Taking Profits on one ... giving up on another

Just a quick note to post some changes in my portfolio -- after watching MEMC Electronic Materials grow into one of my larger holdings on the back of near-300% gains, I decided to give in to some of my misgivings about the company's valuation and take profits on about 40% of my holdings.

I'm still holding the balance of my WFR shares, and I do think that it's certainly possible that they will continue to climb -- but there is significantly more risk in the equation now that we're dealing with a trailing PE of 31.

The polysilicon shortage that helped to fuel WFR's rise, on the back of strong pricing, a huge ramping of demand from solar cell manufacturers, and continued strong demand from semiconductor companies, is now getting quite long in the tooth. It was part of my initial buy thesis in this stock when I bought it a little over two years ago. That means that MEMC and their competitors have had plenty of time to see the demand curve rising and put into place plans for dramatic increases in production -- which nearly all producers have done, with some increased production already online.

I'm not enough of an expert on this industry to know whether or not the "big four" polysilicon suppliers will overplay their hand and oversupply the market as their new supply continues to come online over the next year -- so given the boom and bust history of this sector, I'm hedging my bets, taking enough profit off the table to be comfortable holding the balance and watching the supply/demand dance play out. I sold 40% of my WFR position at $60.02, and will continue to hold the rest pending future developments.

And my other recent move, which was long overdue, was to clear the decks of my holdings in Cryo-Cell (CCEL.OB). I was impressed with this cord-blood banking operation when I first picked up shares back in November of 2005, and thought that they were on the cusp of a few good things: potential relisting on a major exchange, transition to a consistently profitable operation thanks to their ongoing relatively high-margin income from storage fees, and possibly increased public interest in their product as stem cell "miracles" come to light.

Well, how's 0 for 3? I should have listened to Yehuda Fruchter and sold my shares a while back when it began to be clear that management was either "competency challenged" or not aligned with common shareholders.

Instead of transitioning to a high-margin, solid growth company with good steady income from storage fees, Cryo-Cell has gone through a few different high risk product "near launches" that seem to have not gone well, notably for Plureon placental stem cells, an innovation that appears to still be in search of a market. They've also invested heavily in marketing, and in upgrading and/or fixing their facilities, which they had said before were already state of the art, and now appear to be trying to develop yet another higher margin (and higher risk) maternal stem cell product of some kind. Ballooning costs led to a bitter challenge for board seats that's still underway, but I don't see this ending well ... at least not in the near term ... so I'm clearing out my shares at about a 40% loss.

Thankfully this remained a relatively small investment for me (and a shrinking one, of course), but I'll take it as a lesson that what seem to be great business plans from microcap operators can quickly turn if management doesn't think the same way you do. I've had similar results so far from my other "microcap with a promising business plan," MMC Energy, but I'm willing to be a bit more patient with that one.

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Indirect Investing

One of the themes that has come up with several companies I'm thinking about or have recently bought is the notion of the "indirect investment", by which I mean the purchase of a company in order to get access to the earnings (or growth,or whatever) of a subsidiary or related company -- either at a discount, or because the subsidiary isn't separately traded, or just for diversification in getting two significant businesses in one package.

Cypress Semiconductor (CY) fits this idea nicely, and I own a few LEAP options in the shares and remain tempted to buy the common stock -- it's a downtrodden semiconductor company which the market doesn't like at all. They haven't had particularly nice margins of late, or anything else to make the Street stand up and cheer, and short sellers are holding about 10% of the float.

Most importantly in my opinion, though, many years ago they bought a tiny company that had technology and designs for manufacturing solar cells, and built manufacturing capacity for that company. They've since IPO'd part of that solar company, called SunPower Corporation, but they still own about 70%. And today, though Cypress is the parent, Both companies trade at similar market caps, with SunPower's enterprise value of about $2.5 billion and Cypress at about $2.6 billion.

So that means, if you buy Cypress you're getting $1.75 billion of SunPower, which means you get the semiconductor business for substantially less than a billion dollars. Now, whether or not the semiconductor business is worth more than that is another question -- but even though it's not growing as fast as solar, there is certainly a market. The Semiconductor Industry Association (they're unbiased, right?) reported 9.2% growth year over year in January, so if Cypress was a proxy for semis as a whole you might be tempted. They do work in many different segments of the semiconductor marketplace, so perhaps there's an argument to be made there.

This may be too widely understood an "indirect investment" to make any money from, especially since Cypress has resisted "unlocking the value" of their SunPower subsidiary by selling it or spinning it off ... Cypress is probably already trading primarily on the value of their SunPower holdings.

In solar power, there's another way that I've held on to a somewhat indirect investment, too -- my shares of MEMC Electronic Materials (WFR) were initially bought because they were cheap, the share price didn't reflect the great position they held in the semiconductor wafer business because of their integrated supply chain and good supply of polysilicon in a tight market. But one of the reasons I've held the shares after a huge advance,and in the face of an uncertain balance between burgeoning silicon supply and hopefully booming demand, is their growing exposure to solar power -- including warrants to purchase five percent of Suntech Power (STP) that they received in exchange for a long-term silicon supply agreement. That doesn't yet move the needle at WFR, but it could very well do so in the future -- or at least cushion any blow from a slowdown in semiconductor demand, should it come.

Moving away from silicon, Naspers (NPSN) is another investment along these lines -- I bought shares recently, and while I like the cash generation of their core media (South African newspaper and pay tv) assets, what I really like is the growth potential of their partially owned division, Chinese IM leader (with the QQ product) and portal company Tencent, and their acquisition spree in emerging markets media and internet companies.

The impact on the market cap is big here, too, since Tencent is roughly a $6 billion company and Naspers owns about 36% ... and NPSN itself has a market cap of about $7 billion, so roughly a third of Naspers' market cap is attributable to their not very profitable (in earnings terms) Tencent holdings, which significantly depresses the company's PE ratio and makes them seem a bit more expensive than they really are.

Tight relationships among corporations can give us opportunities to do this kind of investing in nearly any industry -- Ship Finance Limited, a company I've owned in the past, gets an indirect ride on the profits of former parent Frontline. They own Frontline's ships and get a steady lease rate for them, which they churn out as a high, steady dividend yield ... but if the tanker business takes another turn up they'll get a bonus from a profit sharing agreement whereby they get a portion of all profits over a set level on their tankers. Which is probably why the shares are just about at all time highs while the more leveraged Frontline languishes on the currently tepid prognosis for tanker rates.

This kind of investing is not unusual, of course -- a lot of what professional investors do is try to find hidden values in the companies they're interested in, and many arbitrageurs spend their days figuring out which companies are likely to move to unlock those values in a particular time frame.

Other examples abound -- buying Roche a few years back to get a cheaper bid on the future of Genentech comes to my mind as one example ... and in a related way, biotech and other IP-heavy industries also give us the opportunity to invest in companies because of royalties they receive from successful or promising products.

Using the Genentech example again, this might mean buying PDL Biopharma (PDLI) because of the humanized antibody royalties they get from several of Genentech's big products, including Avastin and Lucentis (though PDLI also has its own issues, including a looming fight with a big investor about their spending habits).

Whatever your focus, it sometimes pays to look a little deeper into the companies that interest you -- maybe the companies that don't appear to be publicly traded are really available for investment as subsidiaries of others, or maybe the shares that look a little too pricey are hiding an unusual gem.

full disclosure: I own shares in Naspers, MEMC Electronic Materials, and PDL Biopharma, and call options on Cypress Semiconductor. I have no position in the other companies mentioned.

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Wafer Fat for MEMC (WFR)

A great quarter from MEMC Electronic Materials (WFR) was released last night ... and much more importantly, the company issued very optimistic guidance not only for this coming year but for the next 3-5 years. Eric Savitz, who first introduced me to this company a couple years ago, has a good summary of their earnings news here.

Though I remain somewhat nervous about the stock at these high prices (new almost-ten-year high today), I find it very difficult to consider selling any shares with the business plan management has laid out, and their excellent performance so far during their multi-year turnaround.

MEMC Electronic Materials sells polysilicon and silicon wafers to the semiconductor and solar energy industries -- and, as I've written about before, they've enjoyed almost perfect timing as sales and demand from the solar cell makers have picked up just as semiconductor demand overall has maybe dipped a little (though that really goes segment to segment, there are still plenty of strong semi manufacturers that are going full speed on production even as others work through an inventory glut).

The nervousness for investors lies in the fact that polysilicon production by all of the major manufacturers is going to increase significantly in the years ahead.

WFR management, through its projections that they will earn "over $3 this year" (a 20% bump over street estimates) and $5-7 a share in 2010-2012, is essentially saying that the increased production by both them and their major competitors will be absorbed by the market, and that margins won't suffer (in fact, they expect margins to improve). Some, including Citigroup, are intimating that this is just a ploy to boost the stock price, but I have no idea -- the price was already quite high, and valuation decent, yesterday.

With increasing analyst estimates rolling in, the forward PE should now be something like 15 or 16 -- which is a lot higher than it was when I bought shares a couple years ago as the turnaround started to bear fruit, but also a lot lower than most companies that are growing earnings at a 50% clip.

So although the company seems quite expensive to me, since my shares are now up more than 200%, as an outsider looking in I'd still have to consider it to be pretty fairly priced ... or even a bargain, if you believe the company's assessment of their future prospects.

And with margins continuing to grow during what has been a rough price war for AMD and Intel (two of the major silicon wafer customers) and a widely reported inventory problem in the semi space, I'm inclined to continue to give management the benefit of the doubt. They talk to their customers every day, and they're the ones signing these lucrative deals with solar companies and seeing evidence of a rebound in core semi wafer demand in 2007 (as I wrote back in October, they now have contracted for ten years of sales that equal well over half of their current sales rate just to the solar companies, which must give them a certain level of confidence).

It makes me nervous to hold a company that has appreciated this far, and in every other case where I've had a 200% gainer I've taken some profits on a portion of my position -- but with WFR, the earnings and growth potential have more than kept pace with the stock price while the multiple expansion has been relatively modest (and deserved, given their discount valuation before the turnaround began), and I don't want to walk away from the kind of projections they're making. This has certainly always been a cyclical business, but with the increasing number of products using semiconductor chips, and the steeply ramping demand for solar energy worldwide, I think the boom and bust cycle for semi demand may moderate and have less influence on WFR's results than in the past.

So, with somewhat nervous hands, I continue to hold.

disclosure: I do own WFR with no plans to buy or sell in the near future, and in the semi space I hold LEAP options on Cypress Semiconductor.

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MEMC Makes Another Deal (WFR)

It has been a very busy year for MEMC Electronic Materials (WFR) -- though the shares have come down pretty dramatically from their highs in the late winter of $48 or so, every indication is that their sales and earnings are continuing their torrid growth.

The concern has been, from me as well as many others, that there is the potential for a near-future glut in silicon wafers as WFR and all of the major manufacturers prepare to ramp up (or in a couple cases, have ramped up) capacity to meet high demand from both the semiconductor and solar industries.

I still have that concern, but every time WFR makes a deal like the one announced today, I feel a little more secure. In preparation for making big investments in increasing their production capacity for solar-ready silicon wafers (to go along with what has been the core of their business, the production of wafers for the semiconductor industry), they've been pre-selling that capacity -- today it was announced that they have a new deal with Gintech, a Taiwanese solar cell manufacturer, to supply silicon at "pre-determined" prices for 10 years beginning in about a year.

This deal, expected to be worth between $2.5 and 3 billion, comes on the heels of two other similar deals -- one with Motech for about $1.6 billion (that fell apart), and one with Suntech Power that could be worth up to $6 billion.

I'll guess that a midpoint number for each of these deals is a fair assumption to start with, which means a total deal value of $8 billion over ten years. That averages out to $800 million a year, which compares to about $1.2 billion in sales for MEMC last year, so these deals are very significant in giving MEMC a chance to dramatically ramp up their sales volume.

And of course, they're not dropping their core business, which has been the supply of silicon wafers to the semiconductor industry -- though with some recent softness in semis, I think investors are probably pretty happy to see them further diversifying into another potentially large market.

I'm also happy to see that, as with the other deals they've signed, this one includes a "kicker" that allows WFR to make some real money if solar power takes off in the dramatic way that some people expect. With each of these deals, WFR has received in exchange not only a prepayment or a sweetheart loan to help pay for their capacity expansion, but also a warrant of some kind to purchase a significant amount of the solar company in question -- ranging from 5 to 10%.

That allows them to ride along with any solar power boom, and protects them to some degree from preselling their silicon too cheap, since if silicon prices for solar are much higher in five or ten years than expected it's likely to be because demand has grown much faster than expected ... which would mean that Suntech and Gintech might be worth a heck of a lot of money.

I wrote a couple weeks ago that I was nervous about the huge increase in silicon wafer supply that's coming on the market -- and I still am. But as the deal volume has climbed -- to the point that they now have contracted for ten years of sales that equal upwards of 60% of their TTM sales -- I've grown less nervous. A glut is certainly still possible, and if I see enough evidence of it impacting WFR in the near future I still may sell, but a solid floor of future sales like this is nothing to sneeze at.

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Will New Capacity Drown MEMC Electronic Materials? (WFR, STP)

Companies in the semiconductor and solar cell industries have been fighting an at times severe shortage of polysilicon and silicon wafers as they try to ramp up capacity -- and that shortage has done wonderful things for the resurgent MEMC Electronic Materials (WFR), a company I've held for about a year and a half. There has been lots of press coverage of this shortage over the past year, including a recent AP article on the ceiling this is putting on solar cell growth.

WFR is an integrated producer of silicon wafers for both the solar power and semiconductor industries, with their own polysilicon supplies and an excellent roster of customers in both industries. As I've written about before, in January they announced plans to dramatically expand their production to help meet increased demand ... and more recently, they made a deal with Suntech Power (STP) to help finance that expansion.

MEMC Electronic Materials has also made a pretty good recovery from some financial problems about two years ago, and they've now finally issued all of their outstanding SEC filings and are now current, with a solid balance sheet and, as far as I can tell, no lingering dark clouds over management. So they're in a great spot, right?

Well, the honeymoon couldn't last forever -- WFR is one of the bigger players in this industry, and the largest in the US, but it's a distant fourth in world market share.

And the big guns -- SUMCO and Shin-Etsu, who together hold more than 60% of the world market, are expanding, too (SUMCO announced their expansion in May, Shin Etsu announced theirs yesterday). Each company is investing roughly a billion dollars in its investment plans.

And even if demand for wafers continues to grow dramatically over the next few years, which I expect, there's certainly a solid chance that these expansion plans of three of the four biggest manufacturers will create overcapacity and/or a price war for their largely commoditized products. Even though WFR and their competitors know that this boom/bust cycle is bad news for all the companies involved, no one can risk losing market share if the market does continue to grow as quickly as it is now.

The analyst from Macquarie has a quote in the Reuter's article, and this quote makes me a little nervous about whether the fight between the big guys will end up squashing the not-quite-as-big WFR:

"We're in for a consistent sense of oversupply of roughly 20 percent until 2011, unless chip makers really expand production capacity. But Shin-Etsu has little choice but to expand, given competition from SUMCO."

I don't know this analyst's record, and I don't know if he's right -- but that's certainly a possibility if indeed the chip makers fail to make the expansions that we expect, and to drive demand for raw materials for those chips. And if we do see any pullback in solar power investment with a decline in fossil fuel prices (which I don't expect long term, but should consider just in case) ... then a wafer glut is certainly a possibility a year or two out as new capacity comes online. And I'm also making the assumption that over the next few years we'll continue to see silicon photovoltaics hold market share over the newer thin-film panels that use a lot less silicon, if that assumption proves wrong silicon demand will be impacted there as well.

I have a few options:

• I can sit and wait and see if demand continues to keep up with supply over the next couple of years, and risk the excellent gains I have in WFR right now.
• I can sell part of my holdings to book a profit, and perhaps move that money to Suntech Power (which I think is the most appealing solar play) or one of the semi manufacturers to hedge my bets, since they would benefit significantly from an overall drop in wafer prices.
• Or I can try to time the peak of WFR pricing and sell all of my WFR holdings six to nine months before that peak.

That last one's pretty much a joke, since I have no way to make that prediction -- and no reason to believe any analyst would be correct in timing that peak precisely. I already missed a peak of about $48 that would have given me a 200% gain in less than a year, so there's not much chance I'm likely to catch the next price peak.

I'm going to be patient for the moment -- Shin Etsu's new production will come online in about a year, and SUMCO's in eighteen months, and WFR's expansion is likely to be more gradual over the next few years ... so while it's possible investor panic about this will set in early, I don't expect to see it immediately. And it's entirely possible that demand will more than keep up with supply.

But I will be ready to sell a portion of my WFR holdings if valuation continues to creep up (today's forward PE in the high teens isn't as nice as the sub-10 PE I saw when I made my initial purchase) and it continues to look like these dramatic expansion plans might be overestimating the market's capacity in the out years. I'll let you know if and when I make that decision.

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Making Money from a Cleaner California?

Probably everyone saw or heard the news about California passing new emissions rules a week ago -- there was an interesting editorial on it in the Salt Lake Tribune recently, and the Washington Post ran a more detailed article when the bill passed. The Financial Times ran a story on the political debate, and the possible business impact on our most populous state.

So what does this mean for investors? Is there money to be made on the tails of this initiative to clean up California's air over the next 20 years and push toward reaching the standards of the Kyoto Protocol?

California already gets most of its energy from relatively clean sources (if you ignore transportation), compared to many states. You can see from this CA Energy Dept. summary how the citizens of the left coast get their energy -- coal is pretty low, renewable sources fairly high.

But they're committing to reducing emissions over the next 20 years even as their population may be expected to grow significantly ... so what companies might benefit from that?

I think there are a few categories that might be worth looking at:

1. Natural Gas. The biggest impact on the electricity market in California is that the state will essentially no longer accept power from the current coal-generated plants. This accounts for about 20% of in-state generation and an unspecificied but probably significant part of their imported electricity (as the Utah story referenced above would indicate, the plants that rely on cheap Rocky Mountain coal and sell electricity interstate will be cut out of the CA market).

To me, that means natural gas will be in higher demand in California because it is the only efficient, relatively clean power source that's likely to be able to take up much of the slack as coal plants go offline. Who benefits? You've got the big natural gas producers like Chesapeake (CHK) or XTO (XTO), the drillers like Nabors (NBR), which has some gas exposure, or Grey Wolf (GW), which is focused entirely on gas.

You might also look to the pipeline companies, since most of California's natural gas is going to have to come in via pipeline from the key producing areas in the Southwest and the Gulf. Here's a map of the pipelines that currently serve the state, you can see that they've got excellent distribution from the big basins already ... but volume should grow, which is how pipelines make money. I'd guess El Paso's (EP) western pipelines are probably among the biggest beneficiaries, but I haven't looked at it in detail.

2. Coal Scrubbers. Alternatively, instead of boosting natural gas usage for electricity generation, you might see an aggressive push for cleaning up coal plants. That says to me that the engineering and construction companies that build and retrofit power plants, and the manufacturers of emissions scrubbers for coal plants, might get some additional business. That could be a lot of folks, but URS (URS) is probably more focused on coal scrubbers than the other big E&C guys, though most of the coal scrubbing I've heard of is focused on removing sulfur dioxide, not carbon dioxide which is the bigger issue here.

It might even be possible to see some of the coal technology companies climb, too, if coal gasification or newer clean coal technologies might get a boost from this renewed focus on emissions -- that could perhaps be folks like Sasol (SSL) with their coal liquefication system, or Headwaters (HW) with their various coal technologies, for example, though I can't claim to know much about that business.

3. Power plants that already run on natural gas. This could conceivably allow for some significant rate hikes in California, if the demand for energy continues to grow but the suppliers shrink. That tells me that the folks who are already online with environmentally friendly or natural gas-powered power sources will have a competitive advantage (as much as the market remains competitive, at least).

PG&E is the big provider here, but I'm not so interested in getting involved with a huge company like that with a checkered history and significant regulatory risk. I've looked a bit lately at a tiny company that might benefit down the road, MMC Energy (MMCN.OB) is a small OTC stock that recently went public (and is moving soon to the ASE to attract more institutional buyers). MMCN is building a holding company for the small power plants that have been divested by larger (and sometimes bankrupt) utilities in high-growth areas ... and they're planning to refurbish and expand those plants with new natural gas turbines to serve peak overload periods at peak rates.

They came to my attention because they recently bought two natural gas power plants in San Diego (Chula Vista and Escondido) that were offline (they're also buying a decommissioned plant in Bakersfield, and have a letter of intent to buy a Utah plant that's under construction) [September 13 update: MMC Energy yesterday terminated their letter of intent to buy the Utah plant], and got them online for summer peak season, with plans to expand at least one of them. This is certainly a risky company, and it's largely unknown so far (though it has been touted heavily by Energy and Capital, a service I know nothing about ... which makes me nervous). I've read the company's filings (if you're interested, please read at least the 10-QSB) and didn't see any red flags, but it's going to continue raising lots more money to buy and upgrade or restore plants so I'd say there's a good chance of significant dilution in the near term.

4. Renewable Energy Companies. This is the sector that immediately comes to mind for most folks when we talk about reducing emissions, though CA will be hard pressed to replace their coal-fired electricity with solar or wind power within the next 20 years. They are, however, trying very hard to subsidize the growth of renewable energy ... as are other states to lesser degrees, and as are several other countries (notably China and Germany).

This is good news for lots of companies, but there aren't many profitable, reasonably priced renewable energy companies ... even though prices are much more reasonable now than they were last winter in the peak of our oil and natural gas panic.

The wind energy bets are few and far between -- you could throw your money at GE, which makes most of the turbines, but wind energy isn't going to move their needle. Or you could look to the composite-materials companies like Hexcel (HXL) or Zoltek (ZOLT) that make or engineer the materials required for efficient windmills.

Solar energy is a much more wide-open business, and with state and local governments also pushing for more rooftop solar cells in new housing production and subsidizing solar implementation elsewhere, demand for photovoltaics should continue apace, with or without California's new emissions rules. You can look at MEMC Electronic Materials (WFR), which I own, as the supplier of the silicon wafers that go into solar panels, or you can look at the manufacturers like Suntech Power (STP -- my favorite among these with their Chinese connection), Evergreen Solar (ESLR) or SunPower (SPWR -- or look at CY to possibly buy control of SPWR on the cheap).

Will California's plan really fly, or will this plan move to other states? It's way too soon to tell, but the California auto emissions rules certainly had a massive impact on the rest of the country and on auto manufactureres worldwide, and as one of the largest economies in the world you have to accept that state decisions really matter (CA is somewhere between the fifth and 10th largest economy in the world, right up there with Italy and France if treated as an independent nation -- just how big depends on who you ask).

I don't know whether they can pull off an emissions trading scheme with just one state, but it's certainly possible -- and they can definitely cut off all "dirty" power supplies, which will impact the energy business writ large across the Western US in a big way ... whether any of these companies, or others, will actually benefit is certainly an open question, these are just the initial ideas that came to my mind.

In the interest of full disclosure, at the moment I own shares in WFR, preferred (series D) shares in CHK, and call options on CY, and I've been toying with the idea of buying MMCN and may do so soon.

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Earnings Season Thoughts (GOOG, WFR, AKAM, ISRG, VRTX)

This is very likely the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (AKAM), Intuitive Surgical (ISRG), and Vertex Pharmaceuticals (VRTX) are releasing earnings after the close today.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

Yesterday, Cemex (CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact -- no, the impact was from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again -- over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out ... but I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

Looking forward, we've got AKAM, ISRG, VRTX and WFR all reporting today.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

And today, WFR will release its earnings after the close -- and they've beaten estimates the last two times out, if not by all that much. Analysts are expecting something in the low-40 cent range for EPS, which would be close to twice their year-ago earnings (a year ago is roughly when the company began turning things around and their shares began climbing). WFR has been much higher than this, at around $48 before the bottom fell out of the market, and is priced at close to a market multiple -- for this kind of growth, that seems a more than fair price to pay.

VRTX should be insignificant -- their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has show remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter -- in the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.

Should be an interesting day -- the next six hours will go a long way to determining whether or not my portfolio will shortly recover from the beating it has taken in the last two months, but so far I've heard nothing terribly disturbing from the companies I own, and I remain quite optimistic about their long term prospects.

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Intel and AMD sneeze, WFR and FORM carried out on gurneys

What an odd day. I wasn't watching the market this morning so didn't see how things played out at the open, but as I sit here now, near the end of the trading day, I am a little bit baffled about the wild movement in two strong semiconductor industry stocks that I own.

Both Formfactor (FORM) and MEMC Electronic Materials (WFR) are down dramatically today. FORM is down about 10%, WFR down about 13% as I type this. Neither company has issued earnings or guidance or, in fact, any news at all.

No, this is a reaction to AMD and Intel and various other semiconductor companies reporting disappointing results or lowered guidance.

And on the face of it, that's reasonable. But when you delve into the reasons for poor results at AMD and Intel, it makes less and less sense that those results should automatically hurt Formfactor or MEMC's businesses.

Formfactor is a semiconductor equipment company -- they sell testing products, specifically patented microspring test wafers that can be used to test semiconductor wafers during the manufacturing process.

They depend on several of the large foundries and manufacturers, including AMD and Intel, as large customers. But their profitability isn't related to the profitability of AMD or Intel, it's related to the number of testing devices and systems they sell.

Each different semiconductor chip design requires a different testing product, and testing is a source of a lot of waste and time lag in manufacturing. So when innovation is driving the industry and the companies are fighting to come up with the next revolutionary product or to speed up their production or improve the efficiency of their assembly processes, it stands to reason that they would require more testing wafers of the most advanced variety, not fewer.

Formfactor is the leading company in this space, and has, to the best of my knowledge, the leading product -- their patents have withstood court challenges, and they seem to have a technological edge on their competition.

On the flip side, everything I hear from AMD and Intel tells me that the problem is not that demand is drying up for their products, or that they're no longer innovating -- the problem is that they're having a price war, which is likely to bring prices down for the end product but, in the longer term, increase demand for those products. The more these two companies innovate and the more they fight to deliver more products faster and more efficiently to salvage their margins, the more they need products like those produced by Formfactor.

So I don't see why Formfactor is going down ... even if there is somewhat of a slowdown in the semiconductor space in general, as the market clearly fears with tough numbers from Broadcom and others, I expect FORM to be largely immune to anything but a dramatic crash in the industry -- as long as demand exists and companies are fighting for market share, Formfactor should be in the catbird's seat.

The situation with MEMC Electronic Materials is somewhat similar, but even simpler.

MEMC sells the raw material that becomes semiconductors -- the machined silicon wafers themselves. For the most part, they depend on overall demand in the industry, across all product lines (not just computer processors like AMD and Intel, but flash for Ipods or control chips for cell phones or any of the myriad of other chips out there).

WFR does not care how much AMD and Intel are charging for their products -- when they look at the results today and see that AMD is reporting lower revenue because of this price war, they should look a little deeper and see that the volume of chips being sold is climbing, it's just AMD's margins that are suffering because they're cutting prices . They still need an increasing number of silicon wafers -- and since WFR is one of a limited number of suppliers in a business that is already charging premium prices because demand is so high, I would expect that they're not going to be very worried unless this price war reaches the point that AMD or Intel might suffer significantly and have to cut production. I don't think we're anywhere near that point right now.

And that's not even considering the other significant influence on MEMC's business -- their other major customers are the solar power companies, and from China to Germany to California demand for solar power is really ramping up, causing some real fights over the limited supply of polysilicon.

No, I don't think WFR or FORM needs to be that worried about an AMD/Intel price war just yet. Maybe there's more to this story today, and I've heard other say that options expiration is causing a lot of this dramatic volatility today. But business-wise, I don't we should worry about FORM and WFR's numbers, which haven't come out yet, not Intel's or AMD's.

When the giants throw rocks at each other there's always a danger that you'll get hit ... but there's also a nice profit to be made in selling rocks.

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