The traders are back, and the market is buzzing with action. Too bad the indices continue to stay range-bound. But that's all right -- we aren't index traders, and we don't worry about benchmarks.
The Under $10 portfolio made up some ground this week, picking up about 6%. The gains were widespread, but the surprise winner for the week was KFx (KFX) . Its stock went up 16% this week.
You remember KFx, don't you? The stock we were crazy to own. The stock that the shorts phoned us to say that the company was a fraud and would never market a product. They were trying to get us to sell. Fat chance.
We never lost our conviction on the stock despite the 100 mile-per-hour headwinds. Our homework told a much different story than the shorts and journalists -- like the New York Post's Christopher Byron, who chastised the company in his weekly column -- would have you believe.
We constantly updated you as to why we defended this position all the way down to its low of $6.24 a share in mid-August, and our painstaking mentality is finally paying off. Here is a timeline of how we played the stock, which provides insight into the reasoning behind our average-down philosophy. We don't mind owning stocks for a longer period of time when the story is enticing.
KFx was the first stock in the Under $10 portfolio. We viewed it as an attractive way to gain exposure to the clean-burning coal market with an unknown company. The catalysts included tax incentives, partnerships and plant construction for its K-Fuel process.
We found out quickly that we weren't the only ones who were interested in this "unknown" company. In fact, there were a lot of short-sellers out there with plenty of ammunition to throw at this name. KFx is so overborrowed by short-sellers that it would take about one-month's worth of trading to cover all the shares shorted. We did our homework and believed it would be profitable to take the other side of this trade, but entered only a small position at first, as it made no sense to step in front of a freight train.
KFx shares were quickly raided by the shorts. And the expected hate mail came in. Based on the emails we received, you would have thought we were trying to pump the stock to make it more attractive to sell in the open market. Of course, nothing could have been further from the truth.
As much as the shorts tried to break us -- we were told KFx was essentially a shell company with no real business, product or future -- we stayed the course and added more shares almost every time a big short-seller came in and hammered the stock. We took in the supply at $8.06, and at $6.97, and at $6.91, and at $6.32 a share. Remember how painful that was? We do.
But we continued to do our homework and believed the shorts' backs would eventually be broken and the longs would have their day. The stock scored well in the proprietary Alpha component of our proprietary screening system, which measures the potential for a stock to make a large percentage gain over a short period of time. We believed that the forces of supply and demand would eventually push this stock higher given the number of short-sellers out there and list of potential catalysts.
This week the stock traded within a nickel of $8 a share. Using a first-in, first-out (FIFO) method of accounting and taking into account our current market buys and sales in KFx, we have an 18% gain in the stock in three and a half months.
Not bad for a stock we were warned to sell. We will take that kind of gain any day. We sold our entire stake on Friday, wiped the sweat off our foreheads and are ready to move on. Not all controversial stocks will yield the same positive returns, but the benefit of staying the course in companies like KFx definitely outweighs the downside risk.
Now let's take a look at the portfolio and some of the other moves we made this week.
One quick note: Ones are stocks we would buy now, while Twos are stocks we would buy only on a pullback from current levels. And as a reminder:
-- A Game Breaker is going to change the landscape of an industry, as Intel, Microsoft and Wal-Mart did in their sectors. Investors can make big money in these stocks by getting in before the crowd.
-- Inflection Point stocks have a broken business model that's on the mend but has yet to be recognized by the market. Investors who recognize a turnaround early can pocket strong returns.
-- Stealth Stocks are often unknown names to the general public, but can be hugely profitable investments, especially when they score well in the Alpha component of our proprietary rating system.
ONES
Applied Micro Circuits (AMCC: Nasdaq, $3.38, 1,700 shares, 6.05% of total portfolio, Inflection Point): Lehman downgraded the stock this week as part of a ratings change on the industry. The Lehman analyst expects a slew of preannouncements followed by negative stock reaction in the group. The sentiment around this sector is clearly negative, but we are bullish on AMCC with a six-to-12-month time horizon given its strong business model -- the result of its round of acquisitions -- and strong balance sheet. We are buyers below $3 a share.
Grey Wolf (GW:NYSE, $4.35, 800 shares, 3.66%, Stealth Stock): Energy prices remain high, and this should provide the necessary incentive for increased oil and gas drilling. Grey Wolf is increasing capacity utilization, and day rates -- the amount companies like Grey Wolf charge for use of its drilling equipment -- have been moving higher. We believe this stock is poised to trade up into the end of the year as the strong pricing environment works its way to the bottom line. We will be buying more if the stock trades back toward $4 a share.
NIC (EGOV:Nasdaq, $5.64, 1,000 shares, 5.94%, Stealth Stock): Management is staying busy and is scheduled to present at the Think Equity Partners Growth Conference Sept. 22 in San Francisco. We bought 200 shares this week at close to 10% below our last purchase price and 28% below the stock's high for the year. We remain optimistic that the Florida portal deal will be done this year and that management will continue to grow the pipeline and convert interested states and agencies into customers over the next 12 months.
Restoration Hardware (RSTO:Nasdaq, $6.02, 1,000 shares, 6.34%, Inflection Point): Looks like the high end of the retail market is the only area working right now. Neiman Marcus NMGA and Coach (COH) were out with positive results this week, a good sign that shoppers are still spending money on expensive goods, which is Restoration's niche. The company reported solid second-quarter results in August, and we expect the upward trend in this Inflection Point play to continue. Management provided very conservative fourth-quarter guidance that we feel is achievable. We have a large position in this stock and won't look to add shares until we are more confident in the endurance of the consumer.
Revlon (REV:NYSE, $2.65, 2,000 shares, 5.58%, Inflection Point): The company gave a bullish presentation on its business at the Prudential Back-to-School Consumer Conference Wednesday, emphasizing the progress new CEO Jack Stahl is making in healing the wounds left by the former management. Revlon is taking back lost shelf space, has fixed its balance sheet and is investing in new ad campaigns designed to re-energize the brand. We are buyers of the stock below $2.50 a share and believe 2005 will be the turning point in the company's bottom line.
Sanmina (SANM:Nasdaq, $7.25, 500 shares, 3.81%, Inflection Point): Thomas Weisel met with management this week and said Sanmina's September quarter is on track. This should cause a sigh of relief among the bulls out there after the Intel (INTC) disappointment sent this stock back toward its 52-week low of $6.30 a share. We believe restructuring efforts, a valuation at the lower end of its historical range, and the hiring of a CFO in late August will put a floor under the stock here. A turn in the economy will provide significant upside from current levels. SonicWall (SNWL:Nasdaq, $6.15, 800 shares, 5.18%, Inflection Point): Competitor RSA Security RSAS was upgraded by JP Morgan this week, Cisco (CSCO) bought a voice-over-Internet protocol (VoIP) security play, and Off the Record Research was out with some bullish commentary on SonicWall's business. We expect the tone around the network security group to remain positive for some time because this sector is less sensitive to IT budget cuts and still underpenetrated. We are buyers of this stock below $5 a share now, and believe it will trade back toward $8 a share during the next 12 months.
Tibco Software (TIBX:Nasdaq, $7.10, 1,000 shares, 7.47%, Inflection Point): The software company gave a rather optimistic presentation at a CSFB conference this week. Tibco said that its Staffware acquisition is running ahead of plan and reiterated that its predictive software -- designed to locate problems in company systems ahead of any complications -- is on schedule to be available in the fourth quarter. We wouldn't be surprised to see the stock trade back over $7 a share ahead of its Sept. 21 earnings release date, and we look for the upgrades to follow.
TWOS
Comfort Systems (FIX:NYSE, $7.16, 600 shares, 4.52%, Inflection Point): This stock continues to plug along, trading over $7 a share this week for the first time since early July. When we spoke with the company this week, management said that its activity levels are solid, and it is cautiously optimistic on the future. We will look to buy the stock below $6.50 a share, but we may not get the chance; a recent upbeat report from an industry analyst calls for real-estate growth through 2005 and 2006, which means there will be more demand for heating, ventilation and air conditioning.
El Paso (EP:NYSE, $8.22, 500 shares, 4.33%, Inflection Point): We asked ourselves this week, "If we didn't already own the stock at $1 below its current price, would we be buyers at this level?" The answer is yes. We believe this stock is going to trade into the double digits sooner rather than later, as the Street is still overly negative and upgrades will likely come if natural gas prices creep higher. Barbara Marcin, the long-running manager of the Gabelli Blue Chip Value Fund, is still holding her 3 million-share stake in the company, and we would rather be betting with Marcin than against her.
Hanover Compressor (HC:NYSE, $12.47, 400 shares, 5.25%, Stealth Stock): The company presented at the Lehman Brothers Energy Conference on Monday, and management remained upbeat in its outlook. On the international front, Italian subsidiary Belleli continues to drive results with its growing backlog and strengthening position in the gas-rich Middle Eastern markets. We bought 200 shares ahead of the presentation, and the stock has gone up since. We believe this energy play, which has been working to deleverage its balance sheet, will continue to benefit going forward from high natural gas storage utilization.
Nevada Gold & Casinos (UWN:Amex, $11.29, 300 shares, 3.56%, Stealth Stock): We are growing increasingly frustrated with the lack of news in this name, and we are going to use any move toward $12 a share to make sales. The company has failed to execute on a number of potential positives for the stock, and we have better places to put this money to work.
OraSure (OSUR:Nasdaq, $6.59, 200 shares, 1.39%, Stealth Stock): Execution problems continue to plague this stock, but the company put out a somewhat upbeat 8-K on Wednesday with regards to the higher-than-expected false positives of its oral fluid HIV test, OraQuick. The filing noted that the company does not believe its manufacturing process, raw materials or shelf life for the drug had anything to do with the results. In other news, OraSure is slated to meet before a judge shortly regarding its patent dispute with Schering-Plough (SGP) for its Histofreezer and Freeze Off cryosurgical wart removal products. A quick resolution here should be a positive for the stock. We are waiting for the stock to trade toward $7 a share before closing out our position.
Quantum Fuel Systems (QTWW:Nasdaq, $5.60, 600 shares, 3.54%, Game Breaker): The stock is slowly picking up steam again, as it often does when it dips under $5 a share. High oil prices have continued to drag down the economy. The more they affect the consumer, the more incentive Washington has to invest in and provide tax breaks for fuel cell and hybrid vehicles. We believe this stock has the greatest long-term potential of any of our energy names, but we will continue to move in and out of the stock under $5 a share and over $5.50 a share, as we did this week. This strategy has proved successful to date.
Skyworks Solutions (SWKS:Nasdaq, $9.42, 300 shares, 2.97%, Inflection Point): Positive news this week out of Nokia (NOK:NYSE ADR) and Motorola (MOT) trumped last week's poor midquarter update from Intel. We believe Skyworks is the premier player in this space and will continue to outperform the group given its exposure to Motorola. We will wait for the stock to dip below $8.00 a share before buying back the shares we sold, but we still have exposure to any near-term upside.
David Peltier and William Gabrielski, writers ofTheStreet.com Stocks Under $10, are research associatesat TheStreet.com.
Mr. Peltier is a contributor to TheStreet.com Save Safe Plan and maintains the model portfolio for that product.
TheStreet.com is a publisher and a registered investment adviser. TheStreet.com Stocks Under $10 contains the authors' own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You further understand that Messrs. Peltier and Gabrielski will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in TheStreet.com Stocks Under $10 may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Past results are not necessarily indicative of futureperformance. Investing in the stocks chosen forTheStreet.com Stocks Under $10 model portfolio is riskyand speculative. The companies may have limited operatinghistories and little available public information, and thestocks they issue may be volatile and illiquid. Trading insuch securities can result in immediate and substantial losses of the capital invested. You should use only risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. As editorial employees of TheStreet.com, Mr. Peltier and Mr. Gabrielski are restricted from owning individual securities other than stock or options in TheStreet.com, Inc.
-----------------------------------------------------------Visit the TheStreet.com Stocks Under $10 site (available to subscribers ONLY) by clicking here: http://www.thestreet.com/k/su/index.html
To view TheStreet.com Stocks Under $10 portfolio on theWeb, click here:http://www.thestreet.com/k/su/portfolio.html
For customer service on your account please visit:https://secure2.thestreet.com/cap/selfserve/
-----------------------------------------------------------
(c) 2004 TheStreet.com, Inc., 14 Wall Street, 15th Floor,New York, NY 10005, Attention: Customer Service Department