Companies featured in this edition of the newsletter: ACCP, ACTC, CNLGD, ENZ, HYTM, IFAQ, PCFG, PHC, PSTI, SKYI
It was another brutal week on Wall Street, as the deluge of negative economic indicators continued to pour in, which, when coupled with continued concerns over the state of the financial sector, sparked sell offs in all of the major indices. All told, the Dow surrendered 435 points to close at 6626, down 6.2% on the week and 24.5% on the year. The Nasdaq fared no better, declining by 6.1% to close at 1293, bringing its YTD loss to 18%, while the S&P 500 and Russell 2000 declined 7% and 9.8% respectively, bringing their YTD losses to 24.3% and 29.7%.
The week began on a sour note, as AIG posted a $61 billion quarterly loss, the largest in US corporate history. The government in turn, made an additional $30 billion in aid available in attempts to prop up the ailing insurance giant. US Bancorp and Wells Fargo (NYSE: WFG), widely considered to be among the better run banks, both announced that they will slash dividends by as much as 85% in an effort to save capital, which was met by a 38% decline in shares of USB. Fears surrounding the continued financial stability of auto giant General Motors, which reported a 53% drop in February sales, led to further speculation regarding its ability to avoid bankruptcy and further fanned the selling pressure which has characterized markets of late.
Economic news provided little relief from the negative sentiment predominating markets. Unemployment figures were worse than anticipated, with overall Unemployment rising to 8.1%, while the number of initial jobless claims totaled 651,000, matching expectations. January pending home sales declined 7.7%, significantly worse than the expectation of 3.5%. The negative economic data was reflected in the Fed’s most recent economic forecast in the Beige Book, as it reduced its outlook, saying that it doesn’t expect economic recovery until late 2009 or early 2010.
How bad have things gotten? 5 of the 30 components in the Dow Industrial Index trade below $10, while more than 20% of the companies in the S&P 500 fetch single-digit stocks. Perhaps even more alarming, a Merrill Lynch analyst Friday noted it was more costly to protect from the possibility of a default by Berkshire Hathaway than one by Vietnam. And General Electric’s Credit Default Swaps prices outstripped those of Russia, a country that a dozen years ago actually did default on its foreign debt.
What should investors look for this week? The earnings calendar will be light again with most companies having already reported, but look for results from supermarket operator Kroger (NYSE: KR) before the bell on Tuesday, followed by J. Crew (NYSE: JCG) after the market closes the same day. Staples (NASDAQ: SPLS) reports Wednesday morning.
Economic reports for the week begin with Wholesale Inventories for January at 10:00 am on Tuesday. Weekly Crude Inventories will be released at 10:30 am Tuesday, followed by The Treasury budget for February at 2:00 pm. Weekly Initial Jobless Claims are due out at 8:30 am Wednesday along with February Retail Sales, which will be followed by January Business Inventories at 10:00 am. On Thursday, expect Export and Import Prices for February at 8:30 am, along with January Trade Balance data, followed by Preliminary Michigan Sentiment for March at 10:0 0am.
The conference schedule will be fairly busy this week, beginning on Monday with the three- day Raymond James Institutional Investor’s Conference in Orlando and the Stifel Nicolaus Consumer Conference in New York. JP Morgan holds its two-day Aviation & Transportation Conference in New York beginning Tuesday, along with the Deutsche Bank Securities Hospitality & Gaming Conference and the two-day Barclay’s Capital Healthcare Conference, which is being held in Miami. On Wednesday, UBS holds its Engineering & Construction One-on-one Conference in Boston, along with the Bank of America Consumer Conference which runs for two days in New York. The two-day Wedbush Morgan Securities Conference also begins on Wednesday in New York as does the Merrill Lynch Consumer Conference. Merrill Lynch will also host their Cleantech Leaders Conference in New York on Wednesday. Oppenheimer hosts their Alternative Energy one-on-one Conference beginning on Thursday in New York. Also beginning Thursday is the Noble Financial Capital Markets Conference which is being held in Boston.
Stem cell company Pluristem Therapeutics (NASDAQ: PSTI) could benefit from a report late Friday that President Obama will sign an executive order Monday lifting former President Bush’s limit on embryonic stem-cell research funding. In trading after hours on Friday, several of the stem cell stocks surged as much as 70% in price. On January 23rd, after Geron announced that it had received clearance to commence the first federally approved human studies on an embryonic stem cell therapy, shares of Geron surged 62%, Stem Cells rose 19.8% and other stem cell companies experienced outsized gains. However, the biggest gainer was Pluristem, which rose as much as 258% within a week of that announcement. Could it happen again? Last week, the company announced that the FDA had cleared it to initiate a Phase I clinical trial for the treatment of Critical Limb Ischemia (CLI), the end stage of peripheral artery disease (PAD), using Pluristem’s PLX-PAD. The approval allows PSTI to conduct the world’s first clinical trial using PLX-PAD, Pluristem’s placenta-derived stem cells that are expanded using the Company’s proprietary 3D PluriX technology. PLX-PAD is an off-the-shelf, one-size-fits-all product that needs no tissue matching prior to being administered to patients. The Phase I trial will be conducted in patients considered “late stage” and defined as patients afflicted with CLI that have not responded to traditional medical or surgical interventions. The approval moves the company closer to their goal of providing patients with an affordable, immediate source of cell therapy and should serve to significantly enhance their position as a leader in the cell therapy field. Shares lost six cents on the week to close at $1.08.
Shares of Advanced Cell Technologies (OTC: ACTC) could also surge on Monday as a result of the expected Obama order lifting President Bush’s limit on embryonic stem-cell research funding. After Geron’s clearance, ACTC’s shares rose as much as 222% within two days. Could such a move be possible again? Last week, the company announced that it had received $400,000 in additional funding through the receipt of the final payment from CHA Biotech Co, Ltd., a leading Korean-based biotechnology company focused on the development of stem cell technologies, in connection with its recently formed international joint venture with Advanced Cell. ACTC plans to use the proceeds to fund additional research into their retinal pigment epithelium cells program, for which the company intends to file an IND application with the FDA during the second half of this year. Shares lost a penny on the week to close at $0.11.
Earnings Preview: Enzo Biochem (NYSE: ENZ) is scheduled to report Q2 earnings for the period ended January 31, 2009 on Thursday after the market closes. For the first quarter ended October 31, 2008, Enzo reported total operating revenue of $21.1 million, up from $19.4 million in the corresponding year-ago period, marking an increase of 8%. Implementation of a new billing system associated with the company’s clinical labs division and a foreign exchange loss, coupled with lower interest income resulting from lower money market rates, led to a first quarter net loss of $6.4 million, equal to ($0.17) per share, compared with a loss of $1.2 million, or ($0.03) per share in the comparable period in the previous year. For the coming quarter, investors are expected to focus on how recent acquisitions in the company’s Life Sciences division -which has managed to grow revenues from $7.9 million to $35.7 million in the past three years-are able to contribute to cash flow and earnings. Another area of focus will be the Clinical Labs division. Investors await results there to determine if the billing issues, which the company said impacted Q1 results due to the implementation of a new billing system, have been resolved. The company said last week that it had appointed Kevin Krenitsky, M.D., President of Enzo Clinical Labs. Krenitsky is a highly respected 12-year veteran of the life sciences industry, bringing a wealth of experience in building and managing global diagnostic operations. Shares lost forty seven cents on the week to close at $3.07.
Conolog Corporation (NASDAQ: CNLGD), an engineering and design company that provides digital signal processing solutions to global electric utilities, announced that for the second quarter ended January 31, 2009, the Company’s sales were $491,000, a 45% increase over the same period from last year. The steadily increasing orders which the company has been receiving buck the current economic trends. The company expects that additional significant revenue will be generated from the introduction of its new CM 100 product line later this quarter. Shares gained thirty cents on the week to close at $1.47.
Earnings Preview: Healthcare services company Hythiam, Inc. (NASDAQ: HYTM) is scheduled to release earnings for its fourth quarter and fiscal year ended December 31,2008 Thursday after the closing bell. During the third quarter, the company reported consolidated revenue of $9.7 million, which included $8.4 million in revenue from CompCare’s operations and $1.3 million in revenue from Hythiam’s healthcare services business. Subsequently, the company sold CompCare’s operations. What investors are more likely to focus on is whether the company has been able to land contracts with healthcare providers for Catasys, its disease management offering which incorporates PROMETA. The company had previously expected the contracts prior to year-end. Shares gained five cents on the week to close at $0.31.
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 positive safety and efficacy results from its Phase 2 monotherapy clinical study of ProLindac in late-stage, heavily pretreated ovarian cancer patients. The study demonstrated that 66% of patients who received the highest dose achieved clinically meaningful disease stabilization according to RECIST criteria, while no patient in any dose group exhibited any signs of acute neurotoxicity, which is a major adverse side-effect of the approved DACH platinum, Eloxatin. The research concluded that Prolindac was well tolerated overall, in addition to establishing the maximum tolerated dose for Prolindac and the recommended dose levels for future combination studies. Researchers saw significant DACH platinum activity and efficacy in patients at the highest dose levels which is encouraging given that this study involved monotherapy in a heavily pretreated patient population that typically only respond to an aggressive drug combination. The study further supports the company’s belief that ProLindac is an active platinum agent with a favorable side effect profile, and will serve as an important benchmark for future studies. Shares gained fifteen cents on the week to close at $1.30.
Steel Vault (OTCBB: IFAQ) a premier provider of identity security products and services, unveiled its new corporate website last week. The site is designed to inform the consumer and investor communities about Steel Vault and its services, and will provide current and potential customers and investors with a wealth of information about the Company and the identity security industry. The new site will offer investors more transparency and provide frequent updates on company growth. Additionally, in conjunction with the start of National Consumer Protection Week, Steel Vault has posted on its site their Top Ten Tips to Protect Yourself from Identity Theft. Shares gained 17 cents on the week to close at $0.39.
Volume Alert: Shares of Skye International, Inc., the developer and marketer of next-generation tankless water heaters, surged more than 20% on Friday on four times average volume, as investors have begun to recognize the progress the company has made in launching its unique tankless water heaters, designed to drive efficiency and reliability among water home and commercial water heaters. Skye has increased production 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 the 2009, FORTIS water heater production should reach an annualized rate of 20,000 per year. The MSRP of the FORTIS 120 has been set at $1,899. Shares ended the week at $0.40.
Mining and exploration company Pacific Gold Corp. (OTCBB: PCFG), announced last week that it has entered into an extension agreement with Yorkville Advisors regarding the convertible notes that were due on February 26th, 2009. The extension agreement calls for the maturity date of the notes to be extended to April 20th, 2009. As of March 3, 2009, the remaining principal balance on the notes is $101,887. Shares lost $0.003 on the week to close at $0.005.
SPECIAL SITUATIONS:
Pioneer Behavioral Health (AMEX: PHC) $0.51
The announcement of the stimulus package and the outline of President Obama’s objectives for his term in office has us looking for below-the-radar healthcare services companies who could benefit. Pioneer Behavioral Healthcare, appears well positioned to capitalize on the growing momentum behind healthcare reform, as well as to be somewhat insulated from the economic downturn. The company is a leading provider of in-patient and out-patient, acute and long-term behavioral healthcare services, covering more than one million individuals through operations in five states. The company provides behavioral health services through contracts with government agencies, national insurance companies, and major transportation and gaming companies.
The behavioral healthcare market itself is extremely robust, with $100 billion spent annually on mental health treatment in the US, and $20.7 billion on substance abuse treatment alone- an increase of 124% since 1986. The sector recently received significant support in the form of legislation mandating that all medical issues, including mental health issues, be reimbursed equally, essentially granting the behavioral healthcare industry the same importance that is placed on traditional healthcare services. The bill is expected to take effect in approximately 10 months, which could be another catalyst for PHC, which already has several upcoming events that could drive earnings. Even without this stimulus, Pioneer has been growing steadily, posting record annual revenue of $45.4 million in fiscal year ’08, up 12% year over year. Pioneer has been operating profitably for more than six years despite expensing new hospital startup costs and expects these results to continue, as they have forecasted their core patient care business to grow at 20+% in fiscal year ’09, suggesting another year of record revenue despite the economic slowdown.
Pioneer operates through two complimentary units, the hospital and clinical services division and integrated delivery services. Steady bed growth fuels PHC’s facility based business while outpatient programs and contract support provided a diversified earnings stream, the company operates substance abuse treatment facilities in Utah and Virginia, and outpatient psychiatric facilities in Michigan and Nevada. Pioneer recently announced that it had entered into an agreement to sell its pharmaceutical research and clinical trials business unit for $5 million which allows it to focus on their higher growth, more predictable core businesses, and provides funding for operations under development in key markets like Las Vegas and Detroit. The deal is expected to close this week. The company is currently constructing a 7,000 sq ft behavioral health outpatient facility near downtown Las Vegas which is planned for completion by Q4 of ’09 (ended June 30, 2009), and plans are in the works for a 45,000 sq. ft. hospital/ medical complex on the same property with 100 inpatient beds and capacity to generate more than $25 million annually. The opening of this facility, scheduled for the end of the second quarter, could be a major catalyst for the stock.
In today’s market where capital is scarce for small companies, PHC has a strong balance sheet. As of year-end, the company had cash, cash equivalents and receivables of approximately $7.5 million, and is expecting to receive at least $3 million in proceeds from the sale of a non-core asset. With a strong balance sheet, the company could be well positioned to pursue acquisitions within the behavioral healthcare space due to industry consolidation. Yet despite a strong balance sheet, growing earnings and a new facility scheduled to open later this year, the company has a market capitalization of less than $12 million and actually trades at more than a 25% discount to book value. By contrast, larger industry participants such as Psychiatric Solutions, trades at a significant premium to book value. With investors getting defensive, a rapidly growing healthcare services provider could be just what battered portfolios require.