Hedge Fund

NewsletterAdvisors.com Inside: Nine highly regarded investment gurus reveal their favorite single investment ideas for 2007.

Table of Contents Dynamic Market Alert, J. Christoph Amberger: Aluminum Corp. of China

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Financially Fit, Nancy Zambell: FormFactor

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Gold & Energy Advisor, James DiGeorgia: Anadarko Petroleum

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Growth Report, Ian Wyatt: Minrad International

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Motley Fool Stock Advisor, David & Tom Gardner: optionsXpress

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Rising Star Stocks, Ian Wyatt: China Expert Technology

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Schaeffer's Power Stocks, Bernie Schaeffer: Axcan Pharma

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SmallCapInvestor.com, Bob Bogda: NutraCea

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The Sleuth, Addison Wiggin & Craig Walters: Par Pharmaceutical Companies

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he much anticipated release of Nine Favorite Stocks for 2007 from America’s Leading Investment Experts represents the latest edition of NewsletterAdvisors.com’s hallmark publication bringing sound investment ideas from some of the brightest minds in investing today to individual investors like you.

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Spring 2007 Released March 12, 2007 ©2007, Business Financial Publishing, LLC - All Rights Reserved.

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Dynamic Market Alert The Next Chinese IPO "Backdoor" Candidate J. Christoph Amberger

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J. Christoph Amberger

nitial Public Offerings (IPOs) have a proven history of making people rich. American IPOs recently have delivered tremendous first-day gains, including Under Armour (UARM: NASDAQ), up 95%... American Commercial Lines (NASDAQ: ACLI), up 35%… Chipotle Mexican Grill (NYSE: CMG), up 100%... in a single day. Not bad.

Aluminum Corporation of China (NYSE: ACH) (Chalco for short), a Hong Kong-listed company, plans to absorb two of its subsidiaries, smelter Lanzhou Aluminum Corporation and producer Shandong Aluminum Industry Corporation. Lanzhou and Shandong are listed on the Shanghai Stock Exchange (SSE), and to assimilate the two companies, Chalco plans to replace its shares on the SSE with its own at the rate of 1.8:1 for Lanzhou and 3.15:1 for Shandong. To give you an inkling of the magnitude of this event, Chalco is the second-largest aluminum producer in the world. It provides an important resource for a growing industry, aluminum and alumina, to China’s factories. The company registered 105.5 billion yuan ($13.2 billion) in sales last year ¾ 22.5 billion yuan ($2.8 billion) of that was pure profit.

But that’s nothing compared to what’s happening in Asian IPOs, which have become a breeding ground for stock market millionaires. Of course, there is a crucial difference between most of the Chinese IPOs going public in Shenzen and Shanghai and those you may remember from the IPO mania of the 1990s ¾ when Aluminum companies pushing into the market were start-ups There’s only one problem… Just like many hot Asian Corporation of China with no revenues and wafer-thin business plans. Many IPOs, this new offering will likely be heavily oversubChinese companies issuing shares today are large, scribed. People are going to stand in line to get shares ¾ NYSE: solid businesses that have been trading in Hong Kong and most will be turned away disappointed. Taipan’s (as “H shares”) and even on American markets (as “secret backdoor,” however, will allow you to get shares ADRs) for years, if not decades. of this Chinese IPO sensation ¾ before the new shares go public on the Shanghai Stock Exchange… because Aluminum Two factors have been working in their favor: the new Chinese mid- Corporation of China has been trading on the New York Stock dle class is flush with cash and eager to gamble, and the Chinese gov- Exchange as an American Depositary Receipt (ADR) under the symernment created an artificially high demand for IPOs by not permit- bol ACH. ting new equity offerings until May 2006. The trading volume for ACH already spiked quite nicely when the Now the floodgates are open: in the last three weeks of 2006, invest- company announced its plans. Another spike, and a nice ride up in ment banks and companies whipped more than a dozen companies price, should occur as soon as news hits Western shores that the through initial public offerings on the Shanghai Stock Exchange transaction has taken place in China. alone. Buy Aluminum Corporation of China ¾ looking for that short-term We’re currently up 56% on our position in Guangshen Railways price hike with the impending Shanghai IPO ¾ as a strategic long(NYSE: GSH). Another pick, China Life Insurance Co. (NYSE: term holding strategy (with a holding horizon of 2-3 years) in one of LFC), also rose considerably in the immediate aftermath of its rapid China’s key growth industries. While we prefer to buy foreign shares IPO... before fears of a bubble in Chinese stocks pushed the ADR directly on the markets and in the currencies they’re trading in, back down over the short term. ADRs present the easiest option for American investors to take advantage of foreign opportunities. But that’s yesterday’s news. The next big IPO is just around the corner. And again, we will be profiting from it through our IPO back- J. Christoph Amberger is the founder and president of Taipan door. Financial News (www.taipanfinancialnews.com) and the editor of the daily e-letter, Dynamic Market Alert. Sign up for your FREE subscripIn mid-January, two small Chinese aluminum companies approved a tion to DMA, and you’ll also receive the just-released report, Triple-Digit Gains buyout by their parent company. This by itself is an unremarkable From the Commodities Crunch. But please ACT NOW. This is a limited offer. event. But the buyouts will bring one of the largest and most successful metal-production companies in the world onto the Shanghai Stock Exchange.

ACH

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Financially Fit Chips Ahoy! by Nancy Zambell

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or mFactor (NASDAQ: FORM) came into existence during the raging technologydriven 90s. But unlike many of its brethren, the company survived the tech wreck and has propelled itself into an enviable leadership in the semiconductor industry.

Recently, IEEE Spectrum magazine named the company’s patent portfolio the sixth most valuable portfolio in the semiconductor equipment industry and first in the semiconductor test equipment category.

This tech pioneer is tops in worldwide sales of wafer test probe cards, used to test high-performance, advanced semiconductor chips, including DDR, RDRAM, SDRAM and ERAM DRAM chips, static RAM chips, NOR and NAND flash memory chips, serial data devices, chipsets, microprocessors and microcontrollers. FormFactor has been #1 for the seven consecutive years in advanced probe card sales.

Right now, 47 companies own 80% of the market. And with FormFactor’s gigantic share, it has effectively left its competition in the dust. In addition to its technological edge, the company’s major advantages include its global presence and infrastructure, as well as its excelled financial performance.

Electronic equipment is rapidly becoming more complex, requiring advanced engineering, and providing tremendous opportunities for companies like FormFactor that have proven their expertise and ability to not only survive, but to prosper from their consistent adaptation to new industry trends.

Nancy Zambell

The company set the chip testing industry awhirl with its patented state-of-the-art MicroSpring technology, which has had a tremendous impact on its clients’ bottom lines. Prior to this innovation, a probe card had to touch a computer chip 16 to 32 times to complete the regimen of tests required to make sure a chip functioned as needed.

In its fourth quarter ended December 30, 2006, growth in FormFactor’s memory and logic businesses sent the company’s profit soaring 81%, to $18.9 million, or $0.39 per share, from $10.5 million, or $0.25 per share, a year earlier. The company’s EPS handily beat Wall Street’s 31 cents-perFormFactor share estimate, and its revenues climbed to $98.7 million, from $71.8 million. NASDAQ:

FORM

FormFactor currently has the capacity to manufacture enough product to increase its top line to $125 million in revenues per quarter. But the company is expanding its Livermore, California, facility to achieve $150 million per quarter and is evaluating its Singapore facility for an expansion that could drive revenues to more than $200 million quarterly.

Through a series of advancements, Form Factor developed a 4-touchdown probe card and has continued its engineering success, culminating with its current hot product, the Harmony Probe Card that requires only one touchdown. Global clients such as SpiroxCorporation, ElpidaMemory, Samsung, and Intel use FormFactor’s custom-tailored probe cards to test as many as 250 devices at one time, compared with the 60 that the average probe card can handle.

And with zero debt and almost $500 million in cash on its books, there’s plenty of room for expansion. FormFactor expects to continue growing its revenues at a minimum 25% annual rate, and estimates its gross margin will be a healthy 54%-55%. It’s well on its way, having received a multi-million dollar order from Hynix Semiconductor at the end of January, scheduled to be shipped in the first quarter of 2007.

The Result: A phenomenal time savings that translates into higher profits for the company’s customers. It’s no wonder that revenues from FormFactor’s advanced probe cards have grown at a 30% compound annual growth rate for six years, propelling the company’s market share to 70%.

The company’s financials are in tip-top shape, with profitability and growth ratios more than twice its competition. Yet, the shares’ P/E of 34 is just a hair above its not-as-fortunate peers – a good omen of things to come!

And that market is tremendously expanding, thanks to increasing DRAM demand and the expected growth from Microsoft’s Vista PCs with their 9x increase in memory. In 2001, probe cards were some 9% of a $4.8 billion test equipment market. In 2005, the market expanded to $7.1 billion, and probe cards grew their share to 12%. By 2010, it is forecast that probe cards will have increased their share to 17% of a $9.2 billion industry.

I recommend that you purchase 100 shares of FORM at a price no greater than $46.75 per share. My 12-24 month price target is $58.00, about a 30% increase from today’s level. Sign up to receive a free subscription to Financially Fit. Inside each issue you’ll receive insights into personal finance issues including selecting an online broker, maintaining a balanced portfolio, retirement planning, understanding different investment strategies, and planning for your children’s college and university tuition.

Additionally, FormFactor is steadily gaining market share in the NAND sector.

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Gold & Energy Advisor Forget Wall Street's spin on energy buy Anadarko Petroleum by James DiGeorgia

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ith little doubt this one of and not the $20 that Wall Street originally calculated. The majority of the best possible energy the reserves are natural gas. The focus of many oil companies is plays available to investors shifting to natural gas. in the entire energy sector. We expect that the seasonal weakness Earnings of demand during spring will help hold down energy prices and the Earnings are up about 300% since 2002 and look like they’ll slow in share price of Anadarko growth and peak in 2008. Petroleum (NYSE: APC), giving investors an opportunity to buy The stock price did not reflect the growth in earnings and does not shares at what may be looked at reflect the company’s substantial reserves and potential. later as a wonderful low-cost buyJames DiGeorgia ing opportunity. We think a sub- This stock is not an earnings or growth story but is an asset story and stantial move upward in the share price of APC will likely be enjoyed will require patience for investors to realize its potential. as we move from spring to summer as, historically, energy prices move back up. Of course, if there are any major energy disruptions Fundamentals or if saber rattling between Iran and the United States increases, prices may move higher with these events. Recent reports that Israel The fundamentals of APC are above average for the market and its has negotiated the right to use the airspace of three Arab countries peers. to strike Iranian nuclear sites demonstrate the danger of a spike in the price of oil to $100 a barrel or more is ever presIts P/E is lower that the industry multiple and substanent. tially lower than the market multiple. Its profit margins Anadarko are very strong and its debt, even after the acquisition, Petroleum If you never heard of Anadarko, you should have. It’s is manageable and is backed by substantial reserves. the largest independent oil and gas exploration, proNYSE: duction and marketing company in the United States. Risks Most of APC’s focus has been in the United States but APC does have some international operations. Industry risks. There are several industry risks, includRecently Anadarko acquired Kerr-McGee and ing capital intensity, potential terrorist attacks on faciliWestern Resources. The acquisition announcement was made June ties and volatile energy prices. 23, 2006, and the price of the stock has since traded at the lower levels of its trading range. Most companies that acquire other compa- Hedging. Some hedging does have costs that could lower margins nies will suffer lackluster price performance until the outcome (earn- or create losses and can also limit potential profits ings, management transition, cost savings, layoffs, and changes in capital structure) of the acquisition is clear. The APC deal should Weather. The company has significant exposure to the weather-vulprove positive in the long run. nerable Gulf of Mexico

APC

We believe higher oil prices are inevitable. As large consumers such as the United States and China deplete their reserves, they will have to increasingly rely on OPEC. This will strengthen OPEC’s oligopoly and increase its pricing power. With this reality we recommend owning oil companies that have huge reserves and or have a good track record of replacing and increasing their reserves.

Increased debt due to acquisition. Some credit agencies have put the company on their credit watch list. Asset sales should bring down debt. Also, the company does have substantial reserves that could be sold that could pay off the debt many times over.

We like APC because it has been increasing its reserves by acquisition, enhancing its production activities and using risk-management in its exploration drilling. APC has one of the least developed portfolios in the industry, which gives it greater future prospects. The company’s reserves are approximately 46% oil and liquids, and 54% natural gas.

From trough to peak prices have advanced about 185%, below the growth in earnings. Prices are now about 125% off the 2002 lows. Prices are still above the long-term trend line and are now trading in the middle of the current trading range.

Technical Analysis

Price Target: Anadarko Petroleum (NYSE: APC) is now trading at about $40 a share. Our 2007 price target is $64, which would be about a 56% upward move.

Reserves

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APC’s reserves pre-merger were 2.45 billion BOE (barrel of oil equivalent). According to APC’s website, the company believes last year’s acquisition will ultimately recover 3.8 billion BOE. If this is true then the cost of the acquisition would be about $12 per BOE,

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Growth Report Check out Minrad for Your Medical Device, Drug and Portfolio Needs by Ian Wyatt inrad International Minrad’s patented surgical image-guidance technology enables sur(AMEX: BUF) devel- geons to reduce a patient’s exposure to radiation by between 50% ops and markets drugs and 90%. Best of all, it can be retrofit to any number of C-arm and devices for two distinct med- fluoroscopes already in use from various companies. The U.S. marical markets: 1) inhalation anesthe- ket for kinematic navigation systems for various precision-critical sia, and analgesia manufacture and procedures was valued at $115 million in 2005. delivery and 2) real-time fluoroscopic surgical image guidance. Minrad also offers a line of surgical instruments, which leverage the properties of the image-guidance device. The unique feature is that Minrad’s inhalation anesthetic and the instruments illuminate when properly aligned, providing visual Ian Wyatt analgesic products are halogenated confirmation when the instruments are on target. ethers; Minrad is active in three of the four primary halogenated ether markets including isoflurane, enflurane and sevoflurane. For the year ended December 31, 2005, Minrad saw revenues Minrad sells exclusively through distributors and through Merck & increase 136.5% to $8.3 million, from $3.5 million in 2004, on a pro Co., Inc. in Europe and Baxter International Inc. in the United States forma basis (the firm changed from a Sep 30 year to a Dec 31 year). and worldwide. In 2005, the firm saw a net loss of $12.1 million or $0.42 per basic and diluted share, compared with a loss of $4.8 million, Minrad The company sells sevoflurane internationally, and or $0.21 per share, in 2004 on a pro forma basis. International there are indications the firm could gain regulatory FDA clearance for the sale of this product in the For the three months ended September 30, 2006, AMEX: United States. Indicators of pending approval include Minrad generated revenues of $5.3 million, up 271% Minrad working on product labeling with the FDA from $1.4 million for the same period a year earlier. The and the firm’s sales force being trained in the sevoflunet loss was $1.69 million, or $0.04 per share, versus a rane launch, among others. net loss of $1.73 million, or $0.06 per share, in the year-ago quarter.

M

BUF

Minrad entered the inhaled anesthetic market in 2001 through the purchase of a manufacturing facility in Bethlehem, Pa., from biotech firm Celltech-Medeva. Since then the company has impressively reduced the manufacturing costs of several of these products by upwards of 70%, making it the low-cost manufacturer.

Consensus estimates call for revenues to grow 96.4% this year to $16.3 million from $8.3 million in 2005. The consensus earnings estimate calls for a narrowing of net losses from a loss of $0.42 per share in 2005 to a loss of $0.15 per share in 2006. In 2007, the firm is expected to grow revenues 247% from the estimate of $16.3 million in 2006 to $56.6 million. Earnings are also expected to turn positive in 2007, to $0.22 per share.

The firm currently has approximately 40 contracts in place, all with minimum purchase agreements. Current contracts call for minimum purchases totaling $21.0 million in 2006, $69.2 million in 2007, $116.5 million in 2008, and $127.7 million in 2008.

We hold shares of Minrad International in our Growth Report portfolio, and rate shares a Buy with a share price target of $7.00. Given its virtually locked-in explosive growth and expected turn toward profitability in 2007, we feel 32X forward earnings is a reasonable valuation for the firm. This represents price appreciation potential of 31% from the recent price of $5.35.

Additionally, Minrad has developed a suite of products that represent a quantum advancement in image guidance. Their offering enables surgeons to pinpoint treatment areas in real-time while reducing patient radiation exposure. Minrad’s patented technology, dubbed SabreSource, enables surgeons to both visualize the surface point of entry and the true angle of approach in real-time using fluoroscopically-assisted laser targeting.

Free Report from Growth Report’s Ian Wyatt. Inside this report you’ll learn why you must gain exposure to the booming oil and gas sector, and how you can do so without unnecessary risks. Get the report which includes reports on 6 top oil and gas stocks ready to soar in 2007. Plus learn why now is the perfect time to be buying!

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Motley Fool Stock Advisor One Stock, Unlimited Options by David Gardner

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f you’ve been investing for a while, you’re probably familiar with options. Maybe you’ve even traded them. But what can you honestly say you know about the few companies that provide options contracts or the industry itself ?

With a market cap of $1.5 billion, the company is a little fish compared to ETrade’s $10.4 billion or TD Ameritrade’s $10.6 billion. It attracts mostly options traders, of course, but even within that niche it has plenty of room to grow –with about 3% share of the options market –and plenty of profits to make. Options traders represent an excellent business opportunity. They tend to trade more often than other investors, creating more commissions, and they often have a higher net worth. But they are less attractive to mainstream brokers because their trades require more specialized service.

Did you know that for the past 34 years the options market has been growing at a 24% annual clip, 22.5% Tom and David Gardner in the past 10 years, and finally 27% in 2005? And did you know that despite this torrid growth, fewer than 10% of all domestic online brokerage accounts are authorized to trade options? In the United States alone, analysts estimate that there will be approximately 26 million online brokerage accounts by 2008, and with just 9% of those accounts servicing a fast growing niche, we Fools sense a great opportunity.

And, importantly, optionsXpress’s numbers reflect this kind of superior profitability. For the year ended 2006, profit margins were a breathtaking 38.4% on a top line increase of 45% to $186.9 million. Operating margins have stayed impressively high since IPO, generally in the low 30% range. And returns on equity and assets, which decreased in 2006, still blow AMTD and ETFC completely out of the water. On top of this, customer assets increased an astounding 37% to $4.7 billion, reflecting customers’ optionsXpress faith in the company itself. And, for a little icing on the cake, the company offers a modest but symbolic .8% NASDAQ: dividend yield.

Enter the company that has been voted the best online brokerage by Barron’s for the past four years running: optionsXpress (NASDAQ: OXPS). In 2004, SmartMoney even dubbed the options dealer “nearly flawless.” It is beloved by investors who want to execute complex options strategies, but it offers simple, straightforward trading, too — all with fast execution times and staff who can answer difficult questions. It has won plaudits for its website design, which integrates the “Three Es” of its business strategy: customer education, tools for evaluating options strategies, and top-notch execution of orders.

OXPS

So where are the dark clouds here? The obvious one would be a major event that causes trading volumes to drop, hampering revenues. However, I believe that options traders are on the craftier side of the individual trader spectrum, and would be more willing to step into a market that is troubled. The other issue is the relatively thin moat between optionsXpress and its competitors. At some point farther down the road, optionsXpress might not just be a nuisance and may become a demonstrable threat to the bigger guys. Should that happen, I believe the company might just be a great buyout candidate.

Clearly, this is a well-regarded company with a lot of customer loyalty. But just how does it fit into the crowded and competitive brokerage industry?

All in all, I believe optionsXpress is positioned to deliver outstanding performance over the next several years. Whether it continues to simply create great profits serving options traders, expand its niche and challenge the dominant online brokers at their own game, or even attract a buyout from a larger company, we stand to gain from here on out.

The first online brokerages were disruptive innovators, pulling the rug out from under traditional full-service brokerage firms that didn’t serve the needs of increasingly sophisticated clients who wanted to execute their own trades as quickly and cheaply as possible. Now, optionsXpress is disrupting the disruptors. Stealing share from former rebels Etrade (NASDAQ: ETFC), Ameritrade (NASDAQ: AMTD) and others, optionsXpress has forced industry-wide improvements in options offerings. But OXPS hasn’t eaten up enough of the bigger guys’ bread and butter—standard equity trades—to cause a stir. Rather than sacrifice margins and pursue a costly war for options dominance, the bigger players have left well enough alone. Meanwhile, optionsXpress can continue to perfect its business and then steal another sliver. And another, just like its recent entry into the 24-hour futures market bolstered by its $37 million acquisition of XpressTrade.

In Motley Fool Stock Advisor, Fool co-founders David and Tom Gardner bring you their best stock recommendations and other financial insights to help you achieve your financial dreams. Click here to access their free report, “The Motley Fool’s 2 Top Picks - Plus Wall Street’s Dirtiest Secret.”

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Rising Star Stocks China Expert Technology: An Emerging Chinese Growth Play

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by Ian Wyatt

major objective of the Chinese government is to improve its technology infrastructure nationwide to a level comparable with worldwide standards. The growth of e-government services is expected to be significant as the country digitalizes and develops further into a major world economic power.

income increased to $4.8 million, up 34.6% from $6.5 million the year before. Revenues for the third quarter of 2006 increased 115% to $19.5 million, from $9.0 million a year earlier. Net income increased 147% to $6.1 million, or $0.15 per diluted share, from $2.5 million, or $0.10 per diluted share, for the comparative quarter in 2005. The company finished the quarter with $22.5 million in cash, compared with $7.3 million at the end of 2005. Total longterm debt at the end of the quarter was zero. Gross margins strengthened to 52% in the third quarter, a vast improvement from 45.3% in the year-ago quarter.

Ian Wyatt

By 2008, the e-government market in China is estimated to reach $9.5 billion, according to Beijing-based IT research firm Analysis International. To date, more than 90 government portals have been set up by China's central government. A major focus of improvement is at the regional and municipal government levels in which over 10,000 government websites have been established during the past three years.

Revenues for the nine months ended September 30 of $48.6 million are up 86.8% year-over-year versus the comparative period in 2005. Moreover, the results to date in 2006 have already surpassed the combined results for 2005. Net income for the period was $8.1 million, up a marginal 1.5% from $7.9 million for the same period a year ago. On a per-share basis, the $0.23 per diluted share earned in the China Expert Technology (OTC BB: CXTI) is an period was below the $0.33 per diluted share in 2005 China Expert emerging Chinese growth play in the IT network and due to a higher share count. Technology infrastructure markets in China and Hong Kong. The China Expert is estimated to earn $0.36 per diluted company specializes in the design and installation of share on revenues of $63 million in 2006, according to OTC BB: large-scale information technology network projects a single estimate gathered by Thomson Financial known as e-government solutions for municipalities Network. For 2007, the company is estimated to and city governments in China. China Expert is the increase its earnings by 52.8% to $0.55 per diluted only private enterprise with the authority to provide technological share. The earnings estimate gives the stock an attractive 11X its estiachievement appraisal services for IT companies in China. mated 2007 EPS.

CXTI

China Expert also provides large-scale network infrastructure construction with solutions for enterprise information platform construction, public local area network (LAN) construction, software development, website planning and development, workflow management and computer hosting services. The company also provides business-consulting services through an extensive network of experts from numerous universities in China, including the Chinese Academy of Sciences and the Chinese Academy of Engineering.

We hold shares of China Expert Technology in our Rising Star Stocks portfolio, and rate shares a Buy with a share price target of $7.00. We arrived at our share price target applying a pricing multiple of 13X forward year earnings, conservative by any measure for a firm that enjoys the growth that China Expert does. This represents price appreciation potential of 40% from the recent price of $5.00. Given the growth potential and the goal by all government levels in China, we see excellent growth opportunities for China Expert Technology. China Expert Technology remains largely unknown on Wall Street, providing early investors the opportunity for sizeable returns.

At present, the company is working on five major municipal e-government projects with a combined contract value of about $123 million. In 2006, China Expert Technology won 14 new e-government contracts with a total face value of $251.7 million, which represents an impressive 7.1X its sales in 2005. The company has won in excess of $360 million in e-government projects in Fujian province. The potential in this region has plenty of upside as the company has contracts in only 12 of a possible 82 counties and cities in Fujian. The company's total backlog is at around $141.5 million based on 14 outstanding contracts as of December 4, 2006. For the fiscal year ended December 31, 2005, CXTI recorded revenues of $35.6 million, up 32.6% from $26.8 million in 2004. Net

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Schaeffer's Power Stocks A New Pharma on the Rise: Axcan

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by Bernie Schaeffer

t Schaeffer’s Investment downtrending channel connecting its 2004, 2005, and 2006 highs. If Research, we employ a AXCA’s momentum can carry the shares above this region, we could three-tiered analysis see more buyers step in and help usher the security even higher. approach known as Expectational Analysis® (EA) that was created more than two decades ago. EA utilizes traditional methods of fundamental and technical analysis and combines these with a third, crucial look at investor sentiment. It is this Bernie Schaeffer third layer of analysis that provides a critical edge in selecting stock and option plays. Both anecdotal and quantifiable measures of investor sentiment provide a window into how the investing crowd perceives reality. These perceptions serve as powerful contrarian indicators, as the crowd tends to move as a herd and is, to paraphrase the venerable contrarian Humphrey Neill, “right during the trend but wrong at both ends.” A look into the psyche of the collective investing masses, while also taking into account important technical and fundamental Despite the stock’s display of technical strength, we Axcan Pharma variables, can offer a reliable recipe for trading success. continue to see signs of pessimism from investors. Short interest has begun to decline in recent months, NASDAQ: The EA methodology has turned up a profitable tradbut still resides at significant levels. The 1.79 million ing opportunity in Axcan Pharma (NASDAQ: shares shorted is near an annual high, and at the stock’s AXCA). The company sells drugs mainly to treat gasaverage daily trading volume, it would take more than trointestinal ailments. URSO 250 is used to dissolve gallstones and 14 days to buy back these shorted shares. With a short-covering treat liver diseases. The firm also owns the global rights to trend already in place, AXCA is primed to continue its trek higher on PHOTOFRIN, with applications for esophageal, gastric, and lung the added buying pressure. cancers. Analyst coverage on the equity is lukewarm as well. According to On February 8, the company reported first-quarter earnings of 34 Zacks, six of the nine analysts offering up an opinion on the securicents per share, 12 cents better than the consensus estimate of 22 ty rate the shares a “hold.” Should these naysayers finally take notice cents. Sales rose 11.6 percent on a year-over-year basis to $79.8 mil- of AXCA’s technical and fundamental strength, a few upgrades lion versus the $72.6 million consensus. Axcan Pharma also raised its could add fuel to the fire for the security’s rally. prior revenue guidance for its 2007 fiscal year. It upped its expected 2007 sales range to $307-312 million. That’s higher than the cur- The culmination of this strong technical and fundamental performrent Street estimate of $298 million. ance amid a wealth of negative investor sentiment results in a

AXCA

Schaeffer’s Equity Scorecard rating of 7.0 out of a possible 10. This elevated rating indicates that the security could continue to outperform the broad market during the intermediate term.

Technically, Axcan Pharma has started the year off well. The stock is up 13 percent since the start of 2007, rallying along the support of its 10-day and 20-day moving averages. Additionally, the equity has outperformed the S&P 500 Index since the beginning of 2007. This is no small feat, as the SPX has been on a tear recently, setting a string of new multi-year highs. Lending strength to AXCA during this time of growth is the reaction of traders to the company’s earnings report, allowing the shares to overcome prior resistance at the 15.25 area.

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Moreover, the stock is challenging resistance at 16.25, the site of a

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SmallCapInvestor.com NutraCea: Brown Power by Bob Bogda

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f green is all the rage, can brown be far behind?

Venture capital and private equity investments in clean energy companies in 2006 soared 167 percent from a year earlier to $7.1 billion, fueled mainly by a surge of investments in biofuels in the United States, according to New Energy Bob Bogda Finance, a London research firm. Little wonder, then, that green is getting a lot of ink (much of it soybased, by the way).

NutraCea typically purchases the rice bran for about $60 a ton, and is able to sell the stabilized product for between $400 and $900 a ton or more, after spending $90 a ton to convert it. Moreover, NutraCea earmarks a portion of this production for further patented processing into insoluble fiber, which it sells for about $2000 a ton, and soluble fiber, which has been fetching $10,000 a ton after the additional production costs. NutraCea Chief Executive Officer Brad Edson reiterated at a Roth Capital Partners conference in February 2007 that the company has never recorded margins of less than 44% in a calendar quarter and that in fact margins are continuing to improve each quarter. So who buys stabilized rice bran and its derivatives? NutraCea focuses its efforts on three distinct market segments:

But if you’re looking for a less-publicized opportunity in the do-good investment space, consider NutraCea (OTC BB: NTRZ.OB). Human and animal food channels. Customers include the likes of While the mission of most green companies is to clean the world, this General Mills, Inc., Sara Lee Corporation and Archer Daniels Midland health services firm seeks to feed the world, thanks to a patented Company. Partnerships or distribution deals have been established process that gives shelf-life and edibility to the brownwith companies such as Purina Mills, a wholly owned ish portion of the rice kernel that often goes to waste. subsidiary of Switzerland’s Nestle S.A., and Tractor NutraCea Supply Company, a supplier of goods to recreational NutraCea, formerly known as NutraStar Inc. and forfarmers and ranchers. OTC BB: merly headquartered in El Dorado Hills, Calif., is currently on a tear. Nutraceutical channels. This market includes supplements, foods and compounds. In addition to distribution Revenues hit record levels in each quarter in 2006, a pattern that’s via traditional retailers and distributors, NutraCea has seen great expected to continue in 2007. From its new headquarters in Phoenix results selling through infomercials with ITV. (as of March 2007), NutraCea is engineering a planned seven-fold increase in production capacity by year’s end, to 70,000 tons. The The international feeding segment. NutraCea pegs the global need product: stabilized rice bran. The secret to success: buy low, sell high. for food assistance at several hundred million meals a day spread out over 60 countries, a billion dollar market. With NutraCea’s ability to Know this about rice bran: there’s a lot of it (60 million metric tons produce low-cost, nutritious food products at any mill by simply produced annually around the globe, an amount roughly equal in size attaching its rice bran stabilizing equipment, this is perhaps the comto a year’s wheat production in the U.S.); it comprises just a fraction of pany’s most promising segment. the kernel but contains a majority of its nutrients; it’s found in places where it’s needed (rice is a staple food for about 70 percent of the In the third quarter ended September 30, NutraCea reported revenues world’s population), and it’s inexpensive (pennies per pound in its of $4.9 million, compared with $0.3 million a year earlier, reflecting a unprocessed state). merger last October with RiceX, NutraCea’s sole supplier of stabilized rice bran. Net income totaled $0.6 million, or $0.01 per share, comWhen brown rice is milled into white rice, oil from the bran interacts pared with a net loss of $1.0 million, or $0.03 per share, a year earlier. with an enzyme that renders the bran unfit for human consumption within a matter of hours. Enter NutraCea, the company whose mantra The sole analyst who covers NutraCea, Steve Denault at Northand is, “Positively impacting the human condition by exclusively trans- Securities, Inc., estimates 2007 earnings per share at $0.10 on revenues forming the world’s largest wasted food resource into a valuable nutri- of $43.7 million. He puts 2008 EPS at $0.15 on revenues of $63 miltional food.” lion. Denault’s price target is $3.75, which represents a P/E of 25X his 2008 earnings estimate. In early February NutraCea was trading at Indeed, NutraCea’s patented equipment, which it affixes to other com- about $2.50 a share. panies’ rice mills, deactivates the enzyme in minutes, without sacrificing nutritional value. Into one end goes a food byproduct, out of the SmallCapInvestor.com is Business Financial Publishing’s latest offering: a website other end comes an all-natural, nutritious food product that can be portal for in-depth coverage of small capitalization companies. The reporting at SmallCapInvestor.com is timely, insightful, and independent to serve the needs of packaged and shipped in 50-pound bags or two-ton containers. individual investors.

NTRZ

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The Sleuth A Critical Health Care Trend For 2007

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by Addison Wiggin & Craig Walters

ouse Democrats have an agenda... They intend to repeal a provision in the 2003 Medicare drug benefit law that prevents the government from being involved in negotiations of prescription drug prices. This would essentially unravel Medicare Part D as it’s known today.

Addison Wiggin

Democrats believe this will lower prescription drug prices and be great for America.

Notice that back in late 1994, when President Clinton’s health plan was defeated, we began to see the start of a great bull market in pharmaceutical stocks. It was also coincident with an unbelievable bull market in the broader market as well. We could be in store for something similar. If Democratic lawmakers do not get drug price negotiating powers for Medicare, look for a black cloud-lifting effect across this sector, possibly moving it out of the sideways trading range we’ve witnessed over the last couple of years. The fact of the matter is that PRX is beaten down, and investors are scared to buy, because of Congress:

We couldn’t disagree more. My colleague, Craig Walters, has found a company that could benefit if the White House wins. This is a pure-play generic small-cap producer, selling at a very attractive price. At Agora Financial, we don’t believe government has a place in negotiating lower drug prices. And as an investor, I’d be willing to place Par Pharmaceutical capital on a small-cap drug company that’s poised to grow Companies Inc. if the government lets the free market do what it does best. If the Democrats get their way on this issue, then you want to stay away from generic drug companies. But if you think the White House will win, then this is the stock to own…

NYSE:

PRX Note the bottom in PRX’s share price in the summer of 2006, and the trend that’s been quietly forming over the second half of the year. We think the stock is constrained by drug pricing uncertainty. This is the time to buy — before it becomes clear which side will win.

-Addison Wiggin The Way to Profit if Medicare Part D is Left Intact by Craig Walters One of the producers of Lisinopril, the No. 4 most-prescribed drug in the United States., is one of the largest generic companies in the world. It also happens to be a very rare virtual pure play on generics.

PRX’s income statement shows us a company that is not posting the record numbers that it did a year ago, but sales growth and profitability are still strong and will likely improve when brand products, with their higher margins, contribute more to the overall revenue mix.

The company is called Par Pharmaceutical Companies Inc. (NYSE: PRX).

Par’s capital structure is stout, with $148 million in cash, or $4.35 per share. Long-term debt to total capital is 23%, and the company can easily service it.

As a business, Par Pharmaceutical is fairly easy for investors to understand. It’s a drug company with two primary segments: a generics business, and a very small branded drug segment. The company is the fifth-largest generics company in the United States, with annual sales of around $500 million.

The market is clearly scared of this generics stock and does not yet want to place much value on its burgeoning brand business, as evidenced by its low trading multiples.

Par’s brand segment is continuing to make investments in new candidates. And ultimately, this is where margin improvements will spring.

Action to take: Buy Par Pharmaceutical Companies Inc. up to $36 per share. Since there is some political risk involved here, let’s use a 25% trailing stop to protect us.

The Stock to Own if the White House Wins Take a look at the Amex Pharmaceutical Index chart.

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With investors scared, we have a nice opportunity.

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