Mid Cap Watch List (Track at Marketocracy) member Shuffle Master, Inc. (SHFL) announced its results from continuing operations for the second quarter and six months ended April 30, 2007. Revenue, adjusted EBITDA and GAAP earnings per share from continuing operations totaled $44.6 million, $13.7 million and $0.10, respectively.

The Wall Street consensus expectation was for $0.13 on $43 million in sales. Obviously with sales above expectations but earnings below, there was a margin problem:

A decrease in gross margins and operating margins compared to last year. The decrease in gross margins was primarily due to product sales mix, namely the contribution from lower margin sales of Stargames slot product and to a lesser extent, electronic table game sales. Operating margins were lower primarily due to increased R&D at Stargames and to a lesser extent, an increase in overall SG&A to support current growth initiatives.

Last year the company took a large writeoff for acquired in-process research and development when it acquired Stargames. These writeoffs are supposed to represent money paid for the acquired company’s research and development projects that don’t have a predictable outcome. Since this type of expense is not expected to occur often, its amount is listed separately on the income statement and the acquiring company generally asks investors to ignore it. However, an investor might want to consider what it would have cost the company to develop the products itself rather than buy them in process, and assign those costs to future years for comparative purposes.

Apparently, in this case not only did the written-off projects fail to materialize, but even more was spent on unproductive research.

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:

Today our Watch List names sent a message: nobody is willing to take a gamble.

Shuffle Master (SHFL) was among the day’s top losers, as the company lowered its EPS guidance for the year. Shuffle Master sells chip sorting and card-shuffling machines to casinos, which apparently need to shuffle things less than they were expected to.

Also unwilling to take a gamble are banks. Perhaps concerned over the increasing consumer debt burden they may be taking a more cautious approach to lending. At any rate, credit reporting agency Equifax (EFX) raised its guidance, and the shares were among the big winners today.

With this lack of appetite for risk, companies are rightly concerned about share price. There, too, some are taking no chances. Since a big buyer is needed to get shares moving up, Metal Management (MTLM) found one - itself. That turned out to be a sure bet.