Monday, January 28, 2008

Volume 2, Issue #2

Published every other Monday, the TopStockAnalysts Digest is loaded with stock picks, trading ideas, market commentary, and educational guidance designed to help you become a better investor. To ensure uninterrupted delivery of this newsletter, please follow these simple instructions.

Table of Contents

1.  Market Outlook
2.  China Medical Technologies (CMED)
3.  International Game Technologies (IGT)
4.  Additional Investing Ideas
5.  Investor Trivia -- Solar Power Gains
6.  Featured Topic -- European Dividends
7.  Free Investing Resources

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Today's Top Stock Picks

China Medical Technologies (CMED): A Potentially Phenomenal Growth Stock
CMED has been tantalizing investors since it went public back in August 2005. The company is a producer of diagnostic kits that use bioluminescence to screen for diabetes, thyroid abnormalities and other conditions. Read More. . .

IGT: One of Our Favorite Stocks for the New Year
With a dominant market share and strong growth drivers, we like slot machine maker IGT in 2008. Read More. . .

 

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Market Outlook

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With the major averages in a painful four-week losing streak, it's understandable if there may have been a few jitters around Wall Street this past Monday. And with the U.S. markets closed in observance of Martin Luther King Jr. Day, it didn't bode well that overseas exchanges suffered through one of the most brutal sell-offs in years.

With fears of a global economic downturn building, stocks throughout Europe were ravaged. Major benchmarks in London and Paris registered declines of -5.5% and -6.8%, respectively, while Germany's blue-chip DAX 30 tumbled more than -7%. And things weren't any better in Asia. Stocks in Hong Kong plunged almost -6%, and India's Sensex was down nearly -11% at one point, finally closing with its second-biggest daily decline on record.

At that point, the Fed decided to intervene -- announcing plans to slash short-term interest rates by 75 basis points in an emergency session. It is rare for the Fed to cut rates between regular meetings, and this one was rarer still because of its size -- the largest rate cut since October, 1984. All of that raised concerns that even deeper economic problems might be lurking around the corner.

Still, if the market needed a wake-up call, this may have been it. After retreating more than 450 points in early trading, the Dow Industrials staged a powerful recovery and went on to recoup more than 300 of those points later in the session. Nevertheless, Tuesday's declines left the Dow down -10% for the year, and pushed the small-cap Russell 2000 more than -20% below its peak from last July -- the technical definition of a true bear market.

Fortunately, the market proved once again to be resilient and managed to bounce back from the abyss on Wednesday. The Dow rebounded more than 600 points trough-to-peak in a dramatic turnaround, and the rally continued the next day on optimism that a massive stimulus package (which will see millions of tax-paying families receive rebate checks of $1200 or more) will inject some life into the economy.

For the week, most of the major averages managed to snap their losing streak, posting modest gains of less than +1%.
By no means are we out of the woods, but last week's rate cut (and quite possibly more in the near future) could help the economy stave off a recession and pick up steam.

In the meantime, following Monday's steep pullback, many Chinese companies -- like China Medical Technologies (Nasdaq: CMED, $48.22) -- have come roaring back. And below, Cabot China & Emerging Markets Report editor Paul Goodwin gives a favorable diagnosis for this medical device maker -- which has brought science fiction into the present with a machine that can zap tumors using nothing more than concentrated beams of sound.

Also on tap for today, Paul Tracy, editor of StreetAuthority's premium Market Advisor newsletter, takes a spin on International Game Technology (NYSE: IGT, $39.56). Would you like to receive a cut from every coin pumped into tens of thousands of slot machines around the world? IGT does exactly that -- for a total of $1.3 billion worth last year alone, to go along with the firm's dominant share of the market for new slot sales.

Good Investing!


-- Nathan Slaughter
Co-Editor
TopStockAnalysts Digest

 

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China Medical Technologies (CMED): A Potentially Phenomenal Growth Stock
by Paul Goodwin, Editor -- Cabot China & Emerging Markets Report

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China Medical Technologies (Nasdaq: CMED, $48.22) is a small Chinese company that's been tantalizing investors since it went public back in August 2005. The company is a producer of diagnostic kits that use bioluminescence to screen for diabetes, thyroid abnormalities and other conditions.

Sales of these kits to Chinese hospitals have been solid enough to push earnings up every year since the company was founded in 2001. Management has also pushed revenues along by acquiring rivals in the diagnostic business, most-recently the late-November acquisition of Beijing Bio-Ekon Biotechnology.

But it's not the diagnostic kits that put the gleam in investors' eyes when they think about C-Med. Rather it's the company's High-Intensity Focused Ultrasound (HIFU) machine, a computer-controlled system that uses a beam of concentrated ultrasound to kill solid tumors inside the body without the need for incisions or anesthesia, and without any reported pain. The ultrasound beam can fry tumors inside the abdomen, on bones or on hands and feet. When the tumor bites the dust, the body cleans up the residue and the patient (who probably came to the clinic on an outpatient basis) just walks out.

News of this machine helped the post-IPO price run from $15 to $45 per share, but the price later dropped back down to the $20-range. The attractiveness of the HIFU machine persisted, and after the stock built a very tight three-month base from March through May of 2007 at around $24, news that the machine was in FDA-approved clinical trials in the state of Washington kicked off a new rally. The stock roared from $24 to its recent price near $48.

CMED is still a pretty speculative, trick-or-treat stock. If the HIFU machine proves to be safe and effective and earns the FDA's blessing, the stock could be a real rocket. On the other hand, if it turns out to be a clinker, the stock will no doubt take a hit on the waterline. In this regard, CMED is just like all growth stocks, only more so.

 

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IGT: One of Our Favorite Stocks for the New Year

by Paul Tracy, Editor -- StreetAuthority Market Advisor

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International Game Technology (NYSE: IGT, $39.56) is the world's leading slot machine manufacturer. In addition to basic slot machine design and sales, the company generates more than half of its revenues by leasing machines to casinos in exchange for a percentage of the net win. This gaming market provides the firm with a recurring stream of high-margin revenues. Thanks to steady expansion in recent years, IGT now draws income from about 60,000 machines installed throughout casinos in key gaming markets across the globe.

Competitive Advantages:  Thanks to a stringent regulatory environment, IGT enjoys high barriers to entry and must contend with only a handful of rivals, including WMS Industries (NYSE: WMS) and Alliance Gaming. And among this triumvirate of manufacturers, IGT has a towering lead, producing more than two out of every three slot machines found in North America today.

Given the fact that slot machines have exploded in popularity -- and that they are generally more profitable than traditional table games -- it is not surprising that row after row of machines have taken over considerable floor space in today's casinos. Furthermore, slot department managers usually don't hesitate to try out the latest models, considering a successful machine can pay for itself in a matter of weeks. At the Wynn Resort in Las Vegas, for example, each machine is generating average revenues of around $250 every single day.

As the market leader, no one stands to benefit from these trends more than IGT. With deep pockets and steady cash flows, the company has been able to spend nearly twice as much on research and development (R&D) activities as its closest competitors. This commitment has led to creativity and innovation that have connected with the average slot player. In a recent poll conducted by Casino Player magazine, seven of the top ten most popular video slots were introduced by IGT -- including longtime favorites such as Wheel of Fortune. In a similar poll of video poker players, all five of the top spots were awarded to IGT products.

With a commanding lead, a well-respected reputation, and a knack for developing games that resonate with players, IGT should remain the clear leader in this high-growth industry for years to come.

Growth Drivers:  IGT is benefiting from a number of positive growth drivers. For starters, many states are warming up to the idea of allowing gambling within their borders to take advantage of the additional tax revenue. The introduction of gaming in Pennsylvania alone resulted in an initial market for around 35,000 new slot machines. Even bigger has been the huge gambling boom in Macau, China. This former Portuguese colony has now surpassed Las Vegas as the largest gambling market in the world. Gambling revenue in Macau increased +22% from 2006 to 2007, and this market should continue to grow thanks to a number of new casino developments, as well as strong growth in surrounding Asian economies.

More importantly, IGT is the mastermind behind what many predict to be the next great gaming industry product cycle -- the introduction of server-based games. Instead of having hundreds of individual, self-contained slot machines, the idea is to have one giant computer control all slot machines within the casino. This new technology allows the casino to cut down on labor costs, change games rapidly to increase profits, and monitor revenue in shorter time frames.

The advantage to IGT is that in addition to new casinos purchasing this new technology, the older casinos will also have to retool their old equipment. Industry experts are predicting that 80% of domestic slot machines will be replaced before 2012, leading to a surge in revenues for the #1 player in this market -- IGT. Furthermore, players' tastes can change quickly, and the life span of the average game is shrinking, meaning newer games (like the increasingly popular multi-line penny slots) must continually be rolled out.

Of course, as we noted earlier, product sales account for just under half of IGT's total revenues. The firm generates the rest via its extensive "gaming operations." IGT has leased tens of thousands of slot machines -- many of which are linked to wide-area multi-million dollar progressive jackpots -- to casinos in exchange for a share of the proceeds. IGT receives a cut of every coin pumped into these slots, resulting in recurring revenues of more than $1.3 billion per year. As IGT's industry-leading installed slot machine base continues to expand, this segment of the business should help drive the company's top and bottom lines sharply higher.

Valuation and Outlook:  After delivering sensational returns of more than +20% annually over the past decade, shares of IGT have stumbled in recent years due to sluggish domestic slot machine sales. Going forward, however, we believe the core North American market is poised to grow substantially thanks to the rollout of server-based games. Add to this the impact of strong international sales and growing gaming operations, and IGT's overall earnings are expected to increase at a healthy +15% annual clip going forward. Moreover, even with a modest slowdown in top-line growth in recent years, the company has still managed to generate record cash flows of $820 million per year.

This well-managed and shareholder-friendly company has been a portfolio jackpot for many over the years, and odds are excellent that the firm's winning streak will continue throughout 2008 and beyond.

Important Note: This profile is part of our StreetAuthority Market Advisor Top Ten Stocks for 2008 report, which is available exclusively to Market Advisor subscribers. If you are a current subscriber and would like to read the remainder of this report, you can view it here. But if you aren't already a subscriber, you can learn more about Market Advisor and reserve your copy of this report by visiting this link.

 
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Additional Investing Ideas

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Investor Trivia -- Solar Power Gains

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Currently, solar power constitutes just 0.1% of U.S. electricity generation. But with high energy prices, alternative energy is becoming more widespread -- meaning astounding returns for alternative energy stocks. Which solar power stock booked a remarkable +795% increase in its stock price in 2007?

A.)  Energy Conversion Devices (ESLR)
B.)  First Solar (FSLR)
C.)  DayStar (DSTI)
D.)  Suntech Power Holdings (STP)
E.)  Kyocera (KYO)

(Please click on one the links above. After you make your choice, we'll show you the correct answer on our web site.)

 
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Featured Topic -- The Secret "European Aid Program" Making Millions for Investors

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On June 5, 1947 the U.S. Secretary of State delivered a commencement address in the famous Harvard Yard. In a move that's almost unthinkable in modern politics, the Secretary chose this venue in an effort not to attract significant attention from the press.

You see, the Secretary's words were intended to kick off a major new policy initiative for then-President Harry S. Truman. But President Truman suspected that the new policy would be met with significant initial resistance from the U.S. public and several prominent members of Congress.

Nonetheless, Secretary George Marshall's low-key speech that day has gone down in history as among the most pivotal in American history. Marshall stated that the U.S. should do whatever necessary to assure economic stability in Europe; without economic stability there could be no long-term sustainable peace.

World War II devastated Europe's major economies. The destruction of roads, water pipes, and train networks during the war years left Europe with little functional infrastructure. My own grandparents and other relatives from their generation were spread throughout Europe at the time, and I'll never forget the stories they told me of how difficult life was in those early post-war years. Major cities and commercial centers, including London and Berlin, were either destroyed or badly damaged during the war. Even worse, the chaotic immediate post-war era encouraged lawlessness and corruption; no effective modern economy can exist without the rule of law.

Truman, Marshall, and some prominent congressional leaders were keen to avoid a repeat of the chaotic era that followed World War I. In those years, widespread economic strife and suffering helped pave the way for the rise of fascism and, to some extent, World War II.

Thus, thanks to the Marshall Plan, between 1948 and 1951 aid from the U.S. to Europe totaled $13 billion -- a sum equivalent to more than $105 billion in 2007 dollars. As a result of this aid, as well as a number of other important factors, most European economies stabilized and economic growth finally began to accelerate. As you can imagine, the Marshall Plan was not only good for economic and political stability, it was also a bonanza for businessmen and investors with exposure to the region.

Of course, Western Europe is no longer the growth dynamo is was in the late 1940s -- so investors are keen to look elsewhere. Luckily, there is a second sort of Marshall Plan underway at this very moment -- billions of dollars of aid and reconstruction money are pouring into a single region of the world. 

This "Marshall Plan 2" promises to be every bit as profitable for investors as the rejuvenation of post-war Europe. Ironically, this time the Marshall Plan is being administered by the European Union (EU), and the beneficiaries of that aid are the formerly communist states of Central and Eastern Europe.

The parallels are undeniable. The economies in most Eastern European countries were devastated in the late 1980s and early 1990s in much the same way as their Western European counterparts were in the 1940s. Most had been propped up, to some extent, by aid from the former Soviet Union. Law and order was maintained by often-brutal police forces and militaries backed up powerful central governments and a single communist political party.

And even with all that aid, living standards were a fraction of those that prevailed in Western Europe. For example, most economists believe that in 1991, about one year after Germany was re-unified, the formerly communist East Germany had a GDP per capita of only 31% of the level that prevailed in West Germany. By 1999, that ratio had risen to only about 55%.

The collapse of the Soviet system in the late 1980s and early 1990s also brought other non-economic problems. For example, the end of central planning led to a lack of law and order and the rise of organized crime in some states. This situation was not unlike Western Europe in the 1940s.


But that's all changing...

Important Note:  Because this article is fairly extensive, we could not include it in its entirety in today's newsletter. You can find the remainder of this article on our web site. Please visit this link to continue reading this article.

  
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Good investing in the coming weeks!



Nathan Slaughter
Co-Editor
TopStockAnalysts Digest



Paul Tracy
Co-Editor
TopStockAnalysts Digest

TopStockAnalysts
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