HOM, HOM SWEET HOM

HOM

HOM announced results last night and I thought the results were reasonably good. The market however, is disappointed that it is not increasing its full year guidance (0.42-0.46) and the stock went down this morning. It appears to me that management is playing the game of UPOD ("under-promise, over-deliver"). At this level, it is traded rather decent valuation (about 14X of its 06 earning, with more than 50% growth). I am thinking to add some here. My initial target is $10.

PRLS

I sold my remaining position of PRLS this morning. The trim done yesterday prove to be correct as it went down pretty hard. The quality of earnings is one of the most difficult thing to assess for small investors, certainly including me.

TO SELL OR NOT TO SELL

PRLS

There is a real nervousness in the air for this stock, in front of its earnings tomorrow night, including me. It is not performing well, even when the market is up, totally out of its character. Is this stock over-valued here? I do not believe so. It is traded at about 20X of its 2006EPS and growing at about 70% annually. Is it possible that it would miss its earnings? Unlikely. Management has a solid track records in delivering its quarters. Have industrial fundamentals changed to the worse? I am certainly not aware of any such adverse development. While the chart appears decent, there is tremendous resistence at $10 level, which it tried three times in the past few days and unable to break through. The fact is there are a lot of profits on the table given this is one of the best performing stocks in 2005, and investors, particularly small ones, are nervous and want to take some off the table, which I believe is a PRUDENT thing to do. While I hate to sell stocks on the way down, discinpline dictates that I trim some here regardless of price. Sell half.

BLKB / WFR

Sold my entire position in BLKB this afternoon. The market is ramping up and this one is not participating. It already exceeded my initial target and I want to take some profits from here anyway. Buying some WFR with the proceeds. Tech appears to be strong today and could carry over the next few days. Q1/06 also looks robust. This one is still traded at reasonable valuation and momentum is very strong. I probably paid a bit more today, but if it goes to $50, a buck more here would not matter at all.

A FEW GOOD STOCKS

VDSI

Very strong growing company with both top- and bottom-line growth at about 40% annually. High return on equity (over 40%). Strong and scalable business model, dominate market share, very strong management with consistent and proven track records. While relatively weak in USA, it provides an opportunity to participate the Continental market. A bit on the expensive side, trading currently at 45X of its 05EPS, 32X of 06EPS and about 24X of its 07EPS. While not over-valued in relation to its growth rate, it had better deliver its quarters. The stock has been on a slow downtrend as multiple contracting after Q4/05. Who knows, an 8.0 would be a bargain pick.

RAVN

Man, what a beautiful chart! Straight up. Wish I have picked it earlier. Again, strong topline and bottomline growth (over 20%), strong track record. Still very little coverage. Valuation is reasonable, perhaps a bit on the expensive side. (29X, 24X, 21X). It also has a rather generous yield for a growing stock. I believe this one probably is purchasable here, although I would rather wait for a better entry.

WEX / SMIT

Two micro caps. Both have very reasonable valuation, which is a given as practically no one covers these micro caps. However, growth appears to be rather weak (single digit). WEX is interesting story. However, more than half of its sales are to one single company, Select Comfort (which happens to be one of my recent picks).

MARCH BREAK?

LMS

Picked up some LMS today ($22). The stock has been volatile lately. But I thought it has a lot to offer. It is currently traded at about 13X of its 2006 earning and the company is expecting about 10% revenue and earning growth. I thought it is a bit of under-valued. Part of the reason is that it has a great 2005, making 1.85/sh. In other words, the company is punished for doing a such good job. The company has guided its 2006 numbers with caution, stating that it is unlikely to beat its 2005 results. Nonetheless, the 1.65/sh is not too shaby. The market is concerned with unfavorable q/q and y/y comparison. Another reason may be that a part of its business relates to the housing market, which may cause some concerns. Its balance sheet is clean with a small, declining debt. I note there are a lot of insider buying activities at current and higher level. I feel quite comfortable. I believe it goes to $30 before the end of this year, for a 36% return.

CNTF

CNTF reported in-line results and guided its Q1 lower. AH reacted unfavorably and went down by almost another dollar. I am not doing too well lately. Maybe I need a break.

RESOLUTION

VPHM

The focus of this week will have to be VPHM, and what ever happens, I must prevent it from becoming another Conjuncan. My strategy is if it continues to fall, I will cut loss and run. If it bounces, I will set up a tight stop loss. In either events, I am prepared to exit this position in entirety so that at least a part of the capital is preserved to fight for another day. While I acknowledge that the risk remains high, I feel strongly that this will not turn out another Conjuncan because: it has a profitable and growing product, generate significant cash flow, at least for the next couple of years; it has a clean balance sheet with more than $250 million cash and free cash flow positive. While it has one product, it does have a pipeline. Having said that, who knows what the market will do, it could potentially go down for another five points from here. In any event, the decision is made and it is only a matter of execution!

Overall market may also top a bit here, and if it continues to show strength, I would like to take some profits. One area that is not moving with the overall market is the trust sector. Given my relatively over-weighting, I believe this may be the time to scale a bit in the next couple of weeks.

Otherwise, I feel reasonably comfortable with the portfolio. I believe I have only one position which may face some uncertainty (CNTF reports on Monday). There shouldn't be any surprises in the coming weeks until the Q1/06 reporting season. If the market and the portfolio stabilize in the next couple of weeks, it may provide me some breathing room to deal with other more pressing matters. I got to be POSITIVE, CONFIDENT, and PERSEVERANCE.

FALLING KNIFE 2

MRGE

MRGE blew up again this morning, further delay its filing and restated its Q2/Q3 results. The "cockroach theory" is right after all. This is becoming a much bigger concern for me and I believe I have to cut loss and run. My original theory no longer holds and there could potentially more cockroaches coming out. Despite the loss, I have to try to preserve the capital to fight for another day. Every time I speculate, I loss. It almost never fails. This is so difficult and frustrating. Just as I am ready to move up, a couple of stocks blow up. How will it play out though? Will shorts cover after the opening? Sold. I have suffered quite a bit from "falling knives" recently (SFCC, MRGE, VPHM), not to mentioned those value traps (ABT, BSX, ORCL). I think enough is enough. From now on, NO MORE FALLING KNIVES. Buy good company on the way up.

VPHM

One of the worst thing of a bad stock pick is that it causes so much anxiety that you lose your focus. That was what happened with VPHM. It probably was a bad idea to pick up at 20, but it was definitely worse idea to add at 16. Today, I was unable to do anything at all, other than watching this falling by more than 35% in a single day.

While I am still in pain of this terrible loss, I would like to put it in perspective. Even after today's big drop, it really represents less than 1.5% of my entire portfolio. It is significant, but manageable. Forget about the past, thing about the future. What should be done in order to limit further losses going forward. I believe it is too late to sell here. I do not believe the stock will fall to $5.0 level, given its significant revenue and operating profit growth in 2006. I believe it will bounce a bit from here, which may be the time to scale back a bit in order to limit future losses. This is not supposed to happen to me this year. I am rather disappointed. I failed to recognized the tremendous risks with VPHM, and I listened other's tip. (TIPS IS FOR WAITERS). I averaged on a falling knife. Too many mistakes for one highly speculative stocks, in the most difficult sector. Let's see if it can recover to 13-14 level next week.

TRUE RELIGION 3

OFB.UN

Results are out this morning and good. The unit gets no respect from the market and has been trading down by almost a loonie since its IPO, and is currently yield almost 13%. I think I can scoop a bit this morning, probably at 9.25 level and collect my coupon. I believe it could go back to 10 before the end of this year for a nice 20% total return. Unfortunately, I could not steal this one. It went up almost 10%. I'll wait.

TRLG

I am more or less convinced and I may take a small position this morning. This is a real volatile stock and I have to keep an eye on it. This is one of the most difficult stock. For some reason, I just could not feel comfortable. Better not to own it.

TRUE RELIGION 2

TRLG

TRLG announced its Q4 results after the market closing and it was very good. Revenues, operating income, net income all up and it raised its 2006 EPS from 1.20 to 1.25. However, the stock went down in the AH to 19.5 level. Did the market expect more? Probably. At this level, it is traded at approximately 16X of its 2006 EPS, and the company earnings are growing at almost 40% for the coming year. It is traded at deep discount. Is this a fad or an opportunity? Is this stock too volatile to buy? Is there anything I missed? The chart looks decent to me as well. I have a hard time to find anything negative to rat about this one.

SMTS

SMTS on the other hand, had a so-so earning report. The top line appeared a tad light (43% vs. 50% guidance) and the bottomline is in line. The market did not like it and pushed the stock down by 10%. While I am holding my current small position, I did regret that I overlooked the excessive valuation when I first looked at this company. It did raised a red flag, but I brushed it away, partially because I really liked this business (large addressable market, relatively low penetration, virtually monopoly). The high multiple is exacerbated by the ill-timed secondary, which I did not consider necessary. Having said that, I continue to believe the fundamentals remain strong, growth story remains intact, and I believe the chance is good that the company will beat its own guidance in 2006 significantly. I am hanging tough.

A COUPLE OF SMALL GEMS

XMC/CDV

Home Capital warned this morning, one of the first time I have ever known of. It brought down the XMC as well. I am looking for opportunity to re-purchase XMC. Is this the opportunity? I put a bid at 9.5, did not get filled. HCG would be a better play though as there was some panic selling at opening. It went down as low as 32 but recover to 35-36 level, a good day trade.

I am also looking to add some CDV, which just announced great results for its Q1/06. It is rather reasonably traded at this level (about 10X of its 06 earning estimate). I probably will open a small position today. Opened a small position at 3.09 this morning.

SPRING TRIMING AND PLANTING

HRAY / UNH

Trim some HRAY here to take advantage of this rally, another even trade. I now reduced the exposure to HRAY significantly with two trades in the last few weeks. With the proceed, I added some UNH, which has been under tremendous pressure, due largely to some insiders selling and downgrade from Goldman this morning. I thought at this level (55), UNH represents good value, not to mention in the right sector. I still believe it will see a "7" handle by the end of this year, for a 20%+ return. I felt pretty comfortable of holding UNH, particularly in this range-bounding market.

DEFENSE

UIC

UIC is my pick in the defense sector (I actually picked this name last week, but I sort of overlooked it and regretfully did nothing). It is a small cap defense name. Very robust growth, high level of return equity and return on capital, large backlog, clean balance sheet, free cash flow positive, reasonable valuation (18.5X of its 05EPS of 2.85), in the right sector (defense, and a bit of exposure in the energy sector, although to be disposed), dividend, strong management, little analyst coverage, terrific chart with new high every day. Management appears to be focused, measured, confident and competent. Opened a small position at 52.50. I got be careful on the defense factor though, particularly this year as the Democratic could potentially won the mid term election, which will be rather bad news for the whole sector. A democratic President won in 2008 would be a disaster for the sector, not to mention the name could be Clinton!

To balance it out, I scaled some HRAY off to reduce exposure on this name. It is a flat trade, but it's acceptable. HRAY is in the panelty box for a while and my exposure is relative large. I will continue to scale back of this name.

TRUE RELIGION

TRLG

The screen produced this little company. Growth: very strong (0.9, 1.2, 1.45 for 05 06 07 respectively). Large cash with no debt; Valuation reasonable, traded at about 16.5X of its 06 EPS, with greater than 20% earning growth. Very strong return on equity and capital and the company generates significant free cash flow. I have a few nagging concerns though. (1) The company is not only very small ($400 mil. Market cap, but also very young). (2) It is in the apparel industry, where competition is fierce, and the lifespan of a brand name could be very short. Fashion could change over night. I am also hesitate to open a position here in front of its Q4 earning report. I think it probably is better to wait for the earnings and then decide what to do next.

FOLLOWING THE MONEY

CVO

I opened a small position on CVO. This purchase is really "following the management". Mr. Burton has a very successful track record. Everything he touches has turned out gold. While the easy money has been made, I believe there still some room to grow. The company is on the verge to make some money, as early as Q1/06, and the company guided the 2006 EBITDA at approximately $150 million. It is traded at about 5X of its EBITDA. It appears to be a reasonable valuation.

SCSS

The screen this morning produced this little company in an unexpected place, a mattress producer and retailer. I really like this company (market cap about 1.2 billion) because of its strong growth potential. The company's long term growth targets: same store growth of 7%-9%, revenue growth: 15-20% and EPS growth: 20-25%. That is a very ambitious long term growth target. The company has very high ROE (37.5%) and high ROC. Clean balance sheet with no debt and significant amount of cash. It is free cash flow positive. It has recently guided its 2006 at high end of its long term growth target. The only drawback is that it is slightly expensive, trading at approximately 26X of its 2006 EPS, but about 20X of its 2007 EPS. I am also concerned a littel bit of the slow real estate market and potential slow down of consumer spending. Having said that, I believe the stock could has a "4" handle by the end of this year, and the down side risk is really limited. I intend to open a small position soon.

ANOTHER POSTPONEMENT

SFCC

SFCC postponed earning release, withdrew guidance, and took restructuring charges, and the stock went down by 21% in the AH. While I am very upset, this appears to be the final straw and I have to dump this one tomorrow morning, taking my loss and run. I have not been very good at this speculating game. Everytime I tried, either on the short or long sides, I lose. It is more than clear to me now that I am not too good at this game and I better not to participate any further. SFCC is clearly a speculation, and so is MRGE. Secondly, David Burrow is right. Turn around generally is not an easy job, takes a long time, and may fail as well. Look at my loss positions, they are all turn around types.

Should I try on the short side? Isn't it speculating again? How comfortable do I feel to short this? I do not feel comfortable at all. Then I should not do it. Take a deep breath, take the loss and run. It's not the end of the world. Find better investments. You are doing not a bad job thus far, far better than most professionals. One losing position does not make your portfolio. You just have to try harder.