WATCHING ENERGY STOCKS

Energy stocks are in a free fall all this week. I am kind of warming up to the sector. I am putting together a buying list here: PCA.TO, ECA.TO, CVI/A.TO, HPX.TO, PGE.TO, DDV.TO, GO/A.TO. I like gas names better here because all it needs is a normal winter. I also like some of the drillers here.

CASH IS KING

I just moved about 20% of my portfolio into cash and fixed income. There are simply too much uncertainties out there and we are coming into the September-October season when seasonaly has been poor performing period of the year. The housing numbers appeared really bad. There's no more dispute about the slow down, the difference is on whether the landing is "soft" or "hard". I believe caution and defense remain the key in the next few months. There will be plenty of time to get into the market. If you have to buy any, make sure it is non-cyclical, defensive and at low entry point.

JEAN COUTU GROUP INC CL A SV (PJC-A.TO)

The troubled Canadian drug store operator, PJC-A.TO announced that it unloads all of its US drug stores to Rite Aide (RAD) for a total consideration of $3.4 billion (cash, stock and assuming debt). While this represents an admission of failure on PJC-A.TO, this move is positive on PJC-A.TO. Its 370+ Canadian drug stores are very healthy indeed, with SSS grows more than 5.5% in July and has been consistently growing at 5% level. Coutu family has a very strong reputation for excellent operator and there will be some organic growth opportunities in Quebec. This sale will address its balance sheet issue and will unlock the value of its Canadian stores. Its Canadian operation will probably worth about C$15/share, plus the 30% of RAD. There's also potential to turn it into a trust (a lot of bankers are knocking its doors), which could increase its share to C$20/share with a decent yield (7%-8%). This is also a better way to long RAD. I may add some PJC-A.TO right on here.

position: long PJC-A.TO

Vonage Holdings Corporation (VG)

Despite all kinds of troubles, including a significant number of lawsuits, I see a lot of insiders buying activities in the last few days, for fairly decent volume. Do insiders know something we do not? (They always do). Is this the bottom for VG? I am tempted, simply because this is by now universally hated, not only analysts, bankers, Cramer, even their customers! Could any stock be hated this much? Not only hated, VG has become a laughing stock. it gets no respect.

Position: None.

Alphatec Holdings, Inc. (ATEC)

Just an update, I have bought half of ATEC @ 6.0, higher than the current level. I am now looking to add another half probably here. I see management continues to buy at $6.0 level as late as Friday. This is a very speculative stock, and do your homework and be patient.


Position: long ATEC

DynCorp International Inc (DCP)

Robert McKeon, a director of DCP, bought about $2.0 million worth of stocks in the last couple of weeks, including about 97,000 shares on August 15, 2006, according to SEC filing. The company went to public in early may at $15 and has been falling to current $9.75. It has a decent first quarter of FY07 (09/07), with 26% growth of its revenues, improved EBITDA margin and operating margin, and earned 0.17/sh on a pro forma basis. It also provided fairly good guidance. Based on its pro forma earnings, it is significantly under-valued, and I guess that why insiders are back in trucks. CIBC has a $15 target on the stock, implying a 50%+ return. I am putting this one on watching list.

Position: None.

ATEC

ATEC, a small medical equipment company (market cap $215 million). It went to public in July via IPO at about $9.0 and has been falling to about $4.75 recently, and management, insiders, and institution buyers, have been buying this one all way down. Impressive. This company reminds me a lot like EVVV. Tremendous sales growth, improvement of gross profit margin, a decent portfolio of products, strong management, impressive operating matrix (sales headcount, physicians signed, surgeries performed etc). The company is almost breakeven on a cash-basis, and has a clean balance sheet. The company is also provided very strong and aggressive guidance for the next two quarters, and provided strong margin outlook for 2007. In the healthcare industry, this is also somewhat defensive, although the stock has quiet high beta.

My only concern is with the macro environment. I will put this name on my watch-list and may open a position if opportunity arises.

No position.

CRME 2

I am watching CRME here and may add if it falls below $11. (I accomulated a fairly large position in about $8 range in June and have sold 2/3 of the same position). While the earnings were a bit of weak than expected, management confirmed two near term catalysts: the re-submission of NDA in early September, and more testing results for one of its key drugs in October. There aren't a lot of coverages for this name and here is a note from CIBC this morning:

• "The fundamentals for CRME are strong and are likely to improve. We expect two positive major events near term: full ph.IIa data for oral RSD1235 and refiling/acceptance of the IV RSD1235 NDA. We believe there is a strong likelihood CRME shares will trade substantially higher in 2H06."

CIBC has a $19 target.

Long: CRME

WEAK PPI

The PPI number is much more moderate than expected and futures jumped. This could be a start of a near term rally, which could sustain for a few days. I may add some positions here.

CALL ME CRAZE!

Hard to believe that I had added a couple of positions (CAE.TO @ 9.07; CDV.TO @ 4.85) in the past couple of days, despite my continuing negative view of the current market conditions. I am being opportunistic here and probably would like to get out these positions with a small profits, if I could. I continue holding the view that meaningful rally is highly unlikely, until the issue of inflation/Fed/recession is resolved eventually. When it happens, I do not know. Until then, pick you spot and be very cautious.

HSKA

I have been pondering to open a position on HSKA, a micro-cap, for a few days. Here's my reasons to buy:

• Strong top line growth (12% in the last few quarters)
• Significant improvement of gross and operating margins;
• Becoming profitable for the first half of 2006;
• Increased guidance for both Q3/06 and 2006;
• 2007 guidance is blowing me away, $0.1-0.2 per share;
• It is in a growing, yet defensive sector (IDXX, its main competitor, is also reporting very good results);
• Under-valued, it is traded at about 1X of its sales and about 11.7X of its 2007 EPS.

On the other hand, there's also a few concerns:

• It faces a dominating and fierce competitor, IDXX;
• Its balance sheet is a bit onerous;
• The stock is a bit over-bought;

I believe it could be at $1.8-$2.0 stock by the end of next year, a decent return. The bigger concern is the condition of the overall market. Is this the time to add more risks? (partially filled @1.35. Stop loss @1.25).

POST "PAUSE"

Future market indicates a green market opening, and a couple of good earning reports helped as well. The market wants to rally, you can feel it. Is a rally sustainable? I doubt about it. Fundamentally, the "PAUSE" did not resolve any issue. We still have concerns about inflation (hence potential rate increases in September and December), and slowing economy. Every economic releases will bring out talking heads, speculating the Fed's next move. Furthermore, I see no leaderships, without which I have a hard time to see the market rally meaningfully. Having said that, you have to take what the market gives. A rally, even a short one, would be welcome in this rather difficult year.

PAUSE?

Whatever happens in the pre-market or at the opening probably are wrong moves. The market is unlikely to do anything until 2:15 pm, and even then, the early reaction would likely be reversed. The consensus of "PAUSE" is also concerned me a bit which is probably built into the price already. Given that, it is more likely that the market will sell the "PAUSE", instead of rallying, particularly if it rallies in front of the announcement. Furthermore, "data dependent" will likely retained in the statement, and therefore, more uncertainty about potential future hike, and "waiting for the Fed" game starts all over again. All in all, meaningful and sustained rally is simply unlikely to occur in the near term. How depressing!

SXCI

SXCI, a Toronto based micro-cap (market cap of $66 million) healthy care service company, just announced its Q2 results this morning and it was excellent. Revenues up 52%, EBITDA up 80%, and EPS up 20%, booking up 12%, and raised 2006 revenues, EBITDA and EPS guidance. The company is in a very defensive sector (healthy care processing and services), therefore, can be bought even in today's market environment, and a significant portion of its top line are recurring. Valuation is very cheap, trading at about 16X of its 2006 EPs when it grows at more than 50% annually. Clean balance sheet with a lot of cash. It dominates in Canadian market share and is expanding into US market. With its balance sheet, cash reserve and strong share price, it will continue to expand by both organic growth and acquisition. I believe there will be additional catalysts in near term as I believe SXCI will continue to announce signing of large contracts, particularly with large institutions. This company was only listed on NASDAQ in late July, and a lot of US investors are not aware of this name, although it is rather well-known in the investment community in Canada. I believe this will be a $20 stock by the end of this year.