Will Gmarket (Nasdaq: GMKT) be the next Nasdaq short squeeze?

• BUY GMKT near $16.90, set stop loss at $15.00

Gmarket operates a retail e-commerce marketplace in South Korea. Often referred to as the Korean Ebay, Gmarket would be better described as a mix between Ebay and Amazon. Gmarket sells products in both auction and fixed priced formats and the selling format caters to small to mid-sized businesses. Transaction fees account for about 60% of Gmarket’s revenue, while advertising and other non-transaction revenues account for the remaining 40%.

Gmarket has a market cap of about $820 million, a P/E of 42, and a forward P/E of 19. Gmarket has a strong balance sheet with $187 million in cash and zero long term debt.

The recent move in Amazon shares is mind boggling and it has changed the investing environment for at least the short term. Although the Amazon surge was helped by short covering, it appears that investors are once again willing to pay premium prices for companies with rapid growth. Yesterday, Bidu joined in on the fun and gained over 20% in after hours trading after the company raised guidance and reported slightly higher than expected earnings.

At Wall Street Mayhem we believe that Gmarket’s valuation compares favorably to other internet companies with similar growth potential. Despite Bidu’s blowout quarter, revenue for the first quarter came in at just $35.7 million. Analysts expect Gmarket to have first quarter revenues of $53.43 million. Bidu’s market cap weighs in at a hefty $4.5 billion, while Gmarket’s market cap seems reasonable at about $820 million.

Bidu bulls will argue that Bidu enjoys higher margins than Gmarket and Bidu has greater growth potential due to the rapid growth of the Chinese economy. Although this argument has merit, Gmarket has the potential to expand into the Chinese and Japanese markets which could rapidly accelerate revenue and earnings growth. Gmarket has previously stated plans for international expansion and fellow Wall Street Mayhem pick Ebay has struggled to grow in Asian markets leaving the door wide open for Gmarket to step in and gain market share.

The huge gains enjoyed by Amazon and Bidu were fueled in part by short covering. We think this short squeeze trend is likely to continue for the near term making companies with high short interest and high growth potential attractive. Amazon had short interest that totaled 15% of the float before earnings, while Bidu’s short interest represented about 10% of the float. Gmarket shares have short interest totaling about 16% of the float.

Gmarket reported fourth quarter earnings on March 8^th and although net income rose 78% to $6.8 million and revenue jumped 67% to $51.6 million, Gmarket shares dropped 20% because these numbers missed analyst expectations.

First quarter earning are scheduled to be released on May 9^th and we think this is a great time to go long Gmarket before the earnings release. Considering the reasonable P/E, strong balance sheet, high short interest, and recent big moves by Amazon and Bidu, we think Gmarket shares are poised to surge after first quarter earnings.

Analysts expect Gmarket to report first quarter revenues of $53.43 million and earnings per share of 0.13. Wall Street Mayhem thinks that Gmarket will beat these numbers. On April 9^th Gmarket reported that gross merchandise value for the first quarter came in at $771.59 million representing a 54% year over year increase and a 6% sequential increase. Therefore, if Gmarket’s revenues can match the 6% sequential gain seen in gross merchandise value revenues will come in at $54.69 million. Although the revenue as a percentage of gross merchandise value will have to increase from .0699 to .0708 in order to increase revenues to $54.69 million, we think this increase in revenues as a percentage of gross merchandise value is likely due to the recent increases in non-transaction related revenue. With growth in the subscriber base and growth in monthly page views, Gmarket’s non-transaction related revenue should help the company beat first quarter expectations.

Over 68% of the South Korean population uses the Internet and broadband penetration is over 25%. The South Korean economy is the 11^th largest in the world and Gmarket holds a dominant position in e-commerce transactions in South Korea. Even without Asian expansion, Gmarket should continue to rapidly grow profits and revenues. However, with the help of 10% beneficial owner Yahoo, Gmarket could easily become a large player in e-commerce throughout Asia. After Yahoo made an investment in Gmarket in June of 2006, Yahoo stated, “we look forward to working with Gmarket to leverage their e-commerce expertise to further expand Yahoo’s leading position in e-commerce in Asia.” Gmarket stated that the Yahoo investment enhanced Gmarket’s strategy to improve growth opportunities abroad and that Gmarket has agreed with Yahoo to implement various strategic initiatives internationally.

Gmarket shares represent a compelling value at current prices and Wall Street Mayhem believes that even a small bump in second quarter guidance could result in a large gain in Gmarket’s stock. Gmarket’s stock could also jump with an official announcement of the expansion to an additional Asian market. Either of these events, combined with a short covering panic, could double the value of Gmarket.

Full Disclosure: Wall Street Mayhem is long GMKT

Update on MGIC (NYSE: MTG) and PMI Group (NYSE: PMI)

• Buy to Cover MTG near $61.90

• Buy to Cover PMI near $46.80

Last week MGIC reported first quarter earnings and as we expected they missed estimates by a mile. The average analyst estimate was $1.71 per share, MGIC earned $1.12 a share. What we did not expect was the stock to rally after such a horrendous quarter.

The same analysts that were busy upgrading the stock in the previous weeks were off by over 35% on their quarterly profit estimates. Clearly these analysts do not have a good understanding of this stock with estimates that missed by such a large percentage.

Although we still think the mortgage insurance group is headed for trouble, we are throwing in the towel today as Cramer is out this morning hyping MTG as a short squeeze candidate. We ended up roughly break even on these trades due to the previous half position cover for a profit. It is tempting to wait for a drop in MTG and PMI, but we are worried that Cramer will announce his short squeeze theory on Mad Money tonight which would really send the shares flying.

Ninetowns (Nasdaq: NINE) transforms into a B2B company

• BUY NINE near $4

Ninetowns Internet Technology Group Company Limited (Nasdaq: NINE) provides enterprise software designed to streamline the import/export process in China. Ninetowns’ software allows its customers to complete import/export documentation over the internet. The company first introduced this software in 1995 and it gained a first mover advantage enabling the company to steadily grow revenues and profits until 2005.

Ninetowns has a market cap of $140 million, cash of $116 million and no significant long term debt. The trailing P/E is about 24 and the one analyst that follows Ninetowns predicts a loss of $0.02 per share in fiscal year 2007.

In August of 2005 the business outlook for Ninetowns changed dramatically when the State Administration for Quality Supervision and Inspection of the People’s Republic of China (PRC Inspections Administration) decided to create a free e-filing software package to facilitate the import/export process in China. Although the PRC Inspection Administration hired Ninetowns to provide the new software, the PRC Inspection Administration paid Ninetowns a paltry 400K for their services and Ninetowns was forced to offer a scaled down version of their core software product for free.

Since the introduction of the free e-filing software, Ninetowns has struggled financially. Revenues and profits have dropped consistently including in a recently reported loss in the fourth quarter of 2006. Although Ninetowns has been able to increase the number of service contracts and premium services sold, this increase has not offset the revenue lost due to the free software option now available.

With the B2G business at Ninetowns struggling, the company has been looking for other business opportunities. Considering Ninetowns current customer base of over 130,000 businesses involved in import/export transactions in China, a B2B business that leveraged this customer base was the obvious choice. In September of 2006, Ninetowns acquired a 16.25% interest in Global Market Group Limited, a Chinese B2B trade facilitator. Although this was a positive sign, this investment did not show investors that Ninetowns was fully committed to a strategy change to the B2B market place.

In late 2006, Ninetowns launched tootoo.com, its first full featured entry into the B2B marketplace. Although financial results have yet to be reported for tootoo.com, a look at the Alexa ranking shows that tootoo.com is experiencing significant traffic. Tootoo.com has a current Alexa rank of 2,045 compared to a rank of 2,098 for competitor Global Sources, 374 for MadeinChina.com, and 97 for Alibaba.com.

Although a high Alexa rank doesn’t necessarily translate into revenues and profits, the quick jump in traffic at tootoo.com does show that Ninetowns has the ability to leverage their current customer base.

A few weeks ago Ninetowns announced the next step in its B2B strategy. By acquiring Baichuan, a leading Chinese vertical search engine, Ninetowns plans to offer industry specific web search for suppliers and buyers engaged in Chinese international trade. In order to enhance the quality and relevancy of search results, Ninetowns plans to use the supplier verification technology from its existing iDeclare and iProcess service platforms.

The Baichuan acquisition allows Ninetowns to merge tootoo.com with Baichuan’s yaphon.com. Baichuan has entered into alliances with more than 30 Chinese B2B portals with access to 400,000 suppliers and 1.5 million products. Baichuan also introduced the Total Quality Sourcing (TQS) ranking algorithm to improve search result relevancy and quality. By combining TQS and Ninetowns supplier verification system, Ninetowns hopes to gain a competitive advantage over the competition by focusing its search results on companies that have passed multiple quality standards.

Although Ninetowns core software has been hurt significantly by the introduction of the free alternative, the fourth quarter results have finally stopped the downward spiral of revenues. On a year over year basis, the fourth quarter of 2006 had a significant decline compared to fourth quarter 2005 results, but revenues actually increased from the third quarter of 2006. This increase was due in large part to increased sequential sales of iDeclare packages (+300) and iDeclare service contracts (+5,500). The net loss reported for the fourth quarter was largely due to increased spending on R&D for the new B2B platforms (+$779K).

Although there is no guarantee that the new B2B strategy at Ninetowns will be successful, Ninetowns has some unique advantages in this field. By leveraging its current customer base and utilizing the only Chinese developed vertical B2B search platform, Ninetowns can rapidly grow internet traffic while having a better understanding of local business customs than the foreign competition.

On March 22, 2006, SEC from SC 13G was filed for Ninetowns showing that Netease, founder and CEO Lei Ding purchased 3,070,028 shares in Ninetowns representing about 9% of total shares outstanding. This shows that at least one prominent investor, knowledgeable in Chinese on-line businesses, has confidence in Ninetowns.

The core B2G import/export software business at Ninetowns appears to have stabilized and with increased premium services, this business should make a small profit or at least break even going forward, but the real potential in Ninetowns is in B2B. Although revenue projections are impossible at this stage, competitor Global Sources (Nasdaq: GSOL) has had rapid growth in profits and revenues recently. Although Global Sources relies heavily on sourcing fairs to facilitate transactions, Ninetowns has the potential to succeed without sourcing fairs if its search results can accurately provide quality import/export leads.

At Wall Street Mayhem we think Ninetowns has a compelling valuation at current prices. After backing out the cash, Ninetowns has an enterprise value of only $24 million. Considering the strategic B2B advantages Ninetowns enjoys due to its extensive customer base and its ability to integrate quality measures into B2B search results, Ninetowns has the potential to make a significant impact on the B2B market place in China.

Full disclosure: Wall Street Mayhem is long NINE

Update on Anika Therapeutics Inc. (Nasdaq: ANIK)

Yesterday Anika announced that it has received European approval for the sale of
its cosmetic dermatology product Elevess. Elevess is an injectable dermal filler used for the treatment of wrinkles, scar remediation, and lip augmentation.

CE Mark approval for Elevess is a major step forward for Anika. The worldwide dermal filler market is estimated at about $600 million and is experiencing steady growth. The European Union represents approximately 25% of worldwide demand for dermal filler products.

Elevess was approved by the FDA in December of 2006, but the company has filed a supplement to the pre-market approval (PMA) documents. Final approval is expected in mid 2007. Anika expects to commence a worldwide launch of Elevess in the second half of 2007.

Considering current yearly revenues of about $27 million, the launch of Elevess should transform Anika into a growth stock. If Anika can capture just 5% of the worldwide market for dermal fillers (a conservative estimate) that would translate into an additional $30 million a year in revenue for Anika. Few analysts currently follow Anika, but we expect that to change with the worldwide launch of Elevess later this year. Analysts love growth stocks and with the launch of Elevess, Anika’s growth story will be hard to ignore.

We recommended Anika a few months ago at $13.30. Although it has taken longer than expected to get into the green with this trade, the EU approval of Elevess is a major step forward for Anika and should lead to significant European sales. Shares of Anika have a reasonable valuation without even considering the addition of Elevess sales. Anika has a P/E of about 33, a strong cash position of about $47 million, and no significant long term debt. After factoring in the growth that the launch of Elevess should provide, Anika appears to be significantly undervalued at the current price of $13.85 and market cap of about $150 million.

Full disclosure: Wall Street Mayhem is long ANIK 

Update on MGIC Investment Corp. and PMI Group Inc.

Tomorrow morning, MGIC (NYSE: MTG) will announcement earnings for the first quarter of 2007. This will be the first earning announcement to come out of the mortgage insurance sector since the subprime meltdown began. Although some analysts seem to think that the problems with subprime and Alt-A loans will not carry over into the mortgage insurance sector, the first quarter report from MGIC could give investors their first real look into the potential problems that the subprime mess could cause mortgage insurers.

Investors will key on the quantity of insurance claims paid during the quarter. Wall Street Mayhem believes that any significant increase in claims paid should send this sector down. Last month, National City corp., the nation’s ninth largest bank, said that their $2.2 billion subprime and Alt-A mortgage portfolio was covered by two different carriers. National City went on to say that one of these carriers was paying claims, but the other was “rejecting a meaningful number of claims”. National City will seek contractual or judicial relief against this carrier. Since Radian Group and MGIC are merging, that leaves PMI Group and Triad Guaranty Inc. as the other large mortgage insurers. Although large insurance companies such as AIG also sell mortgage insurance, it is not a stretch to think that PMI Group or MGIC could be the unnamed company refusing to pay claims considering that PMI and MGIC are the largest insurers focusing on mortgage insurance.

If MGIC or PMI Group is refusing to pay claims this could be a signal of major problems related to subprime and Alt-A mortgages. Even if neither MGIC nor PMI group is the nonpaying culprit, it is reasonable to assume that if these companies are paying claims, the increase in claims paid will have a significant negative impact on earnings going forward.

MGIC and PMI Group bulls will argue that many of the subprime loans were securitized and sold in the capital markets instead of being insured. Through this logic mortgage insurers will not have a significant increase in claims paid due to subprime and Alt-A defaults. Although this argument holds some credence, the statement by National City shows that at least some of the large mortgage originators still used insurance for subprime and Alt-A loans.

In PMI Group’s most recent 10-K they state, “In 2006, PMI’s average premium rate increased primarily as a result of its primary portfolio containing higher percentages of high LTV and Alt-A loans. However, there can be no assurance that the premiums earned and the associated investment income will prove adequate to compensate for future losses from these loans.” Although 10-K’s are notorious for sounding like the company is in dire straights due to the legal ramifications of these documents, this statement shows that PMI has significant exposure to Alt-A loans. Apparently, not all of these loans were securitized after all.

Details about MGIC’s questionable acquisition of Fieldstone Investment will also be a key issue surrounding MGIC’s conference call. Although MGIC did manage to lower the offer price from $5.53 per share to $4 a share, Fieldstone’s shares are currently trading at $3.21 implying that the street does not have confidence that the deal will go through. Yesterday, Friedman Billings Ramsey announced that they have sold their entire position in Fieldstone.

We already covered half of our short positions in MGIC and PMI Group for a nice profit. Tomorrow’s earning report for MGIC will set the tone for mortgage insurers going forward. If MGIC has somehow maneuvered through the subprime meltdown unscathed we will cover the rest of our short position, but in our opinion the mortgage insurance sector will continue to under perform.

Full disclosure: Wall Street Mayhem is short MTG and PMI

The Neurochem seven percent solution

• Short Sell NRMX near $15.25

• Sell to Open KQMQC.X (NRMX May $15 puts) near $5.80

• Buy KQMEC.X (NRMX May $15 calls) near $4.90

Neurochem Inc. (Nasdaq: NRMX) is a small Canadian biotech company that focuses on neurological diseases. Neurochem has a market cap of about $600 million, $50 million in cash, and $34 million in debt. The company has yet to take a drug to market, but they do have one drug that is nearing an FDA decision and another drug that just completed phase III.

Data from Neurochem’s phase III trial for Alzhemed, a treatment for Alzheimer’s, is due out sometime in May. Neurochem is also awaiting an FDA decision on Eprodisate, a treatment for Amyloid A amyloidosis, which should come by April 16. The combination of these two events has sent Neurochem’s May option premiums soaring. Although both the puts and the calls are expensive, the options are telling us to expect negative news as the puts are significantly more expensive than the calls. Although Wall Street Mayhem doesn’t really have an opinion on Neurochem’s stock, the large option premiums and the discrepancy between the prices for the puts and the calls have created a good trading opportunity in Neurochem.

By shorting the stock, writing the puts, and buying the calls we have created a net neutral position that should perform well no matter what happens to the underlying stock. The key to this trade is locking in a profit between the price of selling the puts and buying the calls. In this case we gained $0.90 after selling the puts and buying the calls. If Neurochem announces negative data about Alzhemed, the stock will go down significantly. If we hold these positions until expiration with the stock down, the puts we sold will get exercised at $15 which closes out our short position and nets a gain of $0.25 on the short position. With the stock down at expiration, the calls will expire worthless, but the total position will have a net gain of $1.15 or about 7.5% of the net outlay required for this trade.

If Neurochem announces positive data about Alzhemed, the stock will go up significantly. In this scenario, at expiration we exercise the calls closing out the short position at $15 dollars creating a net gain of $0.25 for the short position. With the stock up at expiration the puts will expire and the trade will gain $1.15 or 7.5% of the initial outlay.

If Neurochem’s stock stays flat (unlikely considering the pending news and big option premiums) this trade still works out well. If the stock closed at $15.25 at expiration, we could still exercise the calls and close out the short position for a $0.25 gain brining the net gain back to $1.15 or 7.5%.

Athough it may be difficult to find Neurochem shares available to short, this is a great trade if you can get your hands on some shortable shares.  If you have a direct access broker try calling and asking if there are any available shares to short even if the standard trading interface does not show that any are available.