Could it really be the economy after all? After turning in strong gains early in the week, the market experienced a sharp sell-off as weaker than expected economic data caused investors to pull-back from a nascent rally. The Dow ended the week up 49 points, or 0.6%, the S&P 500 was up 11 points, or 1.3%, while the Nasdaq declined 14 points, or 1.1%. The Dow lost 423 points in the last two days, though, as economic data left investors wondering whether the economy is really recovering.

The stock market usually has a discounting mechanism that anticipates events 6 to 9 months ahead of time. Despite what had been, until recently, a series of relatively positive economic reports indicating that a recovery was underway, the stock market had been setting new lows. In fact, the first three weeks of July had been one of the worst periods in memory, as the Dow plunged over 1,500 points. Many had assumed that this was because of corporate malfeasance. In fact, many of the pundits believed that for one of the few times in memory, the stock market was ignoring the economy. What if, though, investors believed that the economic recovery was not real and were selling equities for those reasons? The past week’s economic data is beginning to support this scenario.

The problems started with Tuesday’s announcement of Consumer Confidence, or a lack of confidence as it could more closely be labeled. The Index fell to 97.1 from 106.3 in June, which was much lower than the 101.9 reading economists were forecasting. Many viewed this as a lagging indicator, resulting from sagging equity values. The next day, though, brought disappointing second-quarter GDP numbers. The economy grew at just a 1.1% rate in the April-June period, half of the estimated rate by economists and well below the 5% rate of the first quarter. Now, it appears most of the first quarter’s growth was inventory building. 

On Thursday, the announcement that spending on new construction projects slumped to its slowest pace in nearly two years roiled investors. Also, The Institute for Supply Management said its monthly manufacturing index fell in July to its lowest level since January, down to 50.5 from 56.2 in June. Friday, the U.S. Labor Department said the number of new jobs created outside the farm sector rose just 6,000 in July, far less than the 69,000 expected by economists. 

So what should investors make of all of this data, and equally important, has it already been priced into the market? We do not think so, especially in the technology sector. Based on expected 2003 P/E multiples, the technology sector comprises 14% of the S&P 500 in value, yet is expected to yield only 5% of the profits. If technology is removed from the calculation, the S&P currently trades for 14 times next year’s estimated earnings. However, we feel that those estimates are likely too optimistic, and that companies will earn much less than anticipated. We continue to believe that the combination of weak economic data, seasonal factors and the upcoming August 14^th date for company executives to certify their financial statements leaves stocks open to further weakness. To date, just 37 out of 947 companies have certified their financial statements.

What should investors expect this week? Although most of the S&P 500 has already reported results, Procter & Gamble (NYSE: PG) will announce results before the market opens on Monday. Tuesday morning, Toll Brothers (NYSE: TOL) will give investors an idea about the strength of the housing market when it posts second-quarter results. Analysts expect EPS of 61 cents per share. Tuesday after the close, networking giant Cisco (NASDAQ: CSCO) will announce fourth-quarter results. Analysts are quite cautious about its prospects. Dresdner Kleinwort Wasserstein believes investors are unlikely to see meaningful upside and maintains its Hold rating. It expects that CSCO will not be able to improve gross margins or operating cash flow. SG Cowen expects the company to meet fourth quarter earnings targets of 12 cents per share, but anticipates Q1 guidance will be flat to slightly up, with visibility still challenging. Sanford Bernstein expects CSCO will make its estimates but remains concerned that it may show reduced sales deferrals on the balance sheet while meeting its sales guidance of flat to 5% sequential growth. 

Thursday morning, Qwest (NYSE: Q), will post results before the market opens, while Emulex (NYSE: ELX) will issue its second quarter report after the market closes. There are a number of conferences this week, including Enercom’s four-day Oil and Gas Conference in Denver beginning Monday. CIBC will hold an Enterprise and eBusiness Software Conference in New York on Tuesday. Adams Harkness & Hill will hold a three-day technology conference in Boston starting Tuesday, while UBS Piper Jaffray will hold a three-day technology conference in the same city at the same time. QLogic (NASDAQ: QLGC), JDS Uniphase (NASDAQ: JDSU), Adobe Systems (NASDAQ: ADBE) will present on Tuesday. Wednesday, Sun Microsystems (NASDAQ: SUNW) will update investors. On Thursday, investors will hear from eBay (NASDAQ: EBAY) and Motorola (NYSE: MOT). The markets in Canada will be closed on Monday for a holiday.

We believe that technology investors, in particular, are vulnerable to earnings warnings and financial restatements in the next two weeks. Several companies guided results lower this week, and saw their stocks punished severely as a result. For example, graphics chipmaker Nvidia (NASDAQ: NVDA) announced that it would badly miss its July quarterly estimates. Its stock was crushed, as it lost 42% of its value in just three days. The stock had been the best performing member of the S&P 500 each of the past two years. Adobe Systems (NASDAQ: ADBE) reduced its third quarter outlook, and saw its shares plunge 27%. While many stocks in the sector have already been beaten down, we feel that there are still considerable valuation risks. Nvidia, for example, still trades at December, 1999 levels.

Last week was a tremendous week for those that follow our Special Situation stocks. We recommended that investors use the recent pull-back in gold as a buying opportunity, and those who followed our advice were well-rewarded, as the Precious Metals sector was the best performing area among the Dow Jones industry groups. Hecla Mining (NYSE: HL), was up an eye-catching 52%, as it reported $4.8 million in net income for its second quarter, versus a $1.6 million loss last year. It produced more gold than in any other quarter during its 111-year history. Net income from continuing operations was the highest in 12 years. It also had the highest quarterly precious metals revenue since 1990 and the lowest costs per ounce of silver since it began such calculations 16 years ago. The company posted a 41% increase in gold production for the first six months, while maintaining low production costs. It also posted a 39% decrease in the average total cash cost per ounce of silver quarter-on-quarter. We think the stock, at Friday’s closing price of $3.71 has much more upside.

The good news was not limited to Hecla, however. Agnico Eagle (NYSE: AEM), one of our favorite mining producers, rallied 21% this week on the improved prospects for the sector. Kinross Gold (AMEX: KGC) surged 32.8% on its earnings announcement. The company narrowed its net loss to $4.3 million, or 2 cents per share, compared to a net loss of $7.5 million, or 3 cents per share, in the same three-month period last year. The company produced a disappointing 204,148 ounces of gold in the period at a cash cost of $209 per ounce, compared with 233,722 ounces at a cash cost of $191 per ounce in the same quarter of 2001. However, it said it expects an improved second-half performance due to increased production and a lower cash cost at it Fort Knox mine and expanded output from its Timmins, Ontario facility. Kinross in June announced plans for a merger with fellow mid-tier miners Echo Bay Mines and TVX Gold that would create one of the world's 10 biggest gold producers.

Golden Eagle International Inc. (OTCBB: MYNG), is a gold exploration and mining company, which is currently focusing its efforts on developing its mining rights on 74,000 acres in the Tipuani Gold Mining District in Western Bolivia, and continuing exploration on 125,000 acres in Eastern Bolivia's Precambrian Shield. The company this week announced that it had completed the fundraising for the purchase of interior mining equipment for its Cueva Playa gold mine. It expects to begin production in September, which we believe is likely to be a catalyst for an increase in price. The stock ended the week at 11.5 cents, giving it a valuation of just approximately $26 million. The stock was up 15% on the week.

Another company we recommended last week was Golden Star Resources (AMEX: GSS).  The company, which has mining interests in Ghana, is expected to announce second quarter results on Monday. Its stock surged 27% this week, closing at $1.07. We continue to believe that the mining sector provides one of the best investment opportunities in today’s market and will continue to highlight solid companies in the coming weeks (see Special Situations below).

Two of the value stocks we are quite high on posted strong gains this past week as well. Allou Health & Beauty (AMEX: ALU), which is the premier distributor of over 22,000 nationally advertised health and beauty aid products, posted a heady 16.6% gain this week after we highlighted them last week. The company, at Friday’s closing price of $5.90, still trades at less than 6 times current year’s earnings estimates. We believe that there is a substantial probability that the company will surpass its projected earnings per share of $1 (year ended March 31, 2003) and that based upon an estimated 7% growth in revenue that there is further room for its multiple to increase. Drew Industries (AMEX: DW), a provider of components for manufactured homes and RV’s, jumped 9.6% this week. The stock still trades for just 11 times trailing 12 month earnings, and we think there is room for price appreciation beyond Friday’s closing price of $15.08.

SurgiCare (AMEX: SRG), a Houston-based Ambulatory Surgery Center company, announced this week that it will release second-quarter results on August 13^th. We believe that the company’s business remains sound, and that it is taking steps to accelerate the collection of its receivables. We expect that it will announce favorable July surgical procedure numbers and is on-track to meet or exceed its annual earnings estimates of 19 to 22 cents per share. While the company still needs to complete the Aspen acquisition, we think that once the company successfully addresses its receivables the stock should trade at a multiple well above its current level of 10 times 2002’s anticipated earnings. The stock has always bounced off current levels, and at $1.97 appears well-positioned to rally.

Decorize (AMEX: DCZ), a provider of direct sourcing solutions for the global home decor market, provided first quarter guidance for the period ended September 30. The company expects to report revenues exceeding $5 million and to generate its first operating profit. We are comfortable with these estimates, based upon the company’s current backlog of over $7 million. The stock was up 4% this week to close at $2.50. Although consumer-related stocks have shown recent weakness, we think that Decorize, which did not participate in the run-up, is very attractively price for an emerging growth company. DCZ has been able to grow revenue from $1 to $14 million in just two years.

Incara Pharmaceuticals (NASDAQ: INCR), a company that focuses on disease therapies based on tissue protection, repair and regeneration, announced this week that the FDA would allow Incara's Investigational New Drug Application to begin Phase 1 clinical trials of cryo-preserved human liver cells for the treatment of patients with cirrhosis and end-stage liver disease. The company said the therapy's goal will be to improve the quality of life of patients, delay a whole liver transplant or even avoid the need for one entirely. The program will target patients who would be candidates for liver transplants.

We think that this development is extremely positive for the company, and long awaited. However, the company recently received a de-listing notice from Nasdaq and had just approximately $1.5 million as of its March reporting date. Thus, it will likely have to complete a financing to fund clinical activities while its stock is depressed, an issue facing many small biotech companies. It closed Friday at just 19 cents.

Cell Pathways, Inc., (NASDAQ: CLPA), a development stage pharmaceutical company focused on the research and development of products to treat and prevent cancer, reported second quarter results this week. Unlike many other small biotech companies, it currently generates revenue from existing pharmaceutical products, while pursuing clinical activities. The company has already shipped $1.7 million of Gelclair™, which is used to treat inflammation and ulceration of the mouth caused by chemotherapy or radiotherapy to wholesalers in the second quarter, despite just launching the product in June. The company continues to advance clinical activities of its Phase III trial of Aptosyn® in non-small cell lung cancer, and has a pilot Phase II trials of CP461 in chronic lymphocytic leukemia, hormone-refractory prostate cancer and renal cell carcinoma. It also recently launched a Phase II clinical trial of CP461 as a potential treatment for Crohn's disease. The company had $18 million in cash and cash-equivalents as of June 30^th, which should be sufficient to fund activities for at least the next 12-18 months. The stock closed Friday near its 52-week low of $0.93.

In June we featured, Tessco Technologies (NASDAQ: TESS), a leading supplier of integrated product plus supply chain solutions to the wireless communications industry. The company showed a 480% improvement in EPS for its fourth quarter. Recently, it reported earnings for the first quarter of 2003 (period ended June 30), which were up 317%, increasing to 25 cents per share from 6 cents in the year earlier period. This was substantiated by solid revenue growth of 15% over the same quarter last year and 12% over last quarter. The company used these proceeds to pay down virtually all short-term debt as of the end of the quarter. We are amazed that the company continues to perform at this level in the poor performing telecom sector. Despite this impressive performance, the company closed at $11.00.

One of the Special Situation stocks that has been disappointing has been Plato Learning (NASDAQ: TUTR), a provider of computer-based and e-learning instruction, assessment, standards-based curriculum management systems, and professional development. We like the company’s technology and penetration into the K-12 education market. However, education spending has been sharply impacted by the delays in schools receiving federal funding, and this has begun to severely impact the company’s business. It recently lowered its third-quarter guidance to $20-21 million in revenue and break-even to 2 cents per share of earnings. While we feel that this is a short-term problem and that the company will ultimately return to solid growth levels, its stock has been pummeled. Friday, it closed at $5.95, down 23% for the week. While there could continue to be some short-term weakness, we think that now is an excellent time to buy the stock, as it is at its lowest level since early2000.

Tag-It Pacific (AMEX: TAG),  which specializes in the distribution of a full range of trim items to manufacturers of fashion apparel, licensed consumer products, specialty retailers and mass merchandiser brands, announced this week the launch of its metal jeans button, rivet and snap business under the Talon®Fastener name. The company believes that this new venture will become an important source of growth and added profitability and compliment its branded product offerings. The thinly-traded stock increased 1 cent for the week to $3.74.

Tri-Valley Oil & Gas Co. (OTCBB: TRIL), a junior exploration and production company, announced promising developments this week as it encountered significant natural gas shows on its Sunrise-Mayel No. 2H well near Delano, California. The company has mapped a probable area of formation to the extent of some 6,600 acres within its 8,300-acre lease block. Independent engineering firms have calculated that the No. 1 appraisal well data indicates the formation holds 72 billion cubic feet of natural gas per 160 acres. The stock was up 10.9% this week amid increasing volume, which suggests that the stock is under accumulation. It closed Friday at $1.32.

BIO-key International (OTCBB: BKYI), a developer of advanced biometric finger identification technologies, announced this week that the Finger Verification Competition, in Italy, provided yet another endorsement of the potential for its technology. The Italian-based organization confirmed the accuracy of the company’s identification technology. The company’s technology is al ready featured at Intel’s offices, and we think that those investors looking for emerging technology plays are likely to be rewarded here. The stock closed Friday at $0.34, giving the company a valuation of approximately $5 million.

PrimeWest Energy (Toronto: PWI), a Canadian-based royalty trust, announced results for the first six months of its year this week. The trust announced that cash flow from operations was $40.2 million, reflecting lower volumes and increased royalties. The trust’s distributions, which remain at 30 cents per unit, reflect a stellar cash-on-cash return of 17.8%. The company’s development program continues to succeed in finding additional reserves. The stock closed Friday at $6.73.

Dynatec Corporation (DYN: Toronto), a leading international provider of mining services, drilling services and metallurgical technologies, posted disappointing results for its second quarter ended June 30^th, as revenue declined sharply to $29.5 million versus $48 million for the previous year. While we would ordinarily be alarmed by such a sharp decline, the company announced that its Mining Division has a strong backlog of contract work, including ongoing contract projects at the Red Lake Mine, the IMC Canada Potash Project in Esterhazy and continuing construction work at Barrick Gold’s Meikle Mine. The recent commencement of underground work at the Inco McCreedy Mine for the its joint venture is also likely to be a catalyst for improved results. The stock ended the week up 19% at 56 cents. 

SPECIAL SITUATIONS:

Sunrise TelecomIncorporated (NASDAQ: SRTI) $1.65

It is hard to get too excited about any company that has its fortunes aligned with the beaten-down telecom sector, but Sunrise Telecom, which manufactures and markets service verification equipment for telecommunications and Internet networks, has withstood the downturn better than most. The company recently reported second-quarter results that were better than expected, driven by higher gross margins and sequential revenue growth in all four of its businesses. The company reported revenue of $14.7 million and pro forma EPS of 2 cents. 

The company continues to develop its portfolio of testing products, somewhat reducing its dependence on any one product or service. SRTI has seen solid growth in its fiber optic and CATV segments, as a result of many of its R&D initiatives. We think that its portfolio of portable test products, for example, should position the company for strong growth when carrier spending picks up. The company’s mix of businesses helped during the past quarter, as wireline revenue grew by 36% sequentially, fueled principally by increases in spending from ILECs.

The company should also benefit from the expected growth in video on demand and cable modem deployments. In fact, this business grew 28% on a year-over-year basis. Both the fiber optic and CATV businesses should continue to grow throughout the year, and should help to offset weak carrier spending, and slow DSL deployment. The company has been conservative in its guidance for its third quarter, which is understandable due to the nature of its business. Since it is a "build to order" manufacturer, this tends to limit visibility more than in other businesses, as the company is unable to determine revenue until an order is placed. However, based upon its business in the first half of the year, we feel that the company should be able to generate annual revenue of between $50-55 million (it reported $23 million for the first six months of the year) and report a slight loss.

Why should investors buy in now? The company currently trades at a slight discount to its tangible book value of $1.69. Based upon Friday’s price, it has a valuation of approximately $84 million. The company has approximately $0.81 per share of cash. We think that based upon its current valuation and cash position, even in a depressed telecom environment that the risk/reward profile is an attractive one. The stock trades just above its 52-week low of $1.52. We think that its ability to continue to spend on R&D in tough times and to manage its cash judiciously will position the company well when the cycle improves. Although it is unlikely to reach its 52-week high of $6.70 established nearly one-year ago anytime soon, the upside potential at these levels far exceeds the downside risk.

T & G2 (OTCBBB: TTGG)$0.66

We believe that Biometrics will continue to grow in their applications. Biometrics is the automatic identification of a person based on physiological or behavioral characteristics. T& G2 has developed the SecureTime System. This generates secure data transactions including time and attendance measurement for businesses. While the company has been public for less than one year, it has already received a growing number of contracts for the implementation of the System. It recently announced that beta testing with Premise, of California was successful. The company also received an order from Canada recently. We think that the technology has much promise.

The company’s model is based upon its ability to offer a complete turnkey solution for small or mid-sized companies that needs to collect time and attendance, scheduling, entitlements, and personal/pay records. With a seamless interface to payroll services, it provides the client with a highly-effective time and attendance management system.

The good news is that while the company further develops this market, it has acquired technology by purchasing Zingo Sales that will generate immediate revenue. Zingo has developed electronic bingo games enabling it to penetrate the rapidly growing electronic gaming market. With the Zingo system, bingo players who can only follow 5 or 10 bingo cards at a time on paper now have the capability to play hundreds of bingo cards at one time. This provides an additional source of revenue for bingo halls and casinos, as they can now charge for additional bingo cards played without the additional cost of paper. 

The company has already received a contract for 50 units from the U.S. military, and will announce on Monday its first order for the game in the Northern California area. The cash flow generated from these orders should allow the company to break-even by the end of the third quarter.

This has been the most difficult environment in history for early-stage companies to develop business models. Capital has been scarce, and the tough economic environment has made revenue from new products harder to come by. However, TTGG appears to have weathered the storm, and based upon growing revenue should become profitable before the end of the year. We like this company because it provides current revenue from its bingo games while offering the longer-term upside potential of its biometric technology. 

The stock has pulled back recently from the $1 range to $0.66. Based upon approximately 9 million shares outstanding, we think that the company provides an attractive risk/reward profile. Since management expects the company to become profitable before the end of the year, it should not take much revenue for the company to generate significant earnings per share with such a small number of shares issued. At its current valuation of less than $6 million, the stock looks cheap

Aurizon Mines (OTCBB: AURNF), (TSX: ARZ) $0.81, $1.30 Canadian

We continue to like junior mining stocks very much. Aurizon Mines Ltd. is a Canadian-based gold mining company with operations and exploration activities in the prolific gold producing Abitibi region of north-western Quebec. The company reported cash flow of $400,000 for its first quarter ended March 31, which represents a $700,000 improvement versus the same period last year and a $2 million improvement versus last year’s fourth quarter. The company completed a $13.1million equity financing in the fourth quarter, and has already put the proceeds to good use.

The company recently announced that it had acquired TVX Gold’s residual interest in the Casa Berardi property. As a result, Aurizon now owns a 100% unencumbered interest in Casa Berardi, which comprises a 30,000 acre land position along a 37 km section of the Casa Berardi fault. This includes a 2,200 ton per day processing facility, underground workings and an extensive fleet of mining equipment. The West Mine at Casa Berardi contains mineral gold reserves of 1.5 million ounces contained in 6.9 million ton grading 6.7 grams per ton. In addition, the Casa Berardi project hosts undiluted mineral resources of 1.1 million ounces contained in 4.5 million tons grading 7.7 grams per ton. A feasibility study completed in 2000 indicated that the West Mine could produce approximately 200,000 ounces of gold annually at a total cash cost of US$145 per ounce over an initial mine life of 7.5 years. The company expects that the exploration work at the mine will conclude in the fourth quarter.

Casa Berardi is located in Quebec, north of Rouyn-Noranda. The mine produced 650,000 ounces of gold over a nine-year period beginning in 1988. After acquiring Casa Berardi from TVX in 1998, Aurizon commenced work on the property with a $10 million drilling program. The initial results indicated resources equal to twice the historical gold production from two new zones. The company expects average gold production of over 200,000 ounces by the second full year of commercial operation at a cash cost of $145 per ounce.

The company generates most of its current revenue from a 50/50 joint venture at the Sleeping Giant Mine, which is a venture with Cambior, the operator. Production has increased from 50,000 ounces of gold in 1997 to 70,000 today. Operating costs average approximately $215 per once of gold produced. There have been several positive recent developments at the Mine, however. A significant underground exploration drilling program begun in 2000 resulted in an increase in reserves and resources at the mine now expected to last until 2004. Last year, the joint venture also announced three new mineralized lenses close to the production shaft. This suggests that there could be additional upside potential at the mine.

The stock is one of the more liquid junior mining stocks we have seen, as average trading volume easily allows investors to purchase a position. The company currently has a valuation of approximately $40 million (U.S). The stock’s recent pull-back from its 52-week high set in June makes current levels an excellent entry point. We believe favorable sector fundamentals, an improved balance sheet (it is now debt-free) and solid exploration prospects at Casa Berardi should all be catalysts for the stock to move higher from today’s levels.

We welcome your comments and suggestions at news@ceocast.com

The CEOcast Newsletter is an electronic publication committed to providing our readers with factual information on selected publicly traded companies. All statements and expressions are the sole opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READERSHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING INANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIESA HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS NEWSLETTER IS PROTECTEDBY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCEDIN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF CEOcast. Moreover, as detailed below, this publication accepts compensation from certain of the companies that it features. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. This information has not been independently verified by CEOcast. The reader should use caution, as a result. The following companies, featured in this newsletter, have compensated CEOcast:, SurgiCare, seventy-five hundred dollars per month, one hundred thousand shares of common stock and one hundred thousand warrants exercisable at two dollars twenty six cents, Golden Eagle International, six thousand dollars per month, plus fifty thousand shares of stock per month, Agnico-Eagle Mines, seventy-five hundred dollars, Drew Industries, seventy-five hundred dollars, Allou Health & Beauty, five thousand dollars per month, plus warrants to purchase ten thousand shares of stock at five dollars, sixty-eight cents, Tag-It Pacific, ten thousand dollars, Cell Pathways, seventy-five hundred, Dynatec, seventy-five hundred dollars, Kinross Gold, seventy-five hundred dollars, Tessco Technologies, ten thousand dollars, T & G2, eighty thousand shares of free-trading stock from a third-party shareholder, Sunrise Telecom, seventy-five hundred dollars, Aurizon Mines, seventy-five hundred dollars, PrimeWest Energy, seventy-five hundred dollars, Plato Learning, seventy-five hundred dollars, Hecla Mining, seventy-five hundred dollars, Incarra Pharmaceuticals, ten thousand dollars, Golden Star Resources, ten thousand dollars, Decorize one hundred ninety-five thousand dollars, seventeen thousand shares of stock and options to purchase forty thousand shares of stock at three dollars forty-seven cents, Tri-Valley Corporation, six thousand dollars per month, BIO-KEY International seventy-five hundred dollars per month, plus options to purchase two hundred thousand shares at forty-two cents.