HAZARD OF STOP-LOSS

PMI / EPIC

This is rather distressful. PMI just got stopped out and as usual, it went right up after taking care of me. The hazard of using the stop loss! On the other side of the ledger, I low-balled (NOT LOW ENOUGH) some EPIC and it got filled at $10.50 and continued to tank. Is this a falling knife? Could be. The company missed by a penny (due largely to FX), and actually guided up for the year, and stock promptly declined by about 15%. The valuation becomes compelling as it is traded under 10XE06 and the visibility is reasonably good by way of its deferred revenues and booking. Is the market over-reacted? I see a lot of towels. I believe it has and it should recover, particularly if management could deliver its earnings. In any event, I don’t see a lot of down side risk and risk/reward is rather compelling, particularly if you take the current level of NASDAQ into consideration. Having said that, it provides very little comfort when it tumbled another five percent immediately after you have bought it! I hate those situations. Target is $15. No stop loss.

MOT

I also picked some MOT late this morning. The company blew the estimate away and upped its guidance, gained more market share, and generated decent growth and cash flow. Even though it gapped up by 5%, I believe the stock is still reasonably valued (14XE05, 13.4XE06). The street did not appear to be very exited about these numbers (as analysts are lukewarm at best). MOT has been rather consistent in the past few quarters and it should get more respect. Target $20, stop loss at $14.63.

I have added quite a few positions in the Tech sector over the past few weeks. Most of them have reasonable valuation, good results, increased forward guidance. It all depends on where the NASDAQ is going from here. If NASDAQ confines to trend downward, these positions will likely go down as well. If NASDAQ reverses, it should provide a decent gain in the near term. In any event, I feel rather comfortable to own these stocks for a couple of years, provided economies do not falter too dramatically from here.

SEA OF BEARS

STX

I am considering to add some STX here. It blew out its estimate last night and also provided fairly strong guidance for Q4/05 (June). The consensus numbers are upped significantly and the stock is under valued here (14XE05, 10XE16). I believe techs continue to be oversold here and earnings, while mixed, have been rather robust. There are very few sectors that are working and it appears tech is one of them, or starting to become one. 12-month target is $24, and stop loss at $16.5.

EASY SAID

Sold a couple of more positions in the oil patch. I simply could not take the beating anymore (how depressing). One of them (PFC) was down by more than 30% in a single day. I look at my portfolio and see a lot of positions whose loss is creeping up. What happened here? Didn’t I have a strategy to limit the loss to 7-8% in place? How and why, did I fail to execute such strategy? How could I let these positions pestered in the portfolio? I have no answers.

GLW

On the other hand, I picked up some GLW ($11). The company upped its Q1/05 guidance. It is traded at approximately 16XE05 and 13XE06, which I believe is a reasonable valuation. While the FDP prices remains relatively weak, volume could ramp up this year, which will be very bullish for GLW, the dominate player in the large size FDP market. A combination of stable price and high volume would be a “goldielock� scenario for GLW, and extremely bullish for a long run. Initial target for the end of year is $15 and stop loss at 10.75.

CUT JUNIORS

Juniors

I dumped a couple of speculative juniors today. The decline just became unbearable. Moreover, my energy exposure continues on the high even with this reduction. I am not too proud of these picks as they were all brought at their peak.

PMI

I opened a small position on PMI (37) today. The stock is undervalued currently (10XE05, 9XE06, 1.1XBV). In addition to the overall market, there are concerns with housing market, accounting issues in the mortgage insurance industry, and slower growth going forward. All concerns are valid, but the selling might be over-done. At this level, it is traded at 1.1 times of its book value and under its estimated 2005 BV of 38. I believe the down side risk should be limited. The company is purchasing a lot of its stocks in 2004 and another $100 million scheduled for 2005. It is more diversified that most of its peers as a good portion of its business are from international operations, which grows at 40% a clip. The overall market appears to be rolling over today, but PMI is trading rather well. My only concern is that my financial exposure has increased recently. Given the raising interest rate, it might not be a good thing. My target is 45 (21%) by the end of this year. I would like to limit its downside risk to 7-8% (34.5). The company is rather liquid, I believe it would be save to put a stop loss at 34.5 level.

PINK SHEET

PJC


I sold my entire position of PJC this morning. The stock has been in a downward trend, in a rather listless trading for a while, before its earning release on next Tuesday. I have suffered sufficiently to know that its earning results probably will not be inspiring, and the reactions thereafter will likely lukewarm the best. A downward jerking reaction is a distinct possibility. Therefore, I decide to step aside from here. If the earning is neutral, I believe I can re-take the position. If the earning exceeds, I will wait for the weakness to get in. It generates about 10% in about couple of months. I am not unhappy.


KEGS

This is a very interesting situation. KEGS is delisted by NYSE for not filing its Qs and Ks on a timely manner and it will start to trade on pink sheet today. Normally I would not touch a stock with “accounting irregularities�, “fraud�, or “restatement� etc. However, in this case, things appear to unfold in a orderly manner. Management changed, filings are expected in next few months, waivers from lenders obtained, and pink sheet stated. But more importantly, the company’s fundamentals remain strong now and going forward. Restatements are about the past, not the future! Not surprisingly, it is knocked down to a level where valuation is rather cheap. (14X EPS06, 6.5XEBITDA05, and 6XEBITDA06). I am surprised that it has been knocked down further given potential for insolvency (it breaches financial covenants of itd debt instruments). It is risky, but worthy it.

HATE TECHS? TIME TO BUY

DRTE

I nibbled some DRTE (14.50) this morning. The company lowered guidance last night and the stock did not budge at all, on the contrary, it actually went up, indicating that the bad news is more than reflected in the stock already. Even with the lower guidance the stock appears very cheap, as it is trading at about 15X of its E05 and 12.7X of its E06, considering the company has a long term EPS growth rate of 20%. Its ROE is at about 16%, and book value at about 5.0. It has a clean balance sheet with no debt. I also like technology sector here simply because it is universally hated and ignored. Moreover, this little software company is catering to big pharms, another sector is pretty much universally hated. Sound good to me. Target: $20 by the end of this year.

GTK

I opened a position of GTK late today. I believe it has declined to a level that is under-valued. It is currently traded at 16X of its 05 EPS estimate and about 15X of its 06 estimate. That seems to be at the lower end of its historical multiple and also among its peers. Again it is considered a tech company, but it caters to the gaming industry, which is a stable and non-cyclical sector. I do like tech here as it is detested. There are significant insiders purchases at this level. The company has a modest top-line growth, but very consistent and impressive EPS growth. Its ROE is at over 30% and it generates a lot of free cash flow. Technically, it has been in the trading rage between 22-26 for a while. I believe the downside risk is limited and my target is $30 by the end of 05.