Taking profits on Ninetowns (Nasdaq: NINE)

• Sell NINE near $6.50
• Buy QIIJU.xx near $0.35 (quantity equal to 10% of profit from NINE trade)

In the last 2 weeks the enterprise value of Ninetowns has moved from -$30 million to +$120 million. This trade took longer than expected to materialize, but the market finally appears to be recognizing the value of Ninetowns. Normally we would hold onto Ninetowns a little longer as a $120 million enterprise value is still reasonable, but we are increasingly worried about the valuations of all Chinese stocks so we are taking this opportunity to lock in a 65% profit. However, we decided to buy some October $7.50 calls with 10% of the profit from this trade. Just in case Ninetowns doubles again (as has happened with more than few small cap China stocks over the last week) we will still be well positioned. If the Ninetowns run is over then we will still net 55% on the trade.

Ninetowns could still receive a nice move when the Alibaba IPO comes out in early November so it is still on our radar, but for now we think this is a good time to take profits and buy a small number of October calls.

Update on Taser International Inc. (Nasdaq: TASR)

• Sell TASR near $18.40

Shares of Taser have been on an incredible run for the last three months. We entered a position in Taser back in late March and since then shares of Taser are up over 120%. In that time frame Taser has successfully released the C2 and they have started to gain traction in foreign markets.

Although the fundamentals at Taser have certainly improved and the concern about wrongful death lawsuits has been largely mitigated, we think shares of Taser have outpaced the underlying business fundamentals. In the most recent quarter announced this morning, Taser posted earnings of $3.7 million on sales of $25.9 million. These numbers handily beat analyst estimates, but with a forward P/E that is still over 50, we think this is a good time to take profits in Taser.

Taser bulls will argue that the big French order promised by Nicolas Sarkozy before the French election has yet to materialize. Although a large order from France will likely produce yet another jump in Taser shares, we prefer not to wait around for a slow moving French government.

Taking profits in Cree (Nasdaq: CREE) and Nexxus (Nasdaq: NEXS)

• SELL ½ position NEXS near $6.28

• SELL remaining ½ position CREE near $26.05

The LED sector has had a tremendous run over the last month. Considering the recent market volatility we think this is good time to take some profits in this sector. This trade closes out our position in CREE and reduces NEXS to a half weight position. We will continue to follow CREE and will likely be buyers on any significant pullback.

Update on Cree Inc (Nasdaq: CREE)

• SELL ½ position in CREE near $25.75

Although all of the long term trends are still intact for Cree, the recent run-up has been so strong in such a short period of time that we feel compelled to lock in some profits at this point. New legislation banning incandescent bulbs continues to gain strength. Therefore, we are holding on to a half position in Cree, but with a 35% gain in less than three weeks we think it is prudent to lock in profits at this point.

Update on Dell Inc. (Nasdaq: Dell)

• SELL DELL near $28.15

Dell passed our price target of $28 this morning so we sold our shares. As we hypothesized, Michael Dell has made the changes necessary to revitalize the stock, the most important of these changes being the 10% reduction in workforce announced yesterday. Although Dell appears to be back on track, at current prices Dell shares no longer have the compelling valuation that they did a few months ago.

Update on Ninetowns (Nasdaq: NINE)

Yesterday Ninetowns announced that it has been selected as a winning bidder by the State Administration for Quality Supervision and Inspection of the People’s Republic of China (PRC) for servicing the free import/export e-filing software provided by the PRC.

Although it was expected that Ninetowns would be chosen to provide service for this software since Ninetowns created the software used by the PRC, this is still a significant milestone for Ninetowns. The ability to service the PRC’s free import/export software should allow the import/export software and service segment of Ninetowns to get back into the black.

The real growth for Ninetowns is still tied to the B2B initiatives recently started by the company including TooToo.com. However, the new servicing contract should allow Ninetowns to make a small profit on the import/export software side and create cross-selling opportunities for Ninetowns B2B platform.

This new contract win has made Ninetowns current valuation even more compelling. The company is sitting on about $115 million in cash, it has zero long term debt and a market cap of only $141 million. Ninetowns should now have some breathing room to fully develop B2B search initiatives without depleting cash reserves.

Update on Electro Opitcal Engineering (Nasdaq: EXFO)

• SELL EXFO near $6.48

Although Electro Optical Engineering appears to be out selling JDS Uniphase in optical test and measurement equipment based on JDS Uniphase’s latest quarterly report, there is too much carnage in this industry for us to be comfortable holding Electro Optical Engineering. We will look to get back in Electro Optical Engineering after the dust settles on JDS Uniphase.

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.

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