Taipan Online: Hotline

Good evening. Martin Denholm here to get your weekend off to a flying start with a very profitable sell alert and a bevy of additional positive updates on other Taipan positions. So buckle up and hold on tight for a few minutes.

First, let’s get to that sell alert, courtesy of Taipan editor and the fellow behind the Value Edge and Volume Spike investment services, Brad Colburn.

Brad just e-mailed me this alert:

“Martin – this stock has broken away a second time. It’s time for Taipan subscribers to bag profits now!”

Not going to argue there! Brad continues…

***TAKE 41% GAINS ON PARALLEL PETROLEUM

“Back in the April 2005 issue of Taipan, I recommended you buy shares of Parallel Petroleum (PLLL:NASDAQ), a company whose stock chart clearly showed a breakaway point at the time. Hopefully you bought under US$7 as I suggested.

“Since then, the price activity in PLLL has exceeded my expectations. Not only did this breakaway stock quickly soar past US$7, it left it in the dust, scooting past the US$9 level after a second breakaway.

“What fired PLLL’s rise was its addition to the Russell 2000 and 3000 indices and this perfect storm has brewed nicely to produce today’s action.

“PLLL made a brand new 52-week high of US$9.39 and closed at US$9.32. From the official entry price of US$6.60 on March 29, you’re sitting on a sweet 41% gain.

“This play has proved itself as a true breakaway stock, so go ahead and take these gains off the table.”

Not bad for starters – thanks, Brad.

On to the other news, where my Red Zone colleague Erin Beale has a rash of profitable positions to tell you about. First up, good things to report from Argentinean drinks company Quinsa SA (LQU:NYSE), which produces beer in Argentina, Paraguay, Uruguay, Bolivia and Chile and soft drinks and mineral water in Argentina and Uruguay.

Erin writes:

***BOTTOMS UP! QUINSA TACKS ON 10% THIS WEEK, SCOOTS TO NEW 52-WEEK HIGH AND GIVES TAIPAN READERS 27% GAINS IN ONE MONTH

“Following a fiscal year that showed a 23% rise in net sales and a 60% rise in net income in 2004. Quinsa has a forward P/E just under 10, and a low PEG ratio of 0.59. After reporting healthy volume sales growth last quarter, it’s on track to post a forecasted 31% increase in earnings growth this year. And as the economic conditions in Argentina and its neighbors continue to improve, higher sales should follow.

“Quinsa’s share price has added more than 10% this week alone, hitting a brand-new 52-week high of US$30.85 – that’s a 27% gain over our US$24.25 entry price just last month. The company recently announced that it would be canceling some shares and consolidating classes, which is also good news. This tightens the float, and has much the same effect as a company buying back its shares. Continue to hold.

***BRAZILIAN STEEL: 40% PROFITS AND A 15% DIVIDEND YIELD

“Elsewhere, our undervalued Brazilian steel company Companhia Siderurgica Nacional (SID:NYSE) also continues to perform strongly, having successfully navigated some volatility. By now you should have received your US$2.97 per share dividend that was announced on May 2 and payable on June 21. That’s a yield of almost 15%!

“Currently trading around US$18.70, we’re up over 40% on this position, including the hefty dividend. Continue to hold.

***TERRIFIC EARNINGS FROM THE TUBE! GRUPO TELEVISA PROFITS LAUNCH 165%

“Mexican broadcaster Grupo Televisa (TV:NYSE) recently reported second-quarter earnings showing a 165% rise in net profit, thanks largely to rising political advertising and better results at its satellite business.

“Though Televisa still remains embroiled in a legal battle with rival Univision over royalties, its stock has charged into breakout mode. Sitting atop a new 52-week high of US$67.85, TV continues to nail higher highs and higher lows. Hold your shares.

***CHINESE INTERNETS ZOOMING HIGHER

“Chris DeHaemer’s remaining Chinese Internet stocks are flying.

Netease (NTES:NASDAQ) is up 59%…

SINA Corporation (SINA:NASDAQ) is up 28%…

SOHU.com (SOHU:NASDAQ) is up 33%.

“But the gains shouldn’t stop there. China’s move to revalue the yuan’s peg to the US dollar from 8.28 yuan to 8.11 on Thursday and float it against a basket of foreign currencies should continue to send these stocks higher, considering they rely heavily on the strength of the economy. Continue holding.

***FOUR MORE STOCKS ENJOYING THE SUMMER HEAT

“First recommended on May 3 at US$19.70, Dawson Geophysical Company (DWSN:NASDAQ) ran up US$1.14 today going into its earnings report, giving you a 24% gain in about two months. It’s also presenting at the 2005 Oil & Gas Conference in Denver, CO. from August 7-11, which should provide some positive publicity, so there’s no reason to sell any time soon.

“My gambling play, Alliance Gaming (AGI:NYSE) back in August 2004 also remains a hold. The company will report earnings on August 9.

“I’m also continuing to recommend a hold on the Diversified Security Solutions (DVS:AMEX). It rose 12% today on no news. Continue to hold.

“I’m also recommending that you hold Quantum Fuel Systems (QTWW:NASDAQ). According to a press release, the U.S. Department of Energy just awarded the company “Phase 2 of its US$2.6 million program for the development and advancement of next generation hydrogen storage technologies.”

Wow! That’s a pretty nice batch of updates. Thanks for the info, Erin. OK, on to an update of my own – sadly not as good, but certainly not disastrous.

***FARO TAKES A FALL – BUT DON’T PANIC

Faro Technologies (FARO:NASDAQ) is a small-cap technology company that makes portable software and computerized measurement systems for the engineering and manufacturing sectors. It's the only company with portable 3D computerized measuring equipment and boasts almost half its market's US$200 million value. No surprise, since some of its biggest clients include defense giants Lockheed Martin and Boeing. In fact, it just received a lucrative new order for ten laser trackers from Boeing.

I originally recommended the play at US$25.09 on April 12 in a special pre-release alert in advance of the company's conference call. It also appeared in the May 2005 Taipan newsletter.

Since my recommendation, the stock has fared well, posting steady gains. But it took a tumble this week.

Because FARO prefers to issue annual earnings guidance, rather than quarterly updates, a miss can shock investors. (According to Chairman and CEO Simon Raab, “One of the reasons that we give only annual guidance is that we expect to have quarters where we take initiatives which may lower earnings in the short term, but result in long-term growth.”)

Unfortunately, FARO missed during the second quarter.

Yes, second-quarter sales were up 28.2% to US$30.9 million from US$24.1 million in Q2 2004. And new orders surged 57.5% to US$34.5 million (not counting the new order from Boeing).

But FARO announced that second-quarter earnings-per-share will be “significantly less” than the US$0.29 from Q2 2004, thanks to lower margins, higher expenses and problems with shipping late orders (which the company says will be corrected during the current quarter). It will announce the revised EPS on August 8.

Naturally, investors bailed on the stock Tuesday and Wednesday, sending it sharply down and turning our 10% gain as of Monday's close into a 5.6% loss as of today.

FARO has endured volatility before but nevertheless remains a solid company with healthy upside potential. The usual reaction when a company misses earnings is to panic and sell - just like everyone else. It’s as if folks think an earnings miss suddenly makes it a bad company overnight. Wrong! This is normal business life. It’s not great all the time and the stock won’t go up all the time. Often, a sizeable dip means not only that there’s a big gap to refill (Faro has done so before and its chart technicals suggests it will again this time), but also allows investors to buy more shares at a lower price, provided the company's business and financials remain solid. Which they are.

Profit margin is 15% (versus the industry average of 6.4%) and return on equity is 18%, double the industry average. The company is also set to open a new facility in Singapore later this year. And according to CEO Raab: “We continued to invest in growth-related initiatives, which will impact our second quarter earnings, but these initiatives are already paying off in terms of the growth in new orders.”

Simply put, a bit of short-term earnings pain for some long-term growth gain. Yes, the company might have lost a bit of credibility in the process and likely won't meet full-year earnings guidance. But with the rash of new orders, its long-term outlook still seems pretty robust.

So don’t panic and sell. Continue to hold and wait for the rebound, which started today with a rise of 70 cents (3%) to close at US$23.67.

All that remains is for me to bid you a bon weekend!

Best regards,

Martin Denholm

Executive Editor, Taipan

MMM

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