I’ve been a fan of South American telecom stocks for a while now. It’s one of the fastest growing economies in the world, and telecom has been newly-budding there over the last half-decade or so. Sometimes five years of growth is all you get before that respective market is saturated. In this case though, there’s still a massive amount of unmet need - telecom growth in Latin America is still picking up speed.

For those of you who follow our site closely, you’ll already know of my affinity for the few Latin American telecom stocks. We picked Telemig Celular (TMB) a few weeks ago, not just because they offer wireless service in Brazil (the biggest South American market), but because they’re demonstrative of how strong the opportunity is in the market.

Ironically - though happily - TMB’s trading has been halted today after Vivo (another cell phone company in the region) made a tender offer. No word yet on the outcome, but the fact that acquisitions and mergers are starting to become common suggests things are really heating up there.

Take for instance another merger on the verge…the union between Brasil Telecom Participacoes S.A. (BRP) and Telemar Participacoes (TNE), which will by far make them the largest landline player in the country. The union is being encouraged by President President Luiz Inácio Lula da Silva as an effort to stave off the major role that foreign companies play in their telecom business.

And, there’s certainly plenty of it…in all arenas. Deutsche Telecom (DT) and Vodafone (VOD) are just two foreign companies with eyes on Brazil.

That said, it’s not just Brazil. For that matter, it’s not just land lines. Mexico-based wireless company America Movil (AMX) is the dominant name in mobile phone service for the entire continent, but other outfits are looking to take a bite out of their business.

There are three key reasons I see much more growth ahead for telecom in Latin America. (1) Like I said, the region is still under-served. (2) State governments are more willing to give up control, even if their motivation is money. [See, the government has more to gain from competition and fees than they do by retaining control themselves.] (3) A stronger economy is allowing more residents there to own landlines and cell phones.

Take America Movil as an example of #2 (that governments want more telecom service providers). Movil recently paid $480 million to the country of Ecuador for the right to do business there…and they’re not even the only wireless player in the market.

The point is, if telecom’s growth was winding down in the region, all these companies wouldn’t be jumping through hoops in an effort to get positioned for future growth. I think it’s just getting started.

I mentioned a few company names above, though they’re not the only ones worth a look. As for our Telemig pick, I think it’s good that a buyout offer is on the table…it’s likely to mean more gains for us. I don’t recommend waiting for the merger though (if it happens). If the acquisition is for real, I’m probably going to suggest locking in the gain following any price jump.

Of course, it hasn’t happened yet; Telemig shares aren’t even trading right now. They will be soon enough, so we can reassess the trade then. In the meantime, I’m still bullish on the industry in this region.

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A few days ago I discussed a concern I had with small cap stock Bio-Matrix Scientific Group’s (BMSN) breakout above 63 cents. That concern? That the stock wouldn’t be able to hold onto those gains. Well, I feel a little better now (and more so every day). We’re now into our fourth day of trading above 63 cents. Though the volume has tapered off a bit - along with the momentum - I don’t see anybody wanting to get out.

Ideally, I’d like to see a base established here at 63 cents. Actually, ‘ideally’ I’d like to see BMSN race to $5.00. Realistically, I’d accept seeing BMSN set up a base here by retesting 63 cents a few times, yet staying above it. Based on the March/April flat period, this bulletin board stock has proven to be in an ‘up-flat-up-flat’ pattern. It requires patience to be an owner, but it’s better than ‘two steps forward and one step back’ (and certainly better than ‘one step forward and two steps back’). 

I hope you saw yesterday’s news about this small cap company’s basic revenue plan. The numbers they were using were basically in line with our guesstimates, though it’s nice to see the company confirm them. We’ll be using those numbers in tomorrow’s (Saturday’s) edition of the newsletter to review - and possibly revise - our valuation of this company.

On that note, don’t expect to see us scale back on our expectation, or our recommendation to be in a trade now rather than later. We still don’t know when the tissue-bank licensing inspection will be, though we’re also still sure we won’t hear about it until it’s done. Once completed - and if it’s awarded - we can foresee BMSN being catapulted to new multi-year highs. Trying to get into this small cap pick after the fact may be tough to do at levels anywhere near where they are now.

We’ll take an in-depth look in Saturday’s edition.

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I don’t know if it was being featured on ‘The Price is Right’ that prompted yesterday’s big surge from our bulletin board stock pick SpongeTech Delivery Systems (SPNG), but it may have helped. Or, maybe it was CEO Michael Metter’s letter to shareholders. Frankly, it doesn’t entirely matter what the reason is, because I think SpongeTech’s sales and revenue results merit this small cap stock’s gain. It’s about time we saw this breakout.

The nearby chart tells the whole story. We saw a high-volume gain yesterday…though major accumulation isn’t entirely new here. The other thing we saw was new - a move above the 200 day moving average line, for the first time since there’s been enough data to actually calculate a 200 day moving average line.

There may be one more hurdle, though I don’t really think it will be a problem. February’s peak was 4.9 cents…a line that acted as a ceiling for several days before sending the stock back to multi-year lows. This time seems to be different, in that we have plenty of volume supporting the rally this time.

If we see SPNG hit 5 cents, it may be a good time to start accumulating even more.

By the way, my confidence level in the stock is largely driven by Michael Metter’s letter yesterday. He didn’t tell us anything we didn’t believe already, but it was a nice confirmation of our expectation.

Basically, Metter said the company was on track to ship $3.3 million worth of sponges in their fourth quarter (which ends on May 31st). Annualized, that’s $13.2 million in sales per year. Yet, the backlog is still bigger; it’s about $20 million at this point. I suspect we’ll see several quarters of significant growth.

As a reminder, they did $1.22 million in sales last quarter, and posted decisive profits. I expect to see higher sales translate into higher earnings this time around.

This is shaping up to be one solid bulletin board pick as the company enters its high-growth stage. Of course, that’s the whole point of trading small cap stocks.

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It seems like only yesterday we were examining bulletin board company Stockgroup Information System’s (SWEB) earnings, yet now it’s time for the next update. On May 14th, at 3:00 p.m. EST, StockGroup will be announcing their Q1 results. At 4:05 p.m. EST the same day they’ll be hosting a conference call to discuss those numbers. 

What we’re thinking about and looking for this quarter… sales and profits.

Last quarter, the bottom line took a hit because of one-time expenses associated with the new website. The top line struggled because advertisers didn’t want to commit to a website they didn’t know what was going to be and do. Well, according to the company’s chat from last time around, the website is done, and all the right staff are in place. (You may also recall the company has hired a small army of marketing and sales gurus over the last few months.) In short, this quarter will be the first full quarter StockGroup has had everything firing on all cylinders.

At some point in time, all those things need to start paying off. We need to see results - something we’ve been a little too lenient about since the middle of last year.

In other words, it’s do or die time. We’ll have an answer to our question next week. I highly recommend you get on the call as well, as there always seems to be something revealed there that didn’t show up in the press release accompanying the earnings announcement.

The conference call and webcast will be held on Wednesday, May 14, 2008 at 4:05PM EDT / 1:05PM PDT to discuss the third quarter results. To participate in the conference call, please call 1-866-400-3310 five to ten minutes prior to the start time. To listen to the live webcast, please go to www.stockgroup.com.

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I admit I had to read this press release a couple of different times to make sense of it. Once I finally saw how the puzzle worked though, it all made a lot more sense. What I’m talking about is this small cap company’s latest billboard campaign. To grab some attention, Spicy Pickle (SPKL) is deliberately spelling words wrong on the billboards. And yes, it’s working.

For example, one of the boards read “‘Fud fors mahrt peah pal”. It only took me about 40 seconds to figure out they were trying to say “Food for smart people”.

The goal of the campaign is two-fold. One is to illustrate how the restaurant looks at things in a different way. The other is to send anybody who mentally processed the billboard to a special site the company has set up - http://www.languageofflavor.com/. At the site, browsers can try to figure out more phonetic sentences, and even submit some of their own. Of course, the over-arching point is to reinforce the brand name ‘Spicy Pickle’.

Not earth-shattering, but kinda’ fun.

By the way, I trust you saw yesterday’s news about the 38th restaurant being opened. The company just keeps growing, and growing.

Anyway, all this talk about food has made me huhn gree fora puh neenee.  

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You know, a company can buy an infinite amount of advertising - in all mediums. Sometimes though, the best advertising isn’t advertising at all. Being publicly mentioned in a non-promotional way can ironically be an incredibly effective promotion. It’s simply a matter of credibility. This is an idea small cap company SpongeTech Delivery Systems (SPNG) is not only aware of, but something they’re on the verge of becoming intimately aware of thanks to a few upcoming prime time mentions on the game show ‘The Price is Right’.

SpongeTech’s auto wash/wax sponge will be the subject of one the show’s price-guessing games, so millions of eyes will be studying the product and making the same mental guess at home. That’s only a precious few seconds of consideration, but enough to plant a seed of recognition.

The sponges won’t just be featured on just one game though. They’ll be ‘priced’ on May 7th, May 14th, and once more in July.

If you can’t catch the show during the day, don’t worry - they’ll be airing at 8:00 pm EST those evenings. Check your local CBS listings for the air time in your time zone.

By the way, if you don’t think passive product integration can have an impact, try this short pop quiz. (You’re on the honor system.)

1. What’s the favorite drink of American Idol’s three judges?
2. Where does Donald Trump encourage you to go after each episode of the Apprentice?
3. What snack did you crave a few minutes into the movie E.T.?

If you’re like most people, you actually answered at least two out of the three correctly. Point being, even if you don’t know it, product placement can and does plant seeds in your head. That’s why these three mentions are a subtle but big deal for SpongeTech.

By the way, the answers to the above questions are (1) Coke, (2) Yahoo’s Hot Jobs, and (3) Reese’s Pieces.

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Though it was only on Monday we heard about small cap company Bio-Matrix Scientific Group (BMSN) officially starting the tissue-bank licensing process, they seem to be proceeding as if they expect to get it. Of course, they have to - they want to be sure they’re ready to go when and if they get the approval from the California Department of Health.

Anyway, the news is simple. Bio-Matrix is acquiring a blood bank labeling system designed by a company called Computype. The technology will allow Bio-Matrix to properly manage what will be thousands and thousands of stem cell samples. Such a system is crucial in this type of operation, because when you’re talking about a person’s individual DNA, clearly there can be no mix-up.

Besides, the FDA requires this type of system for all blood banks.

Though we nor the company want to appear presumptuous, the fact that they’re proceeding as if they’re going to be licensed soon is an encouraging sign. And, it reinforces an idea we’ve mentioned several times now…if they do get this tissue bank license, we’re not going to know about it until afterwards. But, when they do get it, they’re going to be fully operational (i.e. able to bear revenue) the very same day.

That was and is the urgency here. The market may be flooded with traders who are all going to jump on the stock simultaneously if this bulletin board company gets its license. We contend the better time to be in a trade is before that might happen.

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I don’t mind gloating a little here regarding yesterday’s comments about our bulletin board stock pick Bio-Matrix Scientific Group (BMSN). I said the stock was on the verge of a breakout above 63 cents. As it turns out, this small cap stock decided today was the day. It’s up 18%, and more importantly, well past its resistance at 63 cents. I think that qualifies it as a ‘hot stock’.

The best part - even better than the big gain - is volume. I was blown away by yesterday’s volume, which was the most volume we’d ever seen in one day from BMSN. Being a news-based surge, I kinda’ figured it would have tapered off today. Nope. Today’s volume is even better…one day removed from the news. That’s what I really like to see - follow through.

The most impressive part of all? Though the news was good, it wasn’t a game-changer. The tissue bank license is the key. My point is, if this is what happens when they submit paperwork, I can’t even fathom what’s going to happen if they get the approval from the California Health Department. 

I don’t know if BMSN is forever going to remain above 63 cents. It might, but even if it doesn’t, this is still a bullish day. Once the wall is knocked down, it’s easier to re-cross.

Longer-term, this bulletin board equity has a milestone at $1.20, which was where we saw 2007’s double-top. We may be revisiting this chart if we get to that point. Heck, we may even decide to take some profits there. Our ultimate price target is still $1.45 for this small cap name though. So, we may jump back in after a healthy dip. That’s still quite a ways down the road.

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This little Brazilian Telecom stock we picked in late February has ended up being a pretty nice trade. Telemig Celular Participacoes (TMB) is now up more than 15% from our pick price, and still itching to go higher.

We were concerned a couple of weeks ago when we saw shares surge to new highs, stall, then make a sharp dip. The pullback was a one-day event though. The stock came rallying back even stronger the next day, and hit new highs again today. Translation: we’re still on the right side of this trend.

Our target remains at $79.20…about $10 away. We saw Telemig easily rally about $20 in the middle of last year before taking a break. So, adding another $10 to what we’ve already achieved isn’t implausible for this trade.

On the other hand, one key item has come back around on the chart - a significant resistance line right around the $70 mark. This isn’t a reason to sell, but it may be the cause for any stall, and possibly a rollover. Of course, it may break past that line and turn into a rocket. It’s just too soon to make that call. For now we’ll wait and see how things proceed.

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Geez, I can understand Yahoo’s (YHOO) shareholders not being happy about Jerry Yang’s stubbornness, but I’m not entirely sure an unwillingness to do a deal with Microsoft (MSFT) merits a downgrade. I guess Colin Gillis at Canaccord Adams disagrees - he downgraded the stock to a ’sell’ earlier today when it became clear Yahoo wasn’t going to lay down. ThinkPanmure analyst William Morrison made the same decision.

Though it seems as if everyone except Jerry Yang liked the deal, I’m not sure a downgrade at this point is entirely fair. Did these two analysts upgrade YHOO when the potential union was first introduced? Nope. So, what’s actually changed with the company that makes it a ’sell’ now? That’s the point - nothing’s changed.

By now you’re realizing this has less to do with Yahoo and more to do with analysts. More specifically, it’s vented frustration that analysts are far too often lemmings, and/or late to the party. It doesn’t really do any investors any good to downgrade the company to a ’sell’ rating after the stock has plunged 14%.

In any case, I doubt this is anywhere close to being over. Microsoft has tipped their hand; they really can’t go back now, lest Google (GOOG) or Time-Warner/AOL (TWX) could step in. Google I could stomach, but a deal with AOL is a deal nobody’s gonna’ like.

Hostile takeover, here we come? Maybe.

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Normally I’d use my morning market comments to set the tone for the day (and share my thoughts about what the market probably had in store). However, we’ve got a ton of small cap stock news for this evening’s edition, so I’ll save it all for then. Instead, I’ll use this morning to do something I’d like to do more of - answer reader questions about the economy.

Here’s a question we got this morning…

I would appreciate if you can explain to me what the Fed is trying to achieve by lowering the Fed funds rate. My understanding is that if the Fed really want to help the financial sectors, is that they have to lower the discount rate to the same level as the Fed rate so that banks will borrow from the Fed than from each other. As it stands I don’t think most banks are still will to lend money to each other. I believe with these two rates at the same level then we will have more banks borrowing from the Fed than from each other. As it stand I believe the worst is not yet over and no bank is willing to lend to the other. Also the Fed can lower the discount rate to a rate lower than the Fed rate and banks will borrow from them. If there are any implications in doing this can you please inform me.

Thanks for the questions. I’ll try and answer them one at a time in the same order received. Bear in mind I’m not an economist, so I may not be able to address all of them. On the other hand, Ben Bernanke doesn’t seem to be an economist either, and that doesn’t seem to stop him from making big decisions.

1. The Fed is trying to stimulate the economy by making it cheap and easy to spend borrowed money. It’s not working. If a fed Funds rate of 3% didn’t do it, can 2% be much better?
2. I don’t know that the discount rate matching the Fed Funds rate will matter. Banks can choose to borrow where they want to. Like you said, they’re choosing the cheapest source right now. I don’t think banks are fearful of borrowing from one another in this case; they aren’t risky consumer loans. More Fed borrowing won’t stimulate anything more than what we have right now.
3. To my knowledge, there are no long-term implications to borrowing from one source or another. These are only short-term loans.
4. In the bigger picture, the issue still isn’t whether or not banks can acquire money to lend. The Fed has made billions of dollars available, and billions more are available from intra-bank loans. The issue is banks just not wanting to make consumer loans to anybody. That’s ok though - most consumers don’t want to borrow right now anyway.

Back to the key point though….I don’t think Bernanke did anybody any good. He caved to Wall Street by giving us rate cuts we wanted but didn’t need. Inflation surged because of the weak dollar, and the dollar was weak because interest rates were so low. You can’t avoid taking lumps, but the lumps he chose for us hurt more than the alternative.

That said, I think the worst is over, economically speaking. However, it’s not as if Ben had anything to do with it.

That’s just my two cents…or one cent, inflation adjusted.

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I don’t know if they actually needed it, but it never hurts to have it. At the same time, the fact that they could get it at all right now says quite a bit about long-term, third-party opinions of their stock.

What I’m talking about is small cap company Stockgroup Information Systems (SWEB) and funding. They just raised $3 million worth of funding from PEAK6 Investments LP. You may know them better by the name of their website, optionsnews.com.

The terms of the deal are pretty straight forward…Stockgroup is issuing 3000 convertible preferred shares at $1000 each. The conversion rate is 2200 common shares for each preferred share (meaning a total of 6.6 million shares are on the table as part of the deal). The preferred shares have a six-month hold, but will convert to common within two years no matter what. The conversion price is 45 cents per share - a premium to the current price.

The deal also gives PEAK6 the right to use Stockgroup’s content feed - something they create anyway.

I honestly wasn’t aware they were seeking funding. They had $2.8 million in cash as of their last filing, and $5.5 million in current assets. And, the expense of new website and re-launch has already been incurred. So, from my point of view, they didn’t necessarily need it.

On the other hand, the time to raise money is when you don’t need it. How’s that for a bitter irony? If they were in a crunch, they may have a hard time getting it.

My bigger picture take - to get anything at all right now speaks well of the company. Though Citigroup has raised several billion this year, it’s not like a lot of venture capitalists and institutions are jumping on private placements or IPOs in this environment.

Stockgroup, on the other hand, just raised a significant amount of money without upsetting current shareholder equity too much. The conversion rate is above the stock’s current price, the 7% dividend on the preferred is manageable, and the money is going to get parked on the balance sheet for a while.