With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Mid Cap Watch List (Track at Marketocracy).

As with the Small Cap Watch List (Track at Marketocracy), we were surprised at the amount of turnover in our screens. Only 7 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Part of the reason for the turnover was to reduce the overlap between the Small Cap and Mid Cap Watch List (Track at Marketocracy)s. Now there is only one-third overlapping names rather than two thirds. Furthermore, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Middleby (MIDD); Olin (OLN); Vector Group (VGR); Sanderson Farms (SAFM); Tesoro (TSO); Downey Financial (DSL); Waddell & Reed (WDR); Gamco (GBL); Apria Healthcare (AHG); Quest Diagnostics (DGX); ITT Educational Services (ESI); Equifax (EFX); Delhaize Group (DEG); Papa John’s (PZZA); Rent-a-Center (RCII); Cato Corp (CTR); Dassault Systemes (DASTY); Ingram Micro (IM); Energy East (EAS); South Jersey Industries (SJI - Annual Report); and American States Water (AWR).

The new list is:

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Small Cap Watch List (Track at Marketocracy).

Frankly, we were surprised at the amount of turnover in our screens. Only 9 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Still, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Steel Dynamics (STLD - Annual Report); NVR (NVR - Annual report); Middleby (MIDD); Vector Group (VCG); Sanderson Farms (SAFM); Downey Financial (DSL); Waddell & Reed (WDR); Wilshire Bancorp (WIBC); Harrington West (HWFG); Gamco Investors (GBL); Apria Healthcare (AHG); Papa John’s (PZZA); Cato Corporation (CTR); Meredith Corporation (MDP); CSG Systems (CSGS); Energy East (EAS); Dynamics Research (DRCO); Ingram Micro (IM); and Dade Behring (DADE).

The new watch list will be:

The Conference Board said its index of U.S. consumer confidence rose more sharply than expected in September to 104.5, up from an upwardly-revised 100.2 in August, as energy costs fell and job prospects improved slightly. This throws a modest kink into the consumer slowdown thesis, so we took a look around to see what other anecdotal evidence might be indicating. In short, it seems like buyouts are the buzzword rather than any overall economic outlook.
TheStreet.com thinks hedgies may be looking to talk Watch List member Guitar Center (GTRC) into going private.

It’s pretty clear to me what Sageview wants management to do: Don’t go into too much debt trying to double or even quadruple the number of stores; rather, take on debt to reduce shares, cut costs and perhaps even go private.

Why go private now? The company has a $1.5 billion enterprise value and cash flow of $180 million, so it trades at a multiple of eight over cash flows and is experiencing growth, albeit not double-digit. In other words, it could take on a lot more debt and comfortably pay it down. This is perfect for an LBO firm looking to help management take it private, even at a premium of up to $50-$55 per share.

Makes sense to us.

Why can’t Valassis (VCI) and Advo (AD) just get along?

Sounds like Liberation Investments wants to “liberate” Multimedia Games (MGAM).

H&R Block shares plunge on loss provision (we warned you about those provision accruals!)

Consumers continued to spend at a stronger-than-expected pace in August as lower gasoline prices helped spur spending in other areas, pushing up retail sales by an unexpected 0.2 percent, a government report showed. Of course, Barry Ritholtz says we should read the fine print. Those strong home theater sales at Best Buy are spurred by 36-month zero-interest financing. But if you hit month 37, watch out! 24% interest - back-dated to the time of purchase!

Speaking to investors gathered in New York for a conference sponsored by Goldman Sachs, (Yahoo! CFO Sue) Decker said weak sales of online automotive and financial ads during the last three to four weeks will cause the Internet giant’s revenue to “come in at the bottom half” of the $1.11 billion to $1.22 billion range Yahoo forecast in July. (MarketWatch)

We started getting a whiff of this possibility on June 26 when Valassis warned. As we said then:

The company attributed this shortfall to continued softness in Free-standing Insert and Neighborhood Targeted page volumes. Both segments are also experiencing pricing pressure.

Targeted ads and inserts are both areas that could be suffering at the hands of on-line advertising outlets, as the new media version may simply be more effective at reaching targeted consumers than the old. Proponents of this theory could point to the pricing pressure and infer that some of it may be due to the new options available to advertisers. This secular story is well known, and the ongoing shift of marketing dollars from newspapers and television into the Internet is a major contributor to Google’s share price.

Of course, the other side of the argument is that ad-driven business models are all highly cyclical and consumer dependent. With the consumer up to its eyeballs in debt and the housing market slowing, consumer cyclicals may be due for a slowdown. In this case, which is supported by the softness in volume, all ad-driven business models could suffer - Google included.

We brought up the potential link again on July 13 when Journal Register missed earnings.

Profits for newspaper publisher Journal Register Co., were down for the quarter ended June 25, largely because of weak advertising revenues in Michigan and Ohio. The company announced profits Thursday of $9.8 million or 25 cents per share, including a one-time charge of $2.5 million.

The fact that the worst of the slowdown is in Big Three Auto territory is telling but not surprising.
Now it’s Yahoo’s turn. Once again, the culprit is auto ads. This is officially not old media losing market share, but a full-fledged consumer slowdown-driven decline in advertising. The thing is, Yahoo! and Google have higher multiples that will come down along with the earnings estimates.

Normally investors like it when they own stock in a company that is being acquired, as the acquiror often pays a healthy premium for the shares. However, here is a case where both the acquiror and the target are on our Watch List. (For the record, we don’t actually own shares in either Advo or Valassis.) In this case, we will have to see whether the gains for Advo outweigh a likely loss of value at Valassis. Update: The deal was announced, and Valassis has lost $133 million of market cap as of 11:30 AM while Advo shares gained $362 million. The market is saying that the combined companies are worth $230 million more than the individual components, a net positive for the Watch List, but more than 100 percent of the benefit accrues to Advo shareholders.

Valassis in talks to buy Advo for $1.1 bln - WSJ | Reuters.com

Marketing company Valassis Communications Inc. (VCI.N: Quote, Profile, Research) is in advanced talks to acquire Advo Inc. (AD.N: Quote, Profile, Research) for at least $1.1 billion, according to people familiar with the matter, The Wall Street Journal said on Thursday.

The two firms have discussed a deal that offers shareholders of Advo a premium of more than 50 percent of its $763.2 million market capitalization, two people familiar with the matter said, according to the newspaper.

A deal, which could fall apart or have its terms change, would unite two stalwarts of the direct-marketing and advertising business, the Journal said.

More »

The Watch List returned 2.86 percent in its first week, which was better than the S&P 500 but not as good as the mid- or small-cap indices that are probably a better comparison. We have now indexed the Watch List to 100 effective at the June 30 close (it was billed as the Watch List for Q3, after all) and will monitor it on that basis going forward.

Here are a few news items that affected Watch List names and that we didn’t give a separate post.

Valassis Communications (VCI) cut its earnings outlook

Valassis decreased its second quarter earnings per share guidance to a range of 38 cents to 42 cents, versus earlier guidance of 49 cents to 55 cents. Full-year expectations were trimmed to a range of $1.60 to $1.80 from a previously range of $1.95 to $2.15.

Analysts polled by Thomson Financial were expecting earnings of 51 cents for the quarter and $1.99 for the full year.

The company cited a slowdown in sales and pricing pressure in both its free-standing insert business and neighborhood-specific advertising. The company also said a suspension of its stock buyback program would effect earnings per share.

Accredited Home Lenders Assumed Aames Financial’s Wholesale Operations Ahead of Merger

Accredited Home Lenders Holding Co. (LEND), a mortgage company specializing in non-prime residential mortgage loans, announced today that it would absorb the wholesale operations of Aames Investment Corporation (AIC) under an agreement dated June 23, 2006. This move is designed to reduce employee attrition and maximize the expected synergies from the combination of the Accredited and Aames wholesale operations that would otherwise occur as part of the merger of Accredited and Aames contemplated to occur in the third quarter of 2006.

Conoco Phillips (COP) is open to new deals. Among them - a stake in a natural gas pipeline.
Sierra Health (SIE) got some more credit. At a lower rate.

American International Pasta (PLB) still likes Sysco, but wants to see other distributors. But if they don’t file their 10K by the end of the year, they could be delisted.

Mario Gabelli’s Broken Legacy (GBL)

Birinyi thinks it may be time to look at the homebuilders again. (NVR, OHB, TOL)

Copper surplus? (FCX - Annual Report)

If Microsoft revolutionizes business communications, Plantronics (PLT) will be there to help.

Dade Behring (DADE) is changing auditors.

Brazil’s Gerdau (GGB) bought Peru’s Siderperu.

Luxury soup (CPB).

Gold bugs think the Fed is too soft on inflation. (GG, GLG)

Lakeland Industries (LAKE) announced a largely pointless stock dividend.

Par Pharmaceuticals (PRX) to manufacture generic version of high blood pressure treatment Norvasc starting in late 2007.

UT Starcom (UTSI) filed its previously delayed reports.

Libbey (LBY) sets table for Mexican dinner.

Heineken starts up Indian JV.

Helix (HELX) closed the buyout of Remington Oil and Gas.

Stifel Nicolaus likes the beer stocks.

Recently-added watchlist member Valassis Communications (VCI) revised its earnings guidance negatively this morning. The company attributed this shortfall to continued softness in Free-standing Insert and Neighborhood Targeted page volumes. Both segments are also experiencing pricing pressure.

Targeted ads and inserts are both areas that could be suffering at the hands of on-line advertising outlets, as the new media version may simply be more effective at reaching targeted consumers than the old. Proponents of this theory could point to the pricing pressure and infer that some of it may be due to the new options available to advertisers. This secular story is well known, and the ongoing shift of marketing dollars from newspapers and television into the Internet is a major contributor to Google’s share price.

Of course, the other side of the argument is that ad-driven business models are all highly cyclical and consumer dependent. With the consumer up to its eyeballs in debt and the housing market slowing, consumer cyclicals may be due for a slowdown. In this case, which is supported by the softness in volume, all ad-driven business models could suffer - Google included.