• Buy to Cover Assurant at $50

Over the past 6 months Assurant has so far managed to get through the credit crisis unscathed. A few weeks ago a Barron’s article even suggested that Assurant will ultimately benefit from a continually weakening housing market. Although Assurant will continue to write more creditor placed homeowners policies, the company still has significant exposure to the credit crunch and a weakening economy.

First, let’s take a look at mortgage exposure. In the latest 10-Q Assurant showed $1,470,477,000 in assets listed as mortgage loans on real estate. Although Assurant’s investment portfolio declined slightly from the previous quarter, the write downs associated with Assurant’s mortgage loans and mortgage-backed securities were only $37,875,000. This write down seems small considering what has happened to the mortgage market in this time frame. Assurant is essentially saying that the value of the mortgages and mortgage-backed securities portfolio declined by about 2.5% for the 3 months ended March 31, 2008. We expect a much larger write down in the next 10-Q.

The latest 10-K breaks out sub-prime exposure for the mortgage-backed security portfolio at about 8%. However, Assurant does not breakdown the rest of the mortgage-backed securities portfolio. Although the precise makeup of the rest of the mortgage-backed securities portfolio is unclear, Assurant mentions in the 10-K that the sub-prime crisis has created volatility in other high risk products such as alternative documentation loans (high credit scores, lack of income documentation). This implies that the rest of mortgage-backed portfolio has exposure to alternative documentation loans, but the extent of this exposure is not quantified in the 10-K. Interestingly, Assurant goes out of its way to break down the level of assets (1,2, or 3) in its fixed maturity portfolio, but they fail to provide this analysis for the mortgage portfolio. Presumably, the majority of the mortgage portfolio consists of level 3 assets (illiquid assets that require qualitative judgments by management to obtain fair value prices).

The Assurant Solutions group provides credit insurance both internationally and domestically. This group also provides extended warranty policies. The credit insurance division faces obvious problems as the economy weakens, but the extended warranty business could also face tough comparables considering that extended warranties are about as discretionary as it gets in the insurance business. We expect consumers to cut back on extended warranties as the economy weakens and gas prices continue to climb.

Perhaps the biggest problem that Assurant faces lies with the Assurant Health division. It is no secret that stocks for most publically traded health insurance companies have traded down sharply over the last 6 months. Industry wide issues including increasing costs, shrinking margins, and increased competition have taken heavy tolls on most health insurance stocks including United Health (NYSE: UNH), Cigna (NYSE: CI), Coventry Health Care (NYSE: CVH), and WellPoint (NYSE: WLP). This group of stocks is down an average of just over 45% since the beginning of March.

Yesterday United Health issued a revenue and profit warning following a warning from Coventry Health Care a few weeks ago. Both companies cited increased competition, escalating inpatient costs, and high outpatient utilization as reasons for lowering profit forecasts. Assurant Health has exposure to the same market forces that have already led to big declines in the pure play health insurance stocks.

An increase in unemployment related to the current economic downturn could have a significant negative effect on Assurant. As unemployment rises, Assurant gets hit with the double whammy of increased credit insurance loss ratios and fewer employees requiring health insurance coverage.

Overall, Assurant is not immune to the problems facing the health insurance industry, the company has exposure to illiquid mortgage-backed securities, and competition for creditor placed homeowners insurance is likely to increase as troubled insurance giants try to replace lost revenue. Although the concept of finding a stock that benefits from the credit crisis is intriguing, Assurant is not that stock. The Barron’s analysis is short sighted and does not reflect Assurant’s total exposure to a weakening economy. We think that Assurant’s stock has been inflated by the inaccurate Barron’s article and Assurant represents a compelling short sell opportunity at current prices.

Global Sources is a business-to-business media and ecommerce company largely focused on China export markets.

Recently, shares of Global Sources have been in free fall. After hitting a 52 week high of $35 in late October, Global Sources shares have dropped all the way down to yesterday’s close of $13.25. The final blow to the stock’s decline came yesterday when Global Sources lowered its fourth quarter earnings and revenue estimates.

The core B2B business at Global Sources is still strong. Even after the recent downside revision on 2007 revenue estimates, revenue for 2007 is now expected to be $182 million compared to $156 million in 2006 and $112 million in 2005. Fourth quarter growth in on-line revenue and revenues from mainland China were up 20% and 28% respectively from the fourth quarter of 2006. The revenues for print media were lower than expected, but at Wall Street Mayhem we don’t see that as a problem going forward. Did any of the investors that were buying the stock back at $35 a share hope that print media revenues would take off? Nope, there were interested in the on-line revenue and sources fairs which are still on track. Global Sources also plans to add several new Chinese-language online initiatives under the Global Sources brand name in 2008 which could further accelerate online growth in Chinese markets. On the sourcing fairs side Global Sources plans to nearly double the size of its two China sourcing fairs in Dubai and Shanghai this year. In addition to the increased number of booths the average selling price for each booth should be up substantially in 2008 as well.

Although we typically stay away from stocks that have recently lowered estimates, the Global Sources long-term growth story is still intact and now the valuation of Global Sources shares is compelling. A trailing P/E of just under 20 seems very reasonably for a company with a strong growth story and a proven long term record in Asian export markets and B2B sales. Additionally, Global Sources has a strong balance sheet with $185 million in cash and no significant long-term debt.

The pre-announced top line for the first quarter was slightly lower than expected coming in at $60.8 million compared to a previous estimate of $61 to $62 million. However, the bottom line is now expected to come in at 16 cents compared to the previous estimates between 25 and 28 cents. Much of the bottom line shortfall is a result of a $3.1 million write-down on Global Source’s investment in Blue Bamboo. This is a puzzling write-down considering that the Blue Bamboo investment was very recent, but the company has now written down the entire amount of the Blue Bamboo investment so Blue Bamboo will have no effect on earnings going forward.

Back in November, Citigroup put a buy rating on Global Sources and they said that $45 a share was a fair value based on solid growth, good visibility, and a large and loyal community of active buyers. Although it appears that revenue and earnings visibility was not as good as Citigroup thought, the revenue is still close to previous estimates and the EPS took a big hit due to the Blue Bamboo write-down.

• Buy MCHX under $13

Marchex Inc. is an Internet search and media company focused on local search, local content, and direct navigation. Marchex owns and operates a portfolio of over 200,000 Internet domains.

Marchex has a market cap of about $485 million, $54 million in cash and no significant long term debt. The trailing P/E is about 500 (the company is just barely profitable) and the forward P/E is estimated at about 24.

Although Marchex has a promising portfolio of domain names and the company has consistently grown revenues year over year, profits have failed to impress and the stock has dropped from its post IPO high of $24 to its current price near $11.50.

Until recently, most of Marchex’s domains have been “parked” with the pages serving up pay per click ad pages with little or no content. Last spring Marchex re-launched over 100,000 new websites with local content. Although most of these websites still lack individuality, the creation of value added local websites is certainly a step in the right direction.

In May of 2006, Marchex acquired OpenList, a local information service designed to help consumers find, rate, and review local businesses. Marchex plans on using OpenList content combined with content from partner sites such as opentable.com, contractors.com, healthgrades.com, and judysbook.com to populate its network of local sites. Marchex recently announced that organic traffic growth at the 100,000 local sites integrated into the OpenList network has increased 20% in the last 3 months.

Although operating profits have failed to impress investors, Marchex generates a healthy amount of cash with 2006 operating cash flow of nearly $32 million. Most of this cash has been used to create and improve the Marchex network of local websites and to make strategic acquisitions. As seen by the recent traffic growth for the Marchex network of sites, these investments are starting to pay off. Although the initial surge in traffic is promising, the Marchex sites could really start to shine as user created content increases. The local sites operated by Marchex will become more useful and traffic will increase as user created content in the form of reviews and message boards starts to grow.

Although Marchex’s stock has performed poorly since its IPO, at Wall Street Mayhem we think Marchex shares are currently undervalued. As the value of domain names continues to appreciate, Marchex’s portfolio of 200,000+ domains could already be worth more than the companies’ market cap of $485 million. However, the real potential for Marchex is in the growth and development of its local network of websites. Local on-line ad spending is expected to reach $25 billion over the next decade. If Marchex can continue to improve its network of local websites, the company is well positioned to become the market leader in local on-line advertising.

The shear number of websites operated by Marchex makes the creation of value added websites a difficult task. In order to obtain sustainable traffic growth, Marchex must create sites that draw repeat users instead of relying on traffic from direct navigation. However, considering the current market cap, we think Marchex is a relatively low risk stock considering the underlying value of the Marchex domain portfolio. If Marchex succeeds in creating a large network of value added user friendly local websites, the stock could soar. If Marchex fails, the break up or buyout value of Marchex would still be close to the current market cap due to the value of the domain portfolio.

Full disclosure: Wall Street Mayhem is long MCHX

• BUY EXFO near $7.06

Electro Optical Engineering provides test and measurement equipment for telecommunication carriers and cable operators to test and monitor fiber optic networks.

Electro Optical Engineering has a market cap of about $483 million, $115 million in cash and no significant long term debt. The trailing P/E is about 38.

Electro Optical reported third quarter 2007 earnings a few days ago. Sales came in at $39.2 million and GAAP net earnings totaled $2.6 million or $0.04 per share. Sales increased 10.7% year over year and 11.4% sequentially from the second quarter. Gross margins were 57.1% compared to 56.4% in the third quarter of 2006 and 57.5% in the second quarter of 2007.

Demand in the optical test and measurement sector remains strong as seen by Electro Optical’s raised forward guidance. The company said it expects “significant growth in the fourth quarter” and raised guidance by about $5 million by forecasting fourth quarter revenues between $41 and $44 million.

Shares of Ciena (Nasdaq: CIEN) have been on tear lately as Ciena has raised guidance and beat estimates for two straight quarters. Back in early March Wall Street Mayhem commented that shares of Ciena appeared to be undervalued after the company reported a strong quarter, but the stock dropped. Since then Ciena has turned in another great quarter and this time the street took notice. More importantly, Ciena’s strong results show that demand for the optical sector as a whole is continuing to grow.

JDSU Uniphase (Nasdaq: JDSU) has reported mixed results lately. However, JDSU has shown strong demand and growth in optical test and measurement equipment. Strength in test and measurement at JDSU is a good sign for Electro Optical because Electro Optical derives nearly 80% of total company revenues from the optical test and measurement division.

Demand for increased bandwidth is showing no signs of slowing down. Bandwidth intensive applications using video continue to gain consumer adoption. A recent article in the Financial Times suggests that Apple (Nasdaq: AAPL) will soon begin renting movies online. Although Apple already sells movies online, the addition of low cost movie rental downloads could have a major effect on the movie rental industry. If downloadable movie rentals from Apple take off like Itunes did, bandwidth usage and demand will skyrocket.

In addition to movie downloads, video applications such as Internet TV should also create a surge in bandwidth demand. The research firm iSuppli recently released a report predicting Internet TV revenues to grow 14 fold by 2011. The report went on to say that bandwidth required for Internet TV will grow by more than 44 times to about seven Tebibytes (TiBs) by 2011.

It seems clear that demand for increased bandwidth will continue to grow for the foreseeable future and shares of Electro Optical Engineering represent a great way to profit from the macro trend in bandwidth demand.

Full disclosure: Wall Street Mayhem is long EXFO 

• BUY JMBA near $10.02

Jamba, Inc. operates a chain of smoothie shops focusing on fresh fruit smoothies with optional vitamin and protein supplements. Operating under the Jamba Juice brand name, Jamba has about 600 locations including full size stores and on-site kiosks. Jamba differentiates itself from other beverage and fast food outlets by focusing on fresh and healthy drinks and food products.

Jamba, Inc. has a market cap of about $530 million, cash of about $67 million and no significant long term debt.

On June 11^th Jamba announced earnings for the first quarter of 2007 of $11.9 million or 20 cents per share versus a year ago loss of $81.5 million or -$3.88 per share. Although these first quarter results included a pre-tax gain of $15.2 million, after backing out this gain the results still handily beat analyst expectations. Revenues increased 22% year over year coming in at $89.4 million.

Jamba opened 26 new stores in the first quarter of 2007. Although Jamba is already expanding at a brisk pace, the long term goal for Jamba is to open over 5,000 stores worldwide. Jamba says that this number can be reached without cannibalizing existing stores by expanding to new areas with residential density of 15,000+ within one mile, average household incomes over $50,000, and strong vehicular and pedestrian traffic counts. Fueled by these expansion plans and increasing same store sales, Jamba is forecasting revenues of at least $600 million a year by 2010.

We think that yesterday’s weak market conditions helped create a rather subdued movement in shares of Jamba after the company reported excellent results for the first quarter. At this point, shares of Jamba are only about 0.5% higher than they were before the first quarter results were announced even though Jamba beat top line expectations by 30% and it appears that Jamba’s growth is accelerating faster than expected.

Currently, 42% of Jamba’s revenues come from “light” users. These light users visit Jamba Juice stores 1 or 2 times a month. If Jamba can entice these light users to visit Jamba Juice 1 more time per month, total company revenues would rise by 10%.

In order to increase the frequency of customer visits, Jamba is implementing various new initiatives designed to compliment Jamba’s core competency of healthy, fun, and on-the-go product offerings. A healthy version of a stuffed pocket breakfast product will be offered at select locations starting this summer. A ready to drink bottled product is also in development and should be ready in the second half of 2007.

One of the Jamba Juice stores located in the Bahamas recently started selling salads and other pre-packaged healthy food options. Jamba has reported that sales at this location have been brisk and that the additional food offerings have helped increase customer retention rates and customer visit frequency. Jamba is currently evaluating options for including similar healthy food options in at many Jamba Juice locations.

On the marketing front, Jamba recently partnered with Nike to promote Jamba Juice at marathons and other sporting events. This cross promotion with Nike is typical of Jamba Juice marketing which tends to shun traditional media outlets in favor of grass roots campaigns and viral marketing opportunities.

Jamba hopes to become the world’s leading brand focusing on what the company calls “healthy energy”. The core of the healthy energy concept revolves around fresh fruit high in antioxidants, vitamins, minerals, natural sugars, and fiber. Consumers in the US are increasingly health conscious and although fast food chains have attempted to increase healthy food options, Jamba Juice is well positioned to become the market leader for healthy drinks, snacks, and light meals. Jamba does not have to reposition itself to appeal to the health conscious consumer, healthy drinks and food are part of the core concept of the Jamba Juice brand.

Recently companies like Chipotle (NYSE: CMG) and Buffalo Wild Wings (Nasdaq: BWLD) have seen their stock prices soar due to increasing revenues and profits largely fueled by aggressive expansion plans. Jamba Inc. could be poised to follow in the footsteps of these companies. Revenues jumped in the first quarter of 2007 and analysts expect Jamba to become profitable (without one time gains) in the seasonally strong second quarter.

At Wall Street Mayhem we think that the risk/reward ratio for shares of Jamba is excellent at this point. Jamba’s growth should continue to accelerate due to expansion and recent initiatives designed to drive customer frequency rates. Additionally, over 30% of Jamba shares are held short. As seen by the recent moves in Wall Street Mayhem picks Cree (Nasdaq: CREE) and Taser (Nasdaq: TASR), high short percentages can create quick surges in share price when companies receive positive news or increased investor attention.

Jamba is poised to report an excellent 2^nd quarter for 2007. Revenues exploded in the first quarter and traditionally the 2^nd quarter is much stronger for Jamba Juice due to favorable weather conditions. Now is a good time to buy shares of Jamba Juice before the second quarter results and before the short covering starts to accelerate.

The board of directors and the management at Jamba Juice have made quality strategic decisions and they have an exceptional pedigree. Although Jamba is a small company from a market cap perspective, management has extensive experience in food and beverage retail. CEO Paul Clayton is the former President of Burger King (NYSE: BKC) North America while Board member Craig Foley was the early lead investor in Starbucks (Nasdaq: SBUX) and Costco (Nasdaq: COST) and was on the board of directors at Starbucks for 15 years. Other Jamba board members also serve on the boards of Ebay (Nasdaq: EBAY), Burger King (NYSE: BKC), and P.F. Chang’s (Nasdaq: PFCB).

Jamba Inc. is a growth story in its early stages. Although Jamba must increase customer frequency rates to become a highly profitable company, recent initiatives including pre-packed bottled beverages and healthy food products should open Jamba Juice to a wider range of customers while increasing visit frequency for current customers.

With a market cap of only $530 million, rapid growth, and a healthy brand image, Jamba has the makings of an appealing takeover target. If Starbucks wanted to extend their dominance of the beverage industry while improving their appeal to health conscious consumers, Jamba seems like an excellent fit.

Full disclosure: Wall Street Mayhem is long  JMBA

• BUY NEXS near $4.95

Nexxus Lighting Inc. (formerly Super Vision International) designs, manufactures, and markets light-emitting diodes (LEDs) and fiber optic lighting products. Nexxus products are primarily used for commercial, architectural, and signage applications.

Recently, companies focusing on LED lighting have seen dramatic moves in their stock prices due to legislation banning the use of incandescent bulbs resulting in increased investor attention. Color Kinetics (Nasdaq: CLRK) and Wall Street Mayhem pick Cree Inc. (Nasdaq: CREE) have seen their stock prices jump 30% and 15% respectively in the last two weeks. Although Nexxus is a more speculative pick than Cree or Color Kinetics, Nexxus should also benefit from the growing demand for LED lighting and the recent increased investor attention on the LED sector.

Nexxus manufactures and sells the Savi line of LED bulbs with True White Technology. The Savi line of LED bulbs reduce energy costs by about 75% and they last 15 to 25 times longer than traditional incandescent bulbs. Savi LED light bulbs are designed to last up to 5 years when operated continuously. Unlike fluorescent lighting, the Savi LEDs produce clean white light and they are environmentally friendly because they do not contain mercury and they require no special disposal procedures.

In December of 2006 Nexxus reached a comprehensive settlement with Color Kinetics over patent infringement issues. Nexxus agreed to pay Color Kinetics a settlement fee and Nexxus was granted a royalty bearing license allowing Nexxus to continue manufacturing and selling certain LED lighting systems including the Savi line of LED bulbs. As part of the settlement Nexxus also granted Color Kinetics a royalty free license to the LED patent #4,962,687 owned by Nexxus. Although Nexxus had hoped to emerge from these court proceedings with a clean patent portfolio, the settlement allows Nexxus to continue manufacturing and selling the Savi LED line while paying reasonable royalty rates. In the first quarter, gross margin dropped from 43% to 41% after the company started paying royalties to Color Kinetics.

On March 31, Nexxus released financial results for the first quarter of 2007. Total revenue was down 10% from the first quarter of 2006, but revenues in the commercial lighting division were up 30% due to increased LED sales. The decrease in total quarterly revenue was due to a decrease in sales in the pool and spa market. However, sales of commercial LED lighting systems were strong and the company forecast continued rapid growth in this sector.

Although Nexxus is a small company that is currently not profitable, it is well positioned to benefit from increasing demand for LED lighting solutions. In late March, Nexxus moved to a larger more cost effective manufacturing facility and the Nexxus Savi line is one of the first complete lines of LED light bulbs that can be used in existing lighting systems as well as new construction.

Legislation banning incandescent light bulbs is picking up steam sending shares of Color Kinetics and Cree significantly higher. Although Color Kinetics and Cree are the obvious investment choices to take advantage of the growing demand for LED lighting, as investors continue to focus on environmentally friendly LED lighting solutions, shares of Nexxus have the potential to realize gains similar to those recently seen in Color Kinetics and Cree.

Nexxus is a risky investment, but the current media and investor attention focused on LEDs could propel shares higher. For investors that are new to LED companies, Cree and Color Kinetics are safer investments, but for those investors that have already profited from Cree and Color Kinetics, we recommend taking some profits on CREE and CLRK and moving the proceeds into Nexxus.

Full disclosure: Wall Street Mayhem is long NEXS, CREE, and CLRK 

• BUY CREE near $18.85, set stop loss at $17.50

Cree, Inc. (Nasdaq: CREE) develops and manufactures semiconductor materials and devices focused on light emitting diodes (LEDs). Cree has a market cap of about $1.6 billion, $265 million in cash, and no significant long term debt. The trailing P/E is about 22 and about 12% of the outstanding shares are held short.

It appears that the incandescent light bulb is on its way out. Although incandescent light bulbs are inexpensive, they use energy in a non-efficient manner and environmentalists think they have made a major contribution to global warming. Consequently, lawmakers in the US and abroad are talking about banning incandescent bulbs.

California and Canada are banning the use of incandescent bulbs by 2012 while Australia has announced plans to ban incandescents by 2010. Energy conservation and strategies to overcome global warming are becoming increasingly important political and social issues. Banning incandescent light bulbs is a relatively easy way to make a significant contribution to energy conservation. Therefore, the death of the incandescent bulb in the US and many developed countries is only a few years away.

Cree has the potential to be a major beneficiary of new legislation banning incandescent light bulbs. Cree’s white light LEDs have a longer life and use less energy than incandescent light bulbs. In the US lighting accounts for 22% of all electricity consumption. According to the US department of energy, widespread use of LED lighting could cut energy consumption due to lighting in half.

LEDs and compact fluorescents are the primary alternatives to the aging incandescent light bulb. Although compact fluorescents are currently less expensive than their LED counterparts, the price to produce white light LEDs is dropping rapidly. Compact fluorescents have been widely available for the last decade, but consumer adoption rates of compact fluorescents have been low. The light quality of compact fluorescents is typically poor and there is a significant delay when compact fluorescents are turned on. LEDs can provide a higher quality light, with no delay, and they should last about five times longer than compact fluorescents.

Although it will be a few years before LED prices will come down enough for the average consumer to purchase LED lighting solutions, businesses are already implementing LED lighting. Energy conservation and eco-friendly policies have become important issues for many large US businesses and LED lighting is another way for these companies to help conserve energy and show consumers that they are not heartless giants.

Financial results at Cree have been disappointing for the last few years. Although CREE has appeared poised for rapid growth for many years, results have often disappointed. In Cree’s most recent quarter, the company basically broke even, although the company officially posted earnings of $0.27 per share, the majority of these profits were due to a tax benefit. Over the past year investors have often expected faster growth and higher profits than Cree has been able to produce and shares of Cree have dropped from about $35 to $19. Although prior results have failed to live up to expectations, the growing demand for environmentally friendly LED ambient lighting solutions could transform Cree back into the growth stock it once was.

Recently, shares of Color Kinetics (Nasdaq: CLRK) have been on a tear. It appears that the rally in Color Kinetics is directly related to increased news about incandescent bulb legislation efforts. In the last four trading days shares of Color Kinetics have jumped from about $21 to $25.50. Although Color Kinetics should also be a beneficiary to the LED trend, at this point in time we feel that Cree has a more compelling valuation. As news about legislation banning incandescent bulbs continues and big businesses start to advertise their environmentally friendly efforts to switch to LED lighting, Cree has the potential for rapid appreciation similar to that recently seen in shares of Color Kinetics.

Cree has the added bonus of a relatively high percentage of shares held short. Considering the recent strength in the overall market, these short shares could help propel CREE higher with any positive news. Last months Wall Street Mayhem pick Gmarket surged 18% after earnings despite missing estimates on the top line. We believe this move was largely due to short covering. If the trend started by Color Kinetics this week continues, both Cree and Color Kinetics could benefit from short covering as news about LED lighting continues to grab the attention of the investing public.

The recent surge by Color Kinetics could be the start of increased investor interest in all things LED. Energy conservation is a trend that is showing no signs of slowing down. Solar companies like Trina Solar (NYSE: TSL) have been flying recently and we believe companies focusing on LEDs could be the next environmentally friendly energy conservation sector to receive serious investor interest.

Full Disclosure: Wall Street Mayhem is long CREE and CLRK

• 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

• 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

• 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.