.  If you back out the roughly $4.80 per share in cash, the multiple would actually be below 10 – one of the most attractive prices investors have been able to buy TNDM at for since the stock started trading in late 2007.

Today’s market has been rewarding small-cap growth companies regardless of valuation risk.  Neutral Tandem certainly has its share of risk, but at the same time that risk appears to be fully calculated into the market price.  At this point, any unexpectedly positive announcement out of the patent office could have a significant effect on the stock.  If it turns out that TNDM has to compete more directly with Peerless, that will not likely be a huge negative for the stock because analysts already expect this to happen.

Following the announcement, TNDM shares have begun to rebound, and today’s trading puts TNDM above the 50 day average and back in line with where the stock was trading before the March 30 downgrade.  I expect the risk to be muted in the stock, and the current positive momentum could be the result of a significant rebound.  Even if the stock recoups just half of the loss from $34.56 to a low of $14.50, it would represent a rebound to near $25 – a healthy return for investors today.

So as we wait for the earnings announcement on May 5, I would recommend picking up a starter position in the stock and potentially adding more shares if the announcement is well received.  TNDM is a strong growth company with a talented management team.  Regardless of the patent issue, the company should be able to grow earnings and continue innovation, strong customer service, and maintain a healthy and growing customer base.

FD: Author does not have a position in any stocks mentioned in this article.

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Up the street in Manhattan, the action was just as intense.  After calling bank executives “fat cats” and pinning much of the blame for the financial crisis on the leaders of financial firms (that’s a discussion for another day) Obama tried to bridge the gap, asking the industry to call off lobbying campaigns to derail the financial reform bill.

The meeting appeared to be civil…  No one threw shoes, shouted in anger, or spouted off to the media afterwards.  But the environment was relatively tense as the president attempted to sell his plan to a group his administration has painted as villains and irresponsible citizens.

Tension was also the theme in Washington as democrats and republicans struggled to come to agreements on the details of the bill.  With so many moving parts, and a sharp divide between lobby interests and public outcry against Wall Street, the bill will no doubt face challenges and multiple changes along the way.

Clearance of OTC Contracts

While changes will be made and the final outcome is still not a complete certainty, there will almost undoubtedly be provisions in the bill which require major financial institutions to clear a much broader portion of Over The Counter (OTC) contracts.  These contracts represent derivative agreements between financial institutions and historically have been out of the view of most investors.

Causing these contracts to be cleared would help to reduce the systemic risk associated with the potential for default, but introducing a third party (ICE or CME) to “guarantee” the trades between institutions.  Essentially, ICE and CME would require the institutions to put up margin for each trade and the exchange would keep that money segregated for settlement of the trade.  As the OTC contract moves against one of the parties, the exchange would require additional margin to account for the increasing risk.

So the business model for CME and ICE requires strict risk control, and an accurate understanding of the terms for each of these detailed transactions.  On the other hand, while the risk management is intensive, the clearance fees can be extremely lucrative which is why investors are sending the stocks significantly higher.

Critical Mass and Nimble Growth

If I had to choose between CME and ICE to invest in, I would have to side with IntercontinentalExchange.  The company has about 1/3 the market cap of CME but as an 8 billion dollar company, they still have enough critical mass to compete in the industry.  Remember, to guarantee the huge trades these investment bankers are engaged in, the clearance firms must have significant capital reserves.

Both companies have grown their businesses through acquisitions in the past, buying rival exchanges and purchasing the rights to design futures contracts on specific indices followed by managers.  The clearance market is now primarily a duopoly with any rival firms struggling to present the critical mass necessary to garner the required confidence.

ICE has always been known for its energy markets although the company has increased its product offering tremendously in the past decade.  The company has a strong reputation and has continued to grow its revenue base even throughout the financial crisis.  In fact, the financial crisis may very well have benefited the firm as sharply increased trading volumes as well as the need for third party clearance actually drove business.  I wouldn’t be surprised if we saw a similar environment sometime in the next 12 months…

Being a smaller firm, ICE can more easily pursue deals that would make a material impact on its bottom line.  International expansion is already underway, but ICE could certainly increase its presence in Europe, Asia, and in other evolving economies.  Expertise in agricultural products will also be a benefit as inflationary concerns along with a ballooning population will drive commodity trading.

Investors have to pay a bit more for ICE – which is currently trading at 21.5 times expected 2010 earnings.  But the strong growth, a management team that has proven its ability and desire to complete large deals, and a political environment that drives more business to the exchange should make the premium price worthwhile.

The recent breakout will likely be just the start of a strong run for both ICE and CME.  Pullbacks can likely be bought as there will no doubt be some uncertainty surrounding the finance bill.  But over the next 12 to 18 months I expect to see a robust return on this investment.

FD: Author has long positions in client accounts

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The Department of Education recently submitted “Gainful Employment” proposed language to the Office of Management and Budget to estimate the costs of the new proposed language.  Credit Suisse expects this language to be submitted to the public by mid-May or at the latest June 1.  From that point there would be a comment period followed by enforceable regulation likely to start November 1.

At question is the issue of federal student loans to pupils enrolled in for-profit institutions as they pursue undergrad or graduate degrees.  Since most student loan programs are federally insured, the government has a vested interest in making sure these education programs are up to standard quality, and that graduates are able to perform well in the workforce (and therefore pay off their student loans.)

There have been widely circulated reports (including a cover story in Barron’s Magazine titled Leveraging Up to Learn) which claim that students who graduate from for-profit institutions are less likely to find gainful employment and more likely to default on their loans.  The negative press has caused investors to think twice before committing capital to for-profit schools and by extension, what used to be lofty multiples on these growth stocks are now actually attractive compared to expected earnings.

If Credit Suisse’s analysis is correct, and these institutions end up facing less regulatory pressure, we could quickly see multiples on stocks increase as investors focus on the growth aspect rather than the risk dynamics.  Since risk seems to be ignored in nearly every other sector right now, I don’t have a hard time believing that traders could quickly jump on the educational bandwagon.

• Devry Inc. – Over the last four quarters, Devry has seen its revenue increase between 28% and 43% for each of the quarterly reports.  Earnings per share has been even more impressive with growth of 40% to 69% using year-over-year comparisons.The stock is trading at less than 20 times earnings even though analysts expect 53% growth in fiscal 2010 (the company’s fiscal year ends June 30) and another 24% in 2011.  A strong balance sheet with no debt should help to inspire confidence, and the stock just broke out of a consolidation on strong volume.  Buying near $70 could turn out to be a very attractive trade over the next three to six months.
• ITT Technical Institute – The company has similar growth characteristics to DV, but a bit more of a leveraged balance sheet.  The most recent report showed a debt to equity ratio of 96% which is manageable as long as cash flow continues to increase.ESI is trading at a much cheaper multiple of 11 times 2010 estimates which could either imply a better value proposition, or less growth potential than DV.  Tuesday’s trade broke the stock out of a relatively healthy looking consolidation, but in early trading Wednesday the stock was giving back much of the gains.  I would recommend keeping ESI on the watch list and potentially buying once the stock rallies above $118 again.

There are plenty of other education companies in the sector to look at – a few of which may actually offer better trading opportunities.  I’m lining up one of these trades for readers of the free ZachStocks Newsletter so make sure you’re subscribed and looking for the trade in the morning.  As always, manage risk carefully and know where your stops will be.  The industry is likely to trade much higher, but if my analysis is premature or even dead wrong, you want to have an exit strategy if the positions head south.

FD: Author does not have a position in any stocks mentioned in this article.

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Calix Networks is a provider of communications equipment to what the company calls CSPs or “Communication Service Providers.”  The equipment helps telecom companies make better use of their networks, be they copper or fiber.  In the offering prospectus, the company laid out several issues that the products are meant to assist with.

• Service Offerings – Calix products are able to help telecom companies offer a broader array of services to their customers.  Many networks were originally designed to only provide voice or limited data to customers.  The products offered by Calix helps to increase the number of services telecom companies can provide.
• Capacity and Efficiency – With the demand for data increasing an exponential rate (think streaming media, video conferencing and other feature rich applications) telecom companies are seeing their networks strain to handle the traffic.  Calix products can help with this – allowing customers to upgrade networks at a moderate pace when capital is available.
• Technology Flexibility – There are many different protocols and technological means by which voice and data flow.  Calix products allow networks to efficiently communicate with each other even when different or conflicting technologies are being utilized.
• Customer Value – The end goal is to provide a value for CSPs technology that will allow for flexibility, lower costs and better returns on their capital expenditures.

While the business model certainly sounds respectable (and the company has already shipped 6 million “ports” to roughly 500 customers) investors are being asked to take a leap of faith.  The fact that the company has yet to post a profitable year has raised concern and will likely be discussed more as CALX continues to trade above its offering price.

Typically, I would agree with this discussion except for the fact that CALX appears to have a good shot of generating strong earnings in the next two years – if management can grow its business responsibly.  On top of the potential for fundamental improvement, we are currently in a very speculative market where traders are looking past fundamental barriers.  So when speculative issues rise, expect CALX to be one of the go-to names for generating higher returns.

The Fundamental Picture

Looking at the financial data from 2009, the company generated a gross margin of 33%.  So before covering expenses like R&D, Sales and Marketing and the catch-all General and Administration category, CALX actually turned a $77 million dollar profit.

Why gold will not make new highs or lows this year

Now assuming the company is able to generate 30-35% annualized revenue growth over the next two years, maintain a 33% gross margin, and keep operating expenses at a stable level, the company could come very close to reporting $1.00 per share in EPS for 2011.  If this were the case, CALX would likely see its stock trade at a multiple north of $20 – good for a 50% increase from today’s price.

I understand that this scenario may not play out perfectly.  Sales growth could be much higher or much lower.  Management will almost certainly increase operating expenses as the company grows.  But the company is at a very dynamic point where earnings are just beginning to turn positive (forth quarter EPS was positive $0.08 per share) and the actual dollar earnings per share could ramp up significantly in the next few years.

The stock is now trading just above the $13.00 IPO price and the reputations of Goldman Sachs (GS) and Morgan Stanley (MS) are on the line.  Trades could be initiated here with a tight stop below the IPO price as the brokerages will likely step in to support the deal if the stock gets close to this level.  Initiating a trade with a relatively small amount of risk and potentially large returns is a good way to initiate small trades at this time, and one could quickly increase position size as the trade moves into positive territory.

FD: Author does not have a position in CALX

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The downgrades came on the heels of March same-store-sales which were released by many key retailers after the close on Wednesday.  The figures showed revenues for ZUMZ stores open over a year to be up 13.2% year-over-year.  The numbers were ahead of the published expectations as analysts had been projecting growth of 11.8%.  For the firm as a whole, sales were up 20% to 35.8 million – quite an impressive showing for a purely discretional apparel and sports equipment store.

I don’t necessarily disagree with the downgrades from a fundamental standpoint.  ZUMZ is currently trading at nearly 40 times expected earnings for 2010 – a premium price even given the attractive growth rate of the stock.  But despite the high multiple and the weakness of shares today, ZUMZ should quickly retake its bullish stance.  The reason rests with the current market climate and the power of momentum and speculative buyers.

Today’s investor is primarily interested in high beta names which are most likely to achieve oversized growth.  Individual investors whose accounts are still underwater from the peak value of two years ago, and mutual fund managers with a mandate to beat the S&P 500 are much less concerned with safety and anxious to capture as much exposure as possible.

This type of trading environment usually favors the high-growth speculative names.  Since the retail and finance sectors have captured a good portion of the momentum trades, I expect these sectors to take a significant amount of bad news before they give up their relative strength.  Many investors watching the strength in these areas have been waiting for pullbacks in order to deploy more capital.  So with these buyers “waiting in the wings” the first pullback for strong retail and finance names will likely be bought.

Zumiez is likely to benefit from the phenomenon of Strategic Defaults.  As homeowners give up the burden of paying mortgages on properties that are worth much less than the liabilities, money is freed from constrained budgets and more likely to be spent on discretionary items.  So it would not surprise me to see Zumiez and other niche retailers post strong revenue trends in April and into the beginning of the year.

Only after the boost from strategic defaults has been fully accounted for will we start to see retail stock prices decline and in turn the fundamentals of the companies in question begin to wither.  (remember, the stock price nearly always precedes the fundamental change.)

The ZachStocks Newlsetter has a stop of $19.80 for our long position in ZUMZ.  If this level is hit, we will exit our position in the interest of risk control and save our capital for a better opportunity down the road.  But for the time being, ZUMZ continues to look healthy and I expect a quick rebound in the shares as investors support the discretionary retail sector.

FD: Author does not have a position in ZUMZ

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Today we’re going to look at NII Holdings Inc. (NIHD) which is one of the smaller wireless carriers in South America.  With a subscriber base of 7.4 million, NIHD is dwarfed by rivals America Movil (AMX) and Telefonica (TEF).  But unlike its rivals, NIHD concentrates on a specific profitable niche of the wireless market – small businesses and corporate accounts.  So while AMX and TEF are appealing to the masses and collecting an average monthly revenue per user near $11.50, NIHD recently reported revenue of $45 per account – quite a difference.

As the Latin American demand for service grows, NIHD has made aggressive expansion plans and is actively increasing its rollout of 3G coverage.  Over the next year, the company expects to spend between $850 and $950 million to build out its network – the majority of this capital being deployed in Chile and Peru.  Analysts also expect the company to be an active bidder this spring when a large portion of wireless spectrum in Mexico is auctioned.

Opportunities with 3G spectrum encompass more than just the handheld phone market.  There is speculation that NIHD will eventually begin selling connections for laptops and even desktops as its business clientele begin to demand the ability to access data on more devices.  The potential for lucrative contracts for business data could provide additional revenue growth for the company – and for existing markets this would require little additional expense.

The metrics surrounding subscriber growth appear to be very healthy.  Over 2009, the company added roughly 1.2 million new subscribers and did this at an average “cost per gross add” of $271.  Since average revenue is $45 monthly per account, it only takes six months for the revenue to make up for the cost to acquire each new customer.  And NIHD’s churn rate is relatively attractive at 2.0% in 2009.  The trend actually looks favorable as the fourth quarter experienced only a 1.85% churn rate.  Satisfied customers lead to better margins – and it appears NIHD is keeping customers very happy.

We expanded our network to about 15 million additional people during the year, with most of that expansion in Brazil. We believe these investments will continue to enhance our brand and visibility, positioning NII to generate more profitable growth in the future. ~Steve Dussek, CEO

One of the biggest challenges for smaller wireless customers is the capital expense necessary to increase coverage.  On February 15^th, the company announced that Grupo Televisia will invest $1.44 billion in cash to acquire a 30% stake in NIHD.  The additional capital will be instrumental as NIHD heads to the auction table for the Mexican spectrum.

Even before this capital injection, NIHD had a very attractive balance sheet with $2.5 billion in cash.  The debt level is high (at $3.49 billion) but with plenty of cash on hand, this is not a significant problem (especially considering the attractive cash flow from existing subscribers).

In 2010, management is guiding investors to expect revenues of $5.2 to 5.4 billion.  NIHD is also expecting to add 1.275 million to 1.375 million net new subscribers.  Assuming these expectation are correct (and they are most likely conservative) shareholders could see NIHD continue its positive trend for months to come.

At $42.25, the stock is just off its 52 week high, but has a long way to go before reaching its 2008 peak of $57.05 or the all-time high above $92 logged in 2007.  And yet the company has higher earnings than during these speculative price periods.  Waiting for a pullback may be the wisest way to accumulate shares of this Latin America growth opportunity, but don’t expect the stock to pull back too much given the growth opportunities and management’s strong track record.

FD: Author does not have a position in NIHD

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But the current market is quite resilient and CIM managed to rally throughout the day and actually close higher – a strong sign of demand for the stock.  Investors obviously believe that CIM will be able to put the capital to work effectively and generate a profit on this new capital.  While management certainly could have borrowed the money and used its available leverage to purchase these securities, I am pleased that management opted for permanent capital rather than leverage which can wreak havoc when economic periods are difficult.

Investors in CIM are currently counting on the high dividend rate as their primary return for owning the stock.  Dividend payments are largely variable as they are linked directly to the operating earnings for each particular quarter.  But with a very low cost of capital, and meaningful cash flow from mortgage securities, CIM has been able to pay a dividend yield north of 15%.

While management states that their primary goal is to produce attractive dividends with capital gains as a secondary objective, I am much more interested in the potential for the stock to trade significantly higher.  As investors realize that the dividend payment is safe (which will likely happen as a function of the company continuing stable payouts), investors will be willing to pay more for this stable cash-flow security.

As demand rises, the price of the stock should trade significantly higher.  In this market, a yield of 6% or 8% is still very attractive, and if CIM traded up to a place where the yield was 8%, the price would be roughly $7.50 per share – good for a 92% increase (all the while, investors are still receiving the dividend payments)

I should note that the ZachStocks Newsletter has a pending position in CIM to buy once the stock breaks out of its current range.

The attractive dividend yield also functions to implement a floor under the shares because as the stock trades lower, the dividend yield only becomes more attractive.  Fund managers looking for attractive value will quickly zero in on the strong dividend yield and likely begin to place large buy orders.

Playing the devil’s advocate, Chimera could potentially come under pressure if mortgage securities take a nose dive. According to this Financial Times article, BlackRock Recently warned that banks would have to take losses on distressed mortgages.  There is speculation that now that the Fed has wrapped up its monumental program to buy mortgage securities, that the market for these assets could dry up.  And then there is the danger of write-downs as homeowners either cannot or will not (see the weekend piece on strategic defaults) pay mortgages on houses where they owe more than the home is worth.

But even with these risks in play, CIM has already taken significant write downs on its existing non-agency mortgages and is carrying them at nearly 50 cents on the dollar.  It would take a very nasty economic reversal for these securities to be re-priced lower, and the potential for actual appreciation in the mortgage portfolio is good.  Now that CIM has additional capital to put to work buying attractive opportunities, the returns on existing and new mortgage holdings has the potential to even increase the dividend payment which makes the buying argument even stronger.

With such positive trading after what could have been perceived as a dilutive transaction, I have more confidence in this position.  Continue to look for opportunities to accumulate shares as management effectively invests and generates strong operating earnings.

FD: Author has a long position in Sound Counsel portfolios

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The “collateralized and short-term non-collateralized loan business” as it is now being called has come under scrutiny as many consumer advocacy groups have issues with the business model.  And while I don’t condone predatory lending practices, there are certainly legitimate arguments that some of these businesses offer access to capital that would not be available to consumers otherwise.  I’ll leave the social issues up to the more qualified and instead look carefully at the investment merit for the business.

Currently, the expansion into Mexico and Canada appear to be generating strong revenue growth and time will tell whether partnerships to gain access to the UK and Australian marketplaces will pay off.  EZPW is showing impressive earnings growth especially considering the fact that the additional stores in Mexico are not actually contributing to earnings growth.  The new stores are profitable, but the expansion campaign is capital intensive with new store opening costs offsetting any existing store earnings growth.

It’s basically a story of reinvestment where the existing store profits have been paying for expansion plans – but once a material base has been built, the expectation is for Mexico to contribute substantially to EZPWs growth.  And after the first quarter announcement (EZPW operates with a Sept 30 fiscal year end) it looked like that growth was on track:

In all segments of our business, we saw strong loan demand.  It appears that our broadened range of loan offerings provides solutions to customers’ cash needs…  With these strong ending loan portfolio balances, we are well positioned for a solid fiscal year. ~Joe Rotunda, CEO

Ezcorp is expected to earn $1.83 per share this year which represents 27% earnings growth over 2009.  Analysts expect 2011 to feature an additional 11% growth although it’s difficult to predict earnings that far in advance.  But looking at the fundamental landscape in North America, I would venture to guess that the consumer will continue to need the financial services and access to cash.

Currently the stock is near $21 which represents a multiple of 11.5 – hardly an expensive price for a company with so much growth.  The low price is likely a reflection of the regulatory risk as many expect the current administration to increase its oversight.  The risk is certainly real, but EZPW is doing a good job of diversifying geographically so that it won’t be devastated if it becomes much more expensive to operate in the US.

The upside of this risk is that if we get to a point in the near future where it becomes clear that regulation will NOT materially hamper profits, the stock could quickly trade to a multiple of 20 or 25 times earnings as investors expect substantially higher growth.

With the stock having pulled back for a few weeks, and holding firmly above the 50 day average, it could easily become a target for momentum players who would want to see the stock break to new highs and maintain its positive trend.  The current consolidation gives us a good area of support and swing traders could place their stops just below $20 to manage risk.  With the potential to run $5, $10 or $15 higher and risk of just over $1.00, EZPW looks like an attractive setup to pursue after the long weekend.

FD: Author does not have a position in EZPW

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But the exercise is always helpful in identifying investment themes and then following those expectations throughout the year to determine what adjustments need to be made, and which situations turned out as expected.  As I write a bit before the close on March 31, it appears that all four of my positions are up on the year (thank God for small victories) but at the same time, there are definitely some shifting themes that give me a different perspective on at least one of my recommendations.

So let’s take a look at the status of these four investment opportunities, and then consider following the links at the bottom to see how we stacked up against the competition…

The Blackstone Group LP (BX) – Liquidity has been increasing during the first quarter, simply meaning that investors are willing to make more speculative purchases and banks are slowly increasing the amount of capital they will lend out.  This is an improving environment for BX for two primary reasons.

1. The appetite for new stocks allows private equity firms to issue IPOs to a market that is demanding speculative investment vehicles.  Every time BX turns out stock at a profit, it is able to realize a gain in one of its investment funds – usually initiating an incentive allocation (BX is often eligible to receive part of profits from funds it manages as payment for overseeing the investments)
2. Blackstone is finding it easier to raise new capital (either from investors or debt capital) to pursue investment opportunities.  Rising AUM creates the potential for much higher incentive allocations down the road when those investments increase in value.

Blackstone currently pays a hefty dividend of 30 cents per share each quarter so our return for Q1 should reflect the additional capital investors received.  The dividend yield (roughly 8.5% annualized) is helpful in stabilizing the price of the stock because investors are likely to pick up shares for income – and the increased demand holds the price above a theoretical threshold.

So while the stock is only up about 7% from the 12/31 initial contest price (9.7% if you include the dividend), I expect gains to accumulate throughout the year with a reasonable chance that BX could eclipse $20 before the end of December.

Assured Guaranty (AGO) – As we mentioned on 12/31, this financial insurer is the only major competitor with enough capital to continue to underwrite new business.  Management has proven their ability to navigate turbulent waters by staying away from dangerous mortgage securities that were the downfall of stocks like Ambac Financial Group (ABK) and MBIA Inc. (MBI).

In early March, AGO passed a significant test with the stock holding up well even though a large shareholder dumped several million shares onto the market.  This was not totally unexpected – the shareholder was Dexia which had received a large block of stock as AGO acquired Financial Security Assurance from the firm.  Now that Dexia is out of its stock, I expect AGO to trade sharply higher both due to its strong financial foundation along with the growth from new underwriting.

While it didn’t make sense for the company to participate in the mortgage mania during the boom years of 2007, the purchase of Financial Security Assurance now allows AGO to underwrite mortgage insurance in an environment where premiums are much more reasonable given the amount of risk taken.

Currently our position is only up 2.3% from the 12/31 close, but sometime during Q3 or Q4 I expect to tack on another 18% as traders test the 52 week high posted in November of 2009.  AGO is actually a pending trade in the ZachStocks Newsletter which has been revised to offer timely stock recommendations twice a week for active traders and investors.

IntercontinentalExchange (ICE) – When we looked at ICE at the beginning of the year, it was expected that increased regulation in the financial industry would require futures trading to be “cleared” which means that a third party must manage the risk and guarantee the trade.  ICE and CME Group Inc. (CME) are the two primary exchanges with clearing functions and the capital to manage risk.

During the first quarter, the administrations focus has shifted to health care reform along with other policy issues.  Financial reform is still on the table, but media attention has waned and it is unclear just how much business ICE could gain as a result of the current political environment.

On the other hand, ICE is trading in a very healthy pattern, and on Wednesday it appeared to break out of a “cup and handle” base with the potential to move quickly towards the 2009 highs near $120.  A healthy market appears to be bringing in many participants who are trading ICE’s products although a bit more volatility might actually spur volume increases.

The stock is currently trading at what I would consider a “fair” value.  Without the regulatory reform, there is not too much that gets me excited about ICE for a short-term trade, but as a long-time follower of the company, I believe ICE is an excellent investment with a talented management team.  So to sum it up – I am leaning towards a luke warm opinion of ICE today and if you don’t currently own it, there may not be a strong argument for picking up shares at this juncture.

iShares Silver Trust (SLV) – While I am thankful to be sitting with a small profit on this trade, I am becoming less convinced that silver will be an excellent trade for 2010.

We have experienced a strong market run which indicates investors are willing to take risk and provide liquidity.  The government statistics (flawed as they may be) lead us to believe that an economic rebound is occurring.  And yet with all the government spending, we are not seeing large moves in gold and silver.  Inflation seems to be temporarily at bay.

Now I have to tell you that I don’t totally buy the “no inflation” argument.  There are just too many fundamental factors that should ignite an inflationary environment at some point along the way.  But if we were going to have a hyper-inflationary move, it likely would have occurred during the first quarter – in fact, we didn’t see any alarming statistical or market based evidence of this trend.

To be honest, I’m sitting back and scratching my head at this a little.  It’s not that I don’t understand how the argument against inflation, it’s just that I don’t agree with it!  But until the market actually begins to indicate that inflation is an issue, there will be more productive places for our capital.

So if you’re reading this today and you have a large position in SLV as a result of my recommendation, you should certainly do your own homework, but my recommendation is to close the position until we once again see signs that the market is focused on the demise of currency and the importance of hard assets.

That just about does it for this quarter.  Be sure to check back and view the other participants links.  We will review the picks again at the end of Q2.

• My Traders Journal
• The Wild Investor
• Where Does All My Money Go
• Intelligent Speculator
• Four Pillars
• The Financial Blogger
• Dividend Growth Investor
• Million Dollar Journey

FD: Author has long positions in stocks mentioned in Sound Counsel Investment Advisers portfolios

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Intuitive Surgical (ISRG) has put in a very strong performance with the stock up more than 250% since this time last year.  The company makes robotic equipment for Minimally Invasive Surgery (MIS) procedures and has expanded the number of procedures and the quality of service that physicians can offer patients.  The daVinci Surgical System employs cutting-edge (no pun intended) technology which is assisting surgeons around the world.

According to the company, the technology is changing surgery in three primary ways:

1. The technology simplifies existing MIS procedures
2. The technology makes difficult MIS operations routine
3. The technology allows new MIS procedures to be possible

These changes have led to adoption of the system around the globe, and ISRG recently announced that Japan has approved the da Vinci system for use.  During the fourth quarter the number of procedures completed with the system rose by 44%.

Led by outstanding patient outcomes, robotic surgery adoption with patients and the medical community at large continues to grow. ~Gary Guthart, CEO

The primary case against investing in ISRG is the premium multiple.  Currently the stock is trading near $345 per share, while the company reported earnings of $5.93 in 2009.  This nets out to a historical PE of 58, certainly an expensive proposition.  But with the company expected to grow earnings by 31% this year and another  20% next year, the numbers start looking a bit more reasonable.

Is The US Dollar Reversing Again?

I expect that the current estimates for earnings growth may be light as analysts are rightfully concerned that ISRG will face pricing pressures as a result of the healthcare reform act.  But with growing international exposure and the expanding necessity of the company’s products, volume should more than make up for the potential pressure on margins.

While Intuitive has been successful in expanding its footprint and selling a large number of systems quarter by quarter, it’s even more impressive to see the stable base of renewable revenue the company is creating.  In the fourth quarter, instruments and accessories accounted for $113.3 million in revenue which was up 39% from a year ago.  On top of this, service revenue accounted for $47.8 million in revenue – and the two categories combined make up for roughly 50% of total revenue.

So as the installed base of systems grows, ISRG’s long-term revenue stream should continue to be healthy.  The additional revenue more than cover additional expense items associated with growth such as overhead issues like medical billing employees.

ISRG finished 2009 with cash of $1.172 billion and no debt.  The financial soundness allows for flexibility in pursuing additional growth strategies.  Intuitive could easily purchase an ancillary business with attractive products it could cross-sell to its growing client base of surgeons and facilities.  The capital can be used for R&D to develop a new line of complementary products.  Or the capital could be returned to investors through dividends or stock repurchases (although I would prefer for management not to buy stock at the current high price)

So with the broad equity market still showing strength, it makes sense to buy strong growth companies with the potential to continue to generate improving numbers.  The recent pullback offers a good entry point where traders could set a stop point near $330 or so and risk $15 with the potential for much higher gains.  If stopped out, investors may want to keep this name on their radar as the fundamental strength of the company should eventually lead to another strong run in the stock.

FD: Author does not have a position in ISRG

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Today, I want to take a closer look at MaxLinear Inc. (MXL) which was priced Wednesday at $14.00.  The book was jointly managed by Morgan Stanley (MS) and Deutsche Bank Securities (DB) in a deal which provided underwriting commissions of $6.3 million.  The stock was well accepted by investors who immediately sent the stock up 33% in its first day of trading to close at $18.70.  The positive traction is likely giving private equity companies such as The Blackstone Group (BX) additional confidence as they prepare additional offerings which could quickly hit the US exchanges.

Part of the appeal for the MXL deal is that the majority of shares being sold to the public were primary shares.  This means that the proceeds went directly to the company which should be helpful in providing the financial ability to continue to generate growth.  According to the prospectus, MXL will use the cash for “working capital” and possibly for future acquisitions.  I would prefer to see a bit more information on how this capital could be put to work, but since the company has shown strong historical growth, I’m willing to give them the benefit of the doubt for the time being.

MaxLinear is a “fabless semiconductor company” which designs chips that allow devices to better receive wireless television signals.  The majority of the company’s sales have been in Japan where it appears that MXL has a lock on the mobile handset market.  In the last four quarters, the company has seen sales increase by 49%, 13%, 107% and 96% (using year over year comparisons).

In addition to the handset market, MXL is increasing its product offering to include chips that enable devices to receive wireless signals for more traditional television viewing.  These products are anticipated to go in cable boxes, digital televisions, PC’s and notebooks.  While the handset market continues to provide stable cash-flow, these new markets are expected to drive the growth in future quarters.

When we say that MaxLinear is “fabless” it simply means that the company does not have its own manufacturing facilities.  This can be both a business strength as well as a liability.  During the financial crisis, many firms struggled under the weight of the debt used to build large manufacturing plants.  For several solar companies, the decision to expand manufacturing capacity at the wrong time turned out to be fatal.  So MaxLinear’s decision to outsource the manufacturing process gives the company better financial flexibility to be able to focus on research and development and growing other parts of its business.

But the flip-side of this coin is that if the economy improves to the point where it becomes difficult to negotiate contracts with outside manufacturers, MXL could see its costs rise exponentially.  The laws of supply and demand can easily come back to bite the firm if it is not accurate in its long-term projections of customer demand and its need for manufacturing capacity.

After staging a positive IPO transaction, MXL has largely been biding its time and trading within a relatively close range.  This week we will begin to see some patterns developing and from a trading perspective, it will be interesting to see what opportunities set up.  Due to the success of the IPO transaction, it appears demand is in control at this point and I would recommend trading from the long side initially.  A pullback closer to the IPO price would provide a welcome entry point and risk can be carefully managed by placing a stop slightly below the $14.00 IPO price.

On the other hand, if MXL were to break higher – crossing $19.50 – a higher-risk breakout setup might be in order.  The risk is higher in this type of trade because there is less of a defined floor that would be supported by the underwriting team.  When buying above $19.50, traders should look to use a stop where they would exit the position if MXL trades back into its current range.

Fundamentally, it is very difficult to set a fair valuation for the stock.  This is because MXL is just crossing the line where its revenue overcomes fixed expenses and the company is starting to show a positive profit.  There are many variables which could cause MXL to ramp up its profitability sharply over the next two years, or possibly cause it to over-extend and lose value for investors.

So for today, it is important to determine who is trading this vehicle and what these traders are looking at.  Currently, MXL is being largely held by growth stock investors who currently appear willing to give the global economic rebound the benefit of the doubt.  As long as these investors continue to provide liquidity and are willing to pay speculative prices for future growth, MXL should stay in a positive trend.  But when the tide turns and growth investing falls out of favor, MXL will likely be hit with distribution – and at that time it might make sense for us to set up a short position.  The stock is dynamic – positive for now – and offers swing traders ample opportunity for profits.

FD: Author does not have a position in any stocks mentioned in this article.

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Tenet Healthcare Corp (THC) is one of those growing companies in an uncertain market.  The firm operates 53 general hospitals and two more specialized hospitals primarily in the Southeast, Texas, and California.  According to the company’s website, the firm focuses on owning and operating acute care hospitals along with ancillary businesses which complement its medical care.

One of the biggest concerns with Tenet (and many other hospital operators) is the tremendous investment these firms must make in order to comply with the American Recovery and Reinvestment Act.  Tenet is guiding investors to expect a $40 million dollar technology expense as it implements the required changes within the hospitals it manages.  The company will focus on a few facilities at a time, rolling out the necessary changes in an attempt to stay ahead of potential regulatory fines.

And while these investments will pressure earnings in the short-run, the efficiency benefits in future periods should actually prove to be accretive to earnings.  Despite the difficult schedule for implementing the technology changes, analysts expect THC to increase earnings by 47% this year bringing the profits to 22 cents per share.

Of particular note is the success management has had in increasing their profit margins.  Adjusted EBITDA margins increased from 8.4% in 2008 to a record 10.9% in 2009.  There are several factors at work here which have led to a more profitable operating platform.

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Lower Employee Turnover – Management has made a concerted effort to increase incentives for employees to remain with the company and to improve productivity.  At the end of 2009, Tenet set aside $16 million to contribute to employee 401(k) accounts.  There were also merit pay increases announced on October 1 that allowed employees to see their pay increase above the general level of inflation.  As a result of these initiatives, Tenet was able to decrease its contract labor which is helpful in keeping costs contained.

Pricing Improvement – Despite the perception that Medicare is driving prices down, Tenet has seen a general improvement in the pricing environment.  This may be a regional phenomenon and certainly warrants some additional analysis, but it is important to note that at this point THC continues to be able to charge a reasonable rate for its services.

Bad Debt Stability – Any hospital which is required to treat patients regardless of their ability to pay is going to have a hefty load of bad debt.  Throw in an economic recession and investors expect bad debt to increase all the more.  But THC has been able to keep this metric at a reasonable level and actually pointed to increased collections as one of the potentially positive driving forces for its 2010 guidance.

Despite pressures from a soft economy and rising levels of unemployment in many of our markets, we achieved another year of solid revenue growth…  Excellent cost control combined with this revenue growth helped us produce the strongest growth in earnings and the highest margin we’ve achieved in seven years. ~Trevor Fetter, CEO

While THC’s stock price is certainly below what you might expect from a top notch hospital management firm, the company actually has a market cap approaching $3 billion and the stock is a very legitimate investment vehicle.  A forward PE of 26 may also scare some investors away as on the surface it appears that THC may be fully valued.

But cautious analysts and conservative guidance by management may be causing this estimate to be a bit too conservative.  After all, the demographic trends in the areas that THC operate combined with the pressure of less-capitalized facilities folding or going out of business will likely lead to higher admission rates.  At the same time, investors willing to look further down the road to when IT investments will add to profitability may quickly increase the amount they are willing to pay for this niche hospital operator.

As a trader, I would watch the $6.00 to $6.50 area very closely.  If the stock is able to break through this level on strong volume, it makes sense to start an initial position.  After a few weeks of holding above this level, I might begin to add to my position at attractive chart points.  My stop would initially be just below $6.00 because if the stock trades back below the breakout range, then something is wrong with the company or the trading dynamics surrounding the stock.

So consider taking advantage of the uncertainty surrounding healthcare by picking up some quality companies before the broad investor population realizes how much value is available.

FD: Author does not have a position in THC

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With all of the attention on the health care reform passage and the exorbitant costs it will impose on US taxpayers, I want to note that there are a few areas of healthcare that are actually decreasing costs and at the same time providing better care for patients.  The home-health industry has been in stealth rally mode, and ZachStocks has periodically reviewed Amedisys Inc. (AMED) as a growth opportunity in the industry.

Today we’re going to take a look at LHC Group Inc. (LHCG) which operates both home-based and facility-based long-term post-acute health care services.  The company is relatively small with a market cap of about $644 million, but the historic growth has been tremendous with revenues increasing by nearly 40% over the past year and earnings per share up 40% as well.  LHCG has virtually no debt which helps to provide confidence and stability for shareholders, and yet the conservative balance sheet doesn’t mean that the company is shying away from aggressive growth opportunities.

Tuesday morning Forbes featured a healthcare article in which the editor predicted that we will see consolidation in the industry.  Fear of reduced government reimbursements is leading the smaller players to combine with more well established players to take advantage of synergies and economies of scale.

On March 10, LHCG actually announced its own acquisition, purchasing Salem Hospital Home Care in Salem Oregon.  While the buyout was a relatively small transaction (the region covers about 1 million people, and over the last 12 months Salem generated about $5.5 million in revenue), bolt on acquisitions allow LHCG to expand their geographic reach.  On top of that, the company can likely increase profitability because they can cut many of the administrative costs which are redundant with the parent company.

Interestingly, the Salem Oregon region features 12% of the population which is over age 65.  This is a strong market for LHCG as home health users above age 75 comprise a statistically overweight portion of home health users.  As a general rule, more patients who use home health describe their health as fair to poor than the average Medicare beneficiary (see chart).

LHCG is currently trading near the top of its range and a break above $35 would likely attract the interest of more institutional investors.  While the stock is an attractive buy on its own merits (trading at 13 times expected 2010 earnings), there is significant potential for a buyout in the next several months.

Just as LHCG picked up Salem’s business to take advantage of cost savings and an increased geographic footprint, another competitor could easily make a bid for LHCG.  Amedisys is nearly three times the size of LHCG and has shown a willingness and ability to get deals completed.  LHCG would be a large acquisition for the firm but it very well could make sense.

If Amedisys or another competitor were to acquire LHCG, the price would more than likely be at a premium to the current price.  It wouldn’t surprise me to wake up one morning and find LHCG up 15% to 20% due to a bid from one of the other players in the industry.

The health care reform bill will be studied for weeks and months to come to determine what effect it will have on industry.  But for now, LHCG appears to be weathering the uncertainty well and could have a very bright future in front of it.

FD: Author does not have a position in LHCG

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Particularly at risk are prescription drug companies which will likely be required to accept whatever schedule the government deems “fair” when it comes to reimbursing them for patients medications.  And while the long-term effect on our economy and on the freedom of commerce are very serious, I believe that a few pharmaceutical stocks are trading at “worst case scenario” prices and could offer bold investors significant opportunity.  In particular, I am looking at Warner Chilcott (WCRX) as a healthy and growing company likely to trade higher in the coming months.

Warner Chilcott recently made a significant strategic acquisition which puts it in a place where it should be able to grow earnings tremendously.  On October 30, 2009, the company acquired the branded pharmaceutical business of Procter and Gamble.  The spinoff allowed P&G to pick up some much needed capital, while giving WCRX an attractive portfolio of new products to market in North America and Western Europe.  To quote the company’s CEO:

This is a transformational acquisition that extends our presence to include many of the major pharmaceutical markets around the World and significantly enhances the scale and diversity of our business.  Importantly, the increased scale afforded by this deal provides us with the ability to pursue a broader range of R&D projects to fuel our long-term growth. ~Roger Boissonneault, CEO

Not only did the transaction give the company additional products to cross sell to its current stable of clients, but the purchase also included manufacturing facilities in Puerto Rico and Germany.  Now  that WCRX has a diversified suite of manufacturing locations it can increase efficiency which should directly affect profitability.

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The thing that particularly caught my eye in relation to WCRX was the extremely attractive valuation.  After making the acquisition, the company is expected to generate $3.41 in earnings for 2010 and $3.78 for the following year.  Now 2010 earnings will be an increase of 80% over 2009 which is quite impressive.  But investors are right to assume that this growth is a one-time event and will not likely be repeated.

However, despite the strong earnings potential for the company, WCRX is currently trading at 7.4 times the expected earnings for 2010.  That’s a pretty low multiple even if WCRX were to remain stable with no future growth at all!

There are a couple of red flags that investors should be aware of and may be part of what is causing the company to trade at such a discount.  The first is obviously the regulatory environment surrounding healthcare reform.  WCRX could certainly have its average price for branded pharmaceuticals cut which would impact profitability.  Secondly, the company has a large debt load of $3.0 billion.  While cash flow appears to be high enough to easily service this debt, the liability adds another layer of risk to the company.

One way to potentially benefit from a rebound in the share price while still holding an acceptable amount of risk would be to buy out of the money calls.  Specifically, I am looking at the July 30 calls which can be bought for roughly $0.55 per share.  Obviously, WCRX would have to rise more than 20% for these calls to be profitable, but given the cheap valuation and the uncertainty right now, the stock is priced very conservatively and any resolution to outstanding concerns could cause the stock to rally sharply.

When investing, one should always be on the lookout for sectors and industries that are trading at a discount due to unnecessary fear or dislocations in the market.  These opportunities are often very lucrative as long as risk is properly managed.  So consider WCRX as an exciting opportunity, but make sure that you have an exit strategy if the improvement does not turn out to be as expected.

FD: Author does not have a position in WCRX

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Aircastle is an aircraft leasing company which purchases passenger or freight planes and then leases them under long-term contracts to airlines and freight companies.  AYR has taken a very diversified international approach with its fleet of 129 aircraft spread out between 60 different customers in 30 different countries.  The focus appears to be passenger planes with only 29% of the vehicles being used for freight.  Looking at the length of contracts, the weight average remaining lease term is 4.9 years.  This gives investors a fairly stable picture of base revenues for upcoming quarters.

Since owning aircraft can be a very capital intensive business, AYR has a significant debt load of roughly $2.5 billion.  With access to capital curtailed over the last two years, you might think that the company would have struggled to meet its obligations.  However, management has done an incredible job getting the company through the crisis and the Aircastle which has emerged is much stronger than many would have expected if they had foreseen the coming economic struggle.

Near the peak of the market, management had the wisdom to pursue a conservative growth strategy, deciding not to purchase additional aircraft at excessive prices when the economic fundamentals appeared to be peaking.  This allowed the company to continue through the crisis with a stable balance sheet and positive earnings.  While management did decrease the dividend to maintain a healthy cash balance, investors likely understand and appreciate this move which was likely instrumental in causing the stock price to rebound sharply from the March 2009 lows.

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Since the economy has begun to turn, AYR has been able to order and take delivery of new and used aircraft at extremely attractive pricing which should lead to healthy growth in upcoming years.  In the fourth quarter, the company found homes for 11 of 12 new Airbus A330s which it will take delivery of in the coming quarters.  Six of these planes will be leased to South African Airways beginning in 2011 in what management calls “further evidence in the recovery of aircraft leasing.”

Fundamentally, AYR appears to be trading at a very attractive price.  The company is expected to earn $1.12 this year and $1.14 in 2011.  These numbers are likely conservative as AYR has a stable base of customers but could very easily pick up additional aircraft and put them to work in the lease pool which could immediately add to earnings.  With a current stock price of $9.73, investors are paying just 8.5 times forward earnings which is quite conservative considering the long-term nature of the firms leases.  On top of that, investors are being paid 4% annually through the dividend and it would not surprise me to see management increase that dividend now that cash balances are increasing and the global economy is considered to be more stable.

The stock is listed at 0.7 times book value which means that if the company sold all of its assets and repaid its obligations, investors would immediately realize a near 50% return.  The discount is likely due to questions about the book value of the aircraft.  In today’s weak economy, it would be difficult to sell all of the aircraft for a reasonable price – and instead investors are looking at the high debt levels.  But as long as the company is able to maintain payments on the debt and has healthy productive assets to back up any needed refinancing, the picture should remain rosy.

Aircastle might not double in the next six months, but the value of the income producing assets on the balance sheet along with the potential for upcoming growth should support the stock and lead to reasonable growth.  With the market looking a little extended, I prefer to own companies with a strong balance sheet, trading at a discount to book with the potential for increasing business.  Aircastle appears to fit that bill.

FD: Author has long positions in Sound Counsel client portfolios

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Force Protection is a manufacturer of armored vehicles and other products that increase survival rates on the battle field.  With the United States and a number of allies in a sustained war against terror on several fronts, there is significant demand for FRPT’s products.  This was made clear as the company announced revenue of$ 289 million which represents a 21% increase over the fourth quarter last year.  Management attributed the increase to modernization, spares, and its sustainment business lines.  Offsetting the strength was a lower number of vehicles which were shipped.

Initially, it might seem like a lower number of vehicles shipped would be a negative for the company.  But a transformation is underway in which the company is broadening the number of products it offers which in turn is building a healthier business.

We are transforming our Company into a full-service survivability solutions provider. This effort was rewarded in 2009 with over $450 million in increased modernization, spares and sustainment revenue during the year. We have expanded our operational footprint and significantly improved our capabilities in this business. We are continuing our product development efforts to ensure that we are delivering the best balance of survivability, mobility and readiness to our end-users. We are also continuing to push forward in the area of new vehicle development. ~Michael Moody, CEO

Not only did the company produce higher revenue in the fourth quarter, but profitability increased sharply as well.  The company earned 27 cents per share for the quarter (totaling 61 cents for the year) compared to 17 cents from the fourth quarter last year.  Gross margins were higher as FRPT transitioned to products that offered better profitability, and general and administrative costs were also kept in check.  In short, it was a strong quarter for the firm and investors now have a newfound confidence in the stock.

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Supplying military vehicles can be a difficult business.  The revenue trends are unpredictable as governments can increase or decrease contracts almost at will.  Research and development costs can be high and it is not always easy to recoup these expenses.  That is why FRPT’s diversification in business lines will be such a strength for the company.  Replacing parts for existing vehicles, modernizing those vehicles with the most up-to-date equipment, and providing other solutions will create a more stable revenue stream leading to a healthier company.

But that doesn’t mean Force Protection will abandon making vehicles all-together.  Quite the contrary, FRPT has a new vehicle called the Ocelot which is currently being tested by the UK.  As the prototypes are approved, FRPT should receive a good number of orders for new vehicles and it appears that there is a strong possibility that Australia could be a purchaser as well.  New vehicles sent to the field will help to generate additional maintenance and parts business for the firm as well.

Looking at the financial picture, FRPT appears to be in a healthy situation.  The company finished the year with cash reserves of $147.3 million – that’s equivalent to $2.00 per share.  With no debt, this leaves FRPT with plenty of flexibility for developing products, making strategic purchases, or simply riding out the ups and downs of the order cycle.  Management has paired down inventory levels as well which helps to increase the financial stability of the firm.

Whether you look at FRPT from an earnings perspective or a book value frame of reference, it appears the stock is attractively priced.  Analysts appear to have very conservative estimates for earnings this year (pegged at 0.45 per share) and while there may be some bumps in the road, I believe FRPT can easily beat these numbers.  Still as I write, the stock is trading at less than 15 times earnings which appears attractive considering the potential for growth and the financial stability.

Book value per share is roughly $4.44 considering cash, inventory, receivables and the company’s current liabilities.  So the stock is trading at about 1.5 times book value or the price per share investors would receive if they simply liquidated the company.  Since FRPT is actively growing value through positive earnings and a growth strategy, this price appears very conservative.  I would recommend waiting for a bit of the excitement to wear off after the earnings announcement and then try to pick up shares near $6.50 if possible.  The company is relatively small with a market cap of $460 million, but their profitability is proven and the long-term opportunity is exciting.

FD: Author does not have a position in FRPT

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