Companies featured in this edition of the newsletter: ACCP, CNLG, ENZ, IFAQ, ITUI, PSTI, SKYI, TAGS
Financials were sharply in focus yet again this week, highlighted by the U.S. Government taking a 36% in Citigroup. Investors seemed to give a thumbs-down to the decision, as well as additional details on the Federal budget, which pressured the healthcare sector. Uncertainty about the Government’s next moves did not help, with the Dow surrendering 302 points to close at 7062, down 4.1% bringing its YTD losses to 19.5%. The Nasdaq lost 4.4% to close at 1377, extending its yearly losses to 12.6%, while the S&P 500 and Russell 2000 lost 4.5% and 5.3% respectively, bringing their YTD losses to 18.6% and 22.1%.
While larger banks were under pressure again, following the announcement of the Obama administration’s Capital Assessment Program, which includes stress tests for the 19 largest domestic banks, the financial sector as a whole managed to gain 2% on the week. The same cannot be said however for the rest of the market, as an 11.4% decline in the health care sector and an 8.3% drop in industrials aided the S&P 500 in joining the Dow at new 11 year lows. While many are bemoaning the sharp drop in the stock market, which has seen the Dow Jones index lose half of its value since its October, 2007 highs, it is important to remember that the market often reflects what has occurred and is expected to occur in the economy. The earnings of the companies in the S&P 500 during the 2008 fourth quarter were negative as a group for the first time since the Index began trading in 1934. While much of this was due to outsized writedowns from firms such as Citigroup, it does provide a sobering reminder of economic weakness.
Data continued to stream in throughout the week suggesting further deterioration in the state of the economy which was met with mixed reactions by investors. Markets rebounded on Tuesday, despite the news that the S&P/CaseShiller Housing Price Index showed a year over year decline of 18.6%, which was larger than expectations. Fourth quarter GDP was revised sharply lower to -6.2% from preliminary reports of -3.8%. The decrease primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment. Durable goods orders dropped more than expected to -2.5% in January, which was coupled with more bad news from the housing sector in the form of New Home Sales dropping to an annualized rate of 309,000 units in January, 48.2% below levels at this time last year, marking a new low dating all the way back to 1963.
News from the corporate side was not much better, as several notable companies including JP Morgan and General Electric announced that they would be slashing dividends to significantly lower levels than estimates provided for, in attempts to bolster balance sheets. Perhaps the lone ray of hope came when Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee that there is “considerable economic uncertainty,” but the recession may end in 2009 with 2010 being a recovery year.
What should investors look for this week? The earnings calendar slows as most major companies have already reported results, but expect to hear from DISH Network (NASDAQ: DISH) and Fannie Mae (NYSE: FNM) Monday morning. Tuesday is slow, but things pick up slightly on Wednesday, as wholesalers BJ’s (NYSE: BJ) and Costco (NASDAQ: COST) release before the bell along with Toll Brothers (NYSE: TOL) and Foot Locker (NYSE: FL). Thursday morning look for a report from AIG (NYSE: AIG) after the close.
Economic Reports for the week begin with figures for Personal Income and Spending during January, being released along with January Core PCE at 8:30 a.m. Monday. January Construction Spending and the ISM Index for February follow at 10:00 a.m. On Tuesday, Pending Home Sales for January are due out at 10:00 a.m. followed by Auto and Truck Sales for February at 2:00 p.m. Wednesday starts with ADP Employment Change for February at 8:15 a.m., followed by February ISM Services at 10:00 a.m. and Weekly Crude Inventories at 10:30 a.m. with the Fed Beige Book being released at 2:00 p.m. the same day. Revised Q4 Productivity and Q4 Unit Labor Costs will be announced Thursday along with weekly initial jobless claims at 8:30 a.m., followed by January Factory orders at 10:00 a.m. Average workweek, hourly earnings, nonfarm payrolls, and the unemployment rate -all for February- are due out at 8:30 a.m. Friday, followed by January Consumer Credit reports at 2:00 p.m.
The conference schedule for the week begins on Monday with the three day Deutsche Bank Securities Media and Telecommunications Conference in Palm Beach, Florida along with the three day Citi Global Property CEO Conference being held in Naples, Florida. Also beginning on Monday are the Financial Times Sustainable Business Conference in New York, and the three day Morgan Stanley Technology Conference which is being held in San Francisco. BP will host a Strategy Presentation webcast on Tuesday Morning at 9 a.m. EST. The UBS Natural Gas, Electric Power and Coal Conference begins Wednesday in Lost Pines, Texas, as does the two day Keefe, Bruyette & Woods Regional Bank Conference which is being held in Boston.
Pluristem Therapeutics (NASDAQ: PSTI), a bio-therapeutics company dedicated to the commercialization of unrelated donor-patient cell therapy products for a variety of disorders, announced that it had entered into a collaboration agreement with Pharmicell Europe GmbH. Under the terms of the agreement, Pharmicell will distribute PLX-PAD, Pluristem’s placental-derived adherent stromal cell product, to various clinical sites in Germany in connection with Pluristem’s upcoming clinical trials for the indication of Critical Limb Ischemia. The company plans to initiate Phase I clinical trials by administering PLX-PAD to patients afflicted with critical limb ischemia, who have not responded to traditional medical or surgical interventions upon approval of their Investigational New Drug (IND) and Investigational Medicinal Product Dossier (IMPD) submissions in the U.S. and Europe. Collaborating with Pharmicell gives Pluristem the advantage of storing its ready-to-use cell product under stringent conditions in a German regulated facility prior to dispensing it for patient use which will greatly enhance their efforts in clinical trials once the required approval has been granted to begin testing on human subjects. Shares gained two cents on the week to close at $1.05.
Life sciences company Enzo Biotechnology (NYSE: ENZ), received some legal news last week in the form of a ruling that The U.S. Court of Appeals for the Federal Circuit granted Enzo’s petition for writ of mandamus requiring the district court to enter final judgment in the case between Enzo Biochem Inc. and the former Applera Corp. over DNA detection technology after finding that the lower court failed to resolve one of Applera’s counterclaims. The appeals court sent the case back so the original judge could rule on Applera’s counterclaim for invalidity of one of the six patents that Enzo asserted was infringed by Applera, now known as Life Technologies Corp. After the infringement suit was filed in ’04, Applera lodged counterclaims of invalidity and noninfringements for all six patents under dispute. The parties agreed to drop the claims over two of the patents and the judge later found three invalid. The judge ruled that because she had found invalid all the claims that Enzo was continuing to assert for infringement, it wasn’t necessary to rule on Applera’s noninfringement counterclaims. In granting the appeal, the Federal Circuit found that because the original judge had never ruled on the invalidity of each specific counterclaim, the claim is still pending and should be sent back for further review. Shares lost $0.62 on the week to close at $3.67.
Access Pharmaceuticals, Inc. (OTCBB: ACCP), an emerging biopharmaceutical company that develops and commercializes propriety products for the treatment and supportive care of cancer patients, announced that it has closed the acquisition of MacroChem Corporation through the issuance of 2.5 million shares of Access Pharmaceuticals’ common stock. The acquisition gives Access rights to MacroChem’s product portfolio which includes several late stage candidates including Pexiganan, a novel topical anti-infective for the treatment of diabetic foot infection that has already completed two Phase 3 clinical trials; EcoNail, a novel topical treatment for onychomycosis that completed a Phase 2 clinical trial; and two proprietary dermatology drug platforms, SEPA and MacroDerm. In addition to their newly acquired late stage assets, Access also gains the rights to two promising clinical stage oncology candidates 4-thio Ara-C (Thiarabine), which is a next generation nucleoside analogue licensed from Southern Research Institute and sodium phenylbutyrate, which is currently approved by the FDA for the treatment of hyperuremia, a pediatric orphan indication. Shares gained $0.32 on the week to close at $1.40.
Conolog Corporation (NASDAQ: CNLG), an engineering and design company that provides digital signal processing solutions to global electric utilities, announced the results of their annual shareholder’s meeting last week. Foremost amongst the results from the meeting was the decision to approve a five for one reverse split in the company’s stock. Following the reverse split, shares ended the week at $1.67.
Volume Alert: Shares of Tarrant Apparel Group (NASDAQ: TAGS), a design and sourcing company for private label and private brand casual apparel, surged 92% on 16 times average volume Friday, following an announcement late in the day Thursday that it had entered into a definitive merger agreement with Sunrise Acquisition Company, LLC. Under the terms of the deal, outstanding shares of Tarrant will be purchased by Sunrise for a price per share of $0.85 in cash. The $0.85 per share cash consideration represents a 28.8% premium to the closing price of Tarrant Apparel Group common stock on April 24, 2008, the day Sunrise first presented their acquisition proposal to Tarant’s board of directors and a 129.7% premium to the closing price of Tarrant Apparel Group common stock on February 26, 2009, the last trading day prior to the announcement of the execution of the merger agreement. The total merger consideration is approximately $15.1 million. Shares ended the week at $0.71, up $0.34.
i2Telecom International, Inc. (OTCBB: ITUI), a developer of award-winning patented and innovative high-quality mobile applications and services, announced that it has been selected as the primary provider of voice services to Main Street Broadband, LLC’s initiative to bring broadband infrastructure to rural and suburban areas. The Rural Utilities Service (RUS) of the USDA loan program awarded Broadband South -an operating subsidiary of Main Street- $34 million, to construct wireless broadband networks in rural communities in Georgia and Florida operating under the Main Street brand. ITUI will bundle their residential and small business offerings with Main Street’s broadband delivery, allowing consumers to purchase a complete high-speed broadband connection and home telephone service package at a substantial savings to traditional wireline telephone services. Shares remained unchanged on the week at $0.07.
Skye International (OTCBB: SKYI), a company developing and marketing a suite of tankless water heating solutions, announced last week that it has increased production of its FORTIS whole-house electric tankless water heaters to approximately 1,000 units per month, representing approximately 60% of the available production capacity in the 30,000 square foot contract manufacturing facility located in Tempe, Arizona. The Company believes that by the end of 2009, FORTIS water heater production should reach an annualized rate of 20,000 per year, with an MSRP of $1,899. The FORTIS tankless electric saves the average household about 10% to 40% of water heating costs when compared to conventional storage tank based water heaters, and has been extremely well received by both wholesale plumbing/home improvement distribution channels and end users. Shares gained three cents on the week to close at $0.41.
SPECIAL SITUATIONS:
Steel Vault (OTCBB: IFAQ) $0.40
With the advent of the internet and the free flowing share of information, a new breed of theft has begun to characterize the marketplace. The abundant availability of information to third parties has made it increasingly easier for malevolent hackers and others with ill intentions to obtain vital information about people and steal their identities, using the information gleaned to promote their own causes to the severe detriment of those whose information has been made public domain. Steel Vault is a company focused on combating these opportunistic parasites through its credit monitoring, reporting, and identity theft prevention services.
Identity theft is one of the fastest growing criminal enterprises in the US, affecting some 15 million people each year at an estimated cost of around $50 billion annually. Victims are typically hurt from a number of financial vantage points, which can include the direct loss of assets due to a thief gaining unobstructed access to personal accounts, or a ruination of credit ratings as thieves have been known to take out loans against pilfered identities with no intention of repayment, ruining the victim’ good name with lending institutions. Some 20 million people a year subscribe to credit reporting/monitoring services at an estimated cost of $3 billion annually, with the number expected to grow with the popularity of the crime. Credit and financial information services generated $37 billion in 2007 and are projected to expand to $47 billion by 2010, growing at a rate of 8.4% annually. This rapidly growing market is dominated by a small group such as Experian, Equifax, and TransUnion who hold an approximate market share of 95%, leaving the remainder for small companies who thrive due to the 20+% operating margins characteristic of credit and financial information companies.
Steel Vault plans to provide a complete suite of credit monitoring and identity theft prevention measures, including credit monitoring and reporting, fraud protection, identity recovery and identity theft insurance to consumers worried about the abundance of personal information floating freely throughout the internet. Credit monitoring services through the company’ most recent acquisition, NationalCreditReport.com protects consumers by providing single and triple credit scores, providing daily credit monitoring, and in the event of a problem, immediate credit analysis to determine the source of the problem. The fraud protection services will monitor public records and provide internet surveillance to prevent the free exchange of private information across these mediums, in addition to providing credit and debit card protection above and beyond that offered by the companies issuing the cards. Identity recovery will provide credit recovery services in the event of an identity theft and will immediately freeze credit in the event of such an occurrence, while its ID theft insurance provides $25,000 worth of insurance with no deductible and up to a $1 million guarantee in the event of a theft. The company is well positioned within the marketplace through being actively engaged in the prevention, recovery and insuring of victims of identity theft, in contrast to most corporate entities who choose to focus their efforts exclusively on one of these three. The value Steel Vault provides to customers is that they will offer a complete set of solutions in the identity security market, making a difficult experience much easier on the victims of this rapidly expanding criminal enterprise, which should greatly enhance the popularity of their subscription-based services.
While the company’s business model has a great deal to offer to consumers wishing to protect their identities, it also presents investors with significant opportunities. Steel Vault’s revenue generation strategy is based on a subscription model, resulting in low customer acquisition costs which translate to higher gross margins and thus higher profits. As more and more private information is made available over the internet, demand for identity security such as that provided by Steel Vault is sure to rise, creating significant advantages for early movers into the space. It is also worth noting that the founders of Steel Vault are Scott R. Silverman and William J. Caragol, who completed a $50 million sale transaction in July 2008, and then formed a private investment partnership to focus on the identity security market. While the company is currently in development stages, it is expected to be cash flow and EBITDA positive after the first twelve months of operations, presenting investors with an opportunity to get into an innovative company with an extremely relevant business model that is expected to become profitable at an early stage.