LOSING MOMENTUM

CNTF

Sold the remaining position of CNTF at 13.30. I thought the market is (1) losing some steam; (2) overbought for the past few weeks; (3) while fourth quarter results are likely in bag, forward estimates are uncertain; (4) bullish sentiment is extremely strong. I would like to sell more into rally in the next few weeks and wait for the fourth quarter earnings.

MKX

Also sold MKX at 2.75. I just want to raise some cash given the over bought condition. This one has given me over 30% return over a very short period and I decide to take profit here. I can always buy it back later.

UTMD

I bought a small position of UTMD ($28.95) this afternoon. I really like this company due to the follows:

- Very strong, and consistent financial performance over the past 10 years;
- Decent growth for its revenues, operating income, earnings and free cash flow;
- Clean balance sheet with no debt;
- High ROE (over 20% over the past five years) and high ROC as capital requirement is very small;
- In the healthy care industry, non-cyclical and defensive;
- Leader in niche markets, large portion of its products are consumables and reoccurring;
- Insider buying and share repurchase program in place;
- I like the management team (from what I can read);

Moreover, I believe the stock is reasonably valued. I expect it to make about 1.90-1.95 for this year, which means the stock is only trading at about 15X of its 2005 EPS. More importantly, I believe its 2006 EPS will be at least 2.15-2.25 level in a static case. This is because the company has won a case against FDA (no less!) recently and I estimate that savings of legal expenses alone will amount to 0.25 per share for 2006. Furthermore, the closure of this case will likely result in meaningful increase of revenues, improving operating profit margin, and earnings for 2006. The company has a very strong earning leverage and small increase of revenues will result in large jump of its EPS. Even with the same multiple, it should be traded at 32.25-33.75 range next year. But I believe its multiple should expand given its decent growth perspective, potential acquisitions, and high levels of ROE and ROC. I expect its multiple to expand to 20X (more or less the same to its peers), which will result the stock price at 43-45 range in next 12 months. The company is relatively small (just above $100 million market cap) and there is no coverage. The only drawback is that it has only 4 million shares outstanding and is rather illiquid. But for a long term investment, it does not matter that much, dose it? Oh, did I mention that it pays a 0.6 dividend while you are waiting..


CPL

Calpine filed long expected Chapter 11 this morning. I am watching with interest in this restructuring, partly because I own some Calpine Power Income Trust here in Canada, partly I thought this is an interest Chapter 11 case which has a lot of characteristics outlined by Joel Greenbelt in his little yellow book. Basically CPL has sold assets, in an industry where demand continues to grow, and it is generating revenues, and cash flow. The problem is that it is highly leveraged, and hopefully Chapter 11 will take care of that. Secondly, there are a lot of debt out there (about 22 billions) and there will be a lot of shares over the Chapter 11 is complete, hence the second element, i.e. there might be a lot of bond holders, trade creditors, banks, and even vultures who may not want to hold new CPL shares, selling of which could create potential value. Third, as mentioned in (1), CPL has a lot of solid pieces of assets could be sold to generate cash, but more importantly, it could result in a smaller, but much more focused utility company, concentrating on the fasting growing markets such as Texas and California. This is going to be a very prolonged restructuring process and I shall pay attention to the last element, insiders incentives.