value_edges - new market leaders report apr 04

8/8/2019 Value_Edges - New Market Leaders Report Apr 04

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Value Edge New Market Leaders Report

April, 2004

As a subscriber to Value Edge, were dedicated to giving you information and research on the mostpromising stocks Wall Street has to offer. Our goal is to uncover the companies positioned to lead the

next bull market and invest in them first getting in before the mutual funds and brokerage houses findthese stocks for themselves.

Weve termed this small group of stocks New Market Leaders. Finding them is the purpose for thisreport. Over the last few months, William and I have identified what we think are the hottest markettrends for 2004 and picked the smaller, unknown list of New Market Leaders that stand to benefitfrom each trend.

Before we begin, please understand that you may not have heard of these companies before. Since weretrying to pick the next big winners, we need to implore a bit of educated speculation when identifyingthese companies. Yes, theyre more risky then your standard blue-chip companies. But the potential

payoff in infinitely greater.

Below is our latest research. We hope you enjoy the report,

Sincerely,

Bryan BottarelliWilliam Bradley Colburn

New Market LeadersEach of our New Market Leader picks falls under the seven sectors below:

l Technology Defensel Computer Data Storagel High-End Computer Securityl Anti-Obesityl Space Explorationl Cryotechnology (Life Preservation)l Modern-Day Oil Exploration

In todays report, each sector is listed followed by each New Market Leader recommendation.

After weve profiled each set of stocks positioned to profit off these trends, youll also get threesupplemental picks based off incredibly strong levels of corporate insider buying.

But enough chit-chat. Lets get right into your newest Value Edge report!

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Trend #1: Technology Defense

Over the last month, high-end technology defense stocks have been on fire. And its easy to understandwhy.

With the military efforts in Iraq looking like theyll continue for months (if not years), theres been an

increased demand for the stocks providing any type of support, technology, or infrastructure to ourmilitary or defense systems. Since this is the hottest trend lately, well start by profiling our list oftechnology defense New Market Leaders.

The very best example of the explosiveness of defense stocks is Taser International (TASR NASDAQ). Im sure youve heard me talk about Taser before. I was one of the only stock gurus (ifthats even the right word) to recommend Taser 15 months ago in the Taipan newsletter when it was"just another microcap" trading for $4.04 a share in January 2003.

Today, the stock trades at a pre-split price of $299 a share. You're reading that correctly, $299 a share.Taser is up 6,410% since January 2003!

Truth be told, I sold shares for a 1,500% gain. But without a doubt, demand for Taser's stock isoutpacing the available supply. This supply/demand disequilibrium can soon be exhibited in many newdefense and security stocks. One of the first New Market Leasers Id like to discuss could wind upseeing pricing action similar to Taser.

The company is called Mace Security Int'l Inc (MACE NASDAQ).

On Monday, April 12 th MACE was one of the days top gainers. It shot up $3.60 to $8.00, a one-daygain of 122%. The next day, Mace continued to rally, getting as high as $14.00 a share before givingback some of the gains.

Mace has two business segments, car care and security products. Although the car care segmentgenerates most of MACEs revenue and profit, their security segment is what has me interested.




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MACE produces consumer safety and personal defense products for retail sale. Follow the link below,and youll see what these safe-security products look like:

http://www.macebrand.com/

Similar to Tasers non-lethal conducted energy devices, MACEs non-lethal personal security devicescould soon see the same type of exploding demand. Judging by the one-day movement on April 12 th,

perhaps the correlation between Taser and MACE has already begun.

Actionable Advice: If youre willing to speculate on shares of MACE, buy them at current levelsup to $12.00 a share.

Magal Security Systems (MAGS - NASDAQ)

Magal Security Systems develops, manufactures, markets and sells complex computerized security andvideo motion-detection systems that automatically detect and locate intruders and identify the nature ofintrusions.

Their two main products are called MagNet and DreamBox.

MagNet is a security management system that integrates the management, control and display of varioussecurity systems into a single, real-time database. These systems are used in more than 70 countries toprotect aircraft, national borders and sensitive facilities, including military bases, power plantinstallations, airports, postal facilities, prisons and industrial locations, from terrorism, theft and othersecurity threats.

DreamBox is a state-of-the-art embedded hardware and software product. It contains twelve differentapplications, including Digital Video and Audio Recording, Video & Audio Matrix Switcher, Outdoorand Indoor Video Motion Detection System (VMD), Security Management System (SMS) andTransmission system.

Cost-wise, the DreamBox is substantially lower in price than most other applications combined. Thispositions DreamBox as the ultimate security solution for all strategic facilities.


http://www.macebrand.com/http://www.value/http://www.value/http://www.macebrand.com/


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The companys target markets include what they call sensitive facilities such as governmentalinstitutions, airports, train stations, seaports, prisons, casinos, hospitals, and anything else that couldrequire high quality security applications.

Since Dreambox is based on a Linux Operating system, it cant be prone to computer viruses. It alsouses a distributed topology - which doesnt require any central server. This means no down-time due tocommon server crashes.

For the nine months ended 9/30/03, revenues increased 41% to $41.8 million. Net income rose 23% to$1.9 million. Earnings were partially offset by an increase in selling and marketing expenses.

Actionable Advice: Buy shares of Magal Security Systems (MAGS - NASDAQ) under $31.00 a share.

Identix Inc (IDNX - NASDAQ)

Please forgive me if I sound like a giddy teenage schoolgirl, but Identix Incorporated is really, reallycool.

They provide fingerprint and facial recognition technology for identification of individuals who wish togain access to information or facilities with built-in warnings against anyone who would pose a threatto public safety.

Right away, the potential market includes law enforcement, aviation, financial, healthcare and everymajor corporate enterprise.

Their two main products are the ABIS system and the TouchPrint 3000 Live Scan Series.

The ABIS system is the industrys first enterprise level facial recognition matching platform, designedto solve the problem of large-scale facial image database search.

This complete network of facial patterns allows government, law enforcement and commercial users thathave millions of facial records at their fingertips. Also, the ABIS system helps to reduce identity theftand associated losses due to the issuance of duplicate and fraudulent IDs. Since this system is automated




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into the mug shot process, theres an ever-updating watch list system built right into photo line-ups.

Their other segment is electronic fingerprint submission.

Identixcurrently owns the fastest way for law enforcement and government agencies, banks, schools andcourt houses to perform background checks via their live scan fingerprint device.

Their TouchPrint 3000 Live Scan Series offers certified live scan products that includes standaloneand rugged systems for booking environments. They also supply desktop, modular, and transportablesystems to suit a wide range of customers in the civil ID and applicant processing marketplace.

When it comes to a New Market Leader itdoesnt get any better than this technology.




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Actionable Advice: Buy Identix Inc (IDNX - NASDAQ) under $8.15 a share.

Viisage Technology Inc (VISG - NASDAQ)

Similar to Identix, Viisage Technology provides identity verification technology.

But their niche market is a little different than Identixs niche market. Viisages verification platformincludes driver's licenses, voter registration, national identification cards, law enforcement, socialservices, access control and personal computer (PC) network and Internet access security.

The big news is that Viisage was just selected for the U.S. Government's largest Smart Card program.

On April 2, 2004 the Department of Defense (DoD) selected Viisage to support the production of smartidentification cards as part of the agency's Common Access Card (CAC) program.

Although its early, the estimated total order from the DoD is expected to be in the range of $6 to $10million. The CAC program, which has more than four million users across the DoD, is the largest andmost advanced use of smart cards currently deployed by the U.S. government.




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For the fiscal year ended 12/31/03, revenues rose16% to $37.4 million. Net loss before acct.change fell 42% to $5.5 million.

Actionable Advice: Buy shares of Viisage Technology Inc (VISG - NASDAQ) under $13.00 a share.

Trend #2: High End Data Storage

This trend is a no-brainer. Computer users will soon be downloading and storing movies on theircomputers as quickly and easily as they store music.

Imagine the space you'd need to store 500 full-length movies on your current machine! Maxtor Corp(MXO - NYSE) is a hard drive company who offers the most storage of any other technology. TheirFireball, DiamondMax and MaXLine hard drives consist of storage capacities ranging from 20 to 300gigabytes per platter and speeds of 5,400 RPM (revolutions per minute) and 7,200 RPM. Their high-endhard disk drives provide storage capacities of 18.4 to 146.9 gigabytes at speeds of 10,000 RPM and15,000 RPM. (*note to non-computer geeks: thats the most storage on the market today)

Maxtor could see sales explode as downloadable movies hits critical mass. For the fiscal year ended12/27/03, net revenues rose 8% to $4.09 billion. Net income from continuing operations totaled $100.1

million vs. a loss of $260.6 million.




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Actionable Advice: Buy shares of Maxtor Corp (MXO - NYSE) under $8.00 a share.

Trend #3: High-End Computer Security

All year, weve been doing research on computer viruses. And our conclusion isn't a pretty one. Allsigns point to the year 2004 being the worst in history for computer viruses.

Studies on virus activity show that 90,000 different computer viruses spread through the Internet eachday. 500 new viruses are discovered each month. 1 in 5 computers is infected and most users don'tknow it.

TheNew York Times reports computer-security firm mi2g estimated that the worldwide cost of(computer virus) attacks in 2003, including clean-up and lost productivity, was $82 billion

Since 90% of computers today use Microsoft operating systems, this is an alarming statistic. In fact,Microsoft tried putting out a Wild-West bounty on virus writers offering a $250,000 reward for theheads of those responsible for unleashing the worms. But it didn't work. Virus writers dismissed thebounty as a marketing stunt, and they continue to write viruses at an alarming rate.

The BBC Newswire reports that Microsoft has admitted to critical security flaws in the latest versionsof its Windows operating system, (which) could leave computers vulnerable to hackers.

The flaw affects systems running Windows NT, Windows 2000, Windows XP or Windows Server 2003software.

According to Marc Maiffret of US company eEye Digital Security This is one of the most seriousMicrosoft vulnerabilities ever released ... The breadth of systems affected is probably the largest ever

Experts warned that if users do not download the fix, hackers could break into computers and take files,delete or steal valuable data, or snoop on what that user is doing. I'm forecasting an explosion incomputer security technology, and we'll be listing the smaller, unknown companies that'll benefit off thisalarming trend.




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One company that stands to benefit is Watchguard Technologies (WGRD - NASDAQ).

WatchGuard offers integrated, multi-layered defenses and tools that protect against known and futurethreats by including simplified implementation, management, and proactive security with theWatchGuard's LiveSecurity Service.

With the risk that threats and attacks will compromise multiple points in a corporate network, the

requirements of a security solution have expanded beyond the core requirement of firewalls for accesscontrol and virtual private networks (VPNs) for secure communications.

As the number of computer viruses continues to rapidly increase each day, the smaller, more speculativeonline security companies should get a big lift. Watchguard is a great way to play this emerging trend.

For the fiscal year ended 12/31/03, revenues rose 6% to $80.2 million. Net loss decreased 49% to $16.1million.

Actionable Advice: Buy shares of Watchguard Technologies (WGRD - NASDAQ) under $8.00 a share.

RSA Security (RSAS - NASDAQ) is another speculative online security play. Their primary securitysegment is called the e-Security Solutions segment. This e-Security segment sells enterprise anddeveloper solutions through four product lines: RSA SecurID authentication, RSA Keon digitalcertificates and smart card solutions, RSA BSAFE developer tools and RSA ClearTrust Web accessmanagement software. All of these represent huge emerging markets in todays world of acceleratedsecurity.




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For the fiscal year ended 12/03, revenues rose 12% to $259.9 million.

Actionable Advice: Buy shares of RSA Security (RSAS NASDAQ) under $19.00 a share.

Trend #4: Anti-Obesity

It's no secret that 127 million Americans are overweight. Even worse, 60 million of them are obese.Although there's many ways to play this, we've isolated one cheaper company that could soon become amajor player in the treatment of obesity.

That company is Arena Pharmaceutical Inc (ARNA - NASDAQ). Arena is a biopharmaceutical

company focused principally on discovering and developing drugs that target G protein-coupledreceptors (GPCRs).

GPCRs are an important part of the pharmaceutical and biotechnology industries' drug discovery anddevelopment efforts, and are established targets for therapeutics. Although Arenas drug developmentefforts are focused in four main therapeutic areas (metabolic diseases, cardiovascular diseases, centralnervous system disorders and inflammatory diseases), were more interested in their new anti-obesityclinical tests.

On February 24th, Arena announced that theyve initiated a Phase 1 clinical trial in the United Kingdomfor APD356, its lead anti-obesity compound. This double-blind, placebo-controlled, single-dose, dose-escalation trial is planned to enroll 54 healthy, overweight volunteers. The study will evaluate the safety,tolerability and pharmacokinetic profile of APD356.

If this test shows promise, we feel shares of Arena will quickly increase in value. After all, the potentialobesity market is $50 billion a year more lucrative than two of todays most prescribed drug markets,anti-depressants and impotence COMBINED.

**Since this is the most speculative pick in this entire report, please expect an increased level ofvolatility. If youre not willing to accept this risk, avoid this play.




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Actionable Advice: Buy shares of Arena Pharmaceuticals (ARNA - NASDAQ) under $6.50 a share.

Trend #5: Space Exploration

Now that scientists are convinced there was once water on Mars, we feel high-tech space companiescould see a huge demand for their products. It's no secret President Bush wants to initiate a program that

lands a man on Mars. If the funding comes in (as we expect it will), these companies will see hugeumps in sales.

Space exploration is slowly becoming the next Wild West for the United States. Before the calendarticked over to 2004, the only notable thing wed done was walk on the Moon. And throw a few satellitesup into the great beyond.

That all changed when we landed on Mars. Once the first Rover made a successful journey across Marslandscape, the scope of space exploration kicked into high gear.

Heck, Bush wants to build a space station on Mars. Thats why weve picked Spacehab Inc. (SPAB-

NASDAQ) as one of todays New Market Leaders.

I admit, all the space exploration we do from here on out is speculative. ButSpacehab is a company atthe forefront of charting the new Wild West.

Spacehab commercially develops, owns and operates pressurized space habitat modules. SPABs habitatmodules and un-pressurized cargo carriers provide space-based research facilities and cargo services foruse aboard the United States Space Shuttle system. A Spacehab Single Module, when installed in thepayload bay of the Space Shuttle, more than doubles the space available to astronauts for research,habitation and storage.

SPAB offers its modules in single and double versions, outfitted for research, logistics or a combinationresearch and logistics depending on customer needs. SPAB also offers an unpressurized cargo carriersystem, the Integrated Cargo Carrier (ICC).




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I wont leave you guessing here. Ill give you a relevant, but sad, example

I dont think well ever forget last years Columbia space shuttle tragedy. I still remember watching theChallengertragedy back in elementary school. Well, SPABs Research Double Module (RDM) was onthe Columbia.

SPAB actually filed a claim earlier this year to get NASA to repay them the $87.7 million in equipment

they lost when the shuttle dismantled. The latest word from NASA is that theyll be contacting SPAB onJune 24 concerning the matter.

Until that time, lets take a look at what the Research Double Module is all about

RDM

Basically, the RDM is a laboratory that fits into a shuttles cargo bay. Enhanced life-support systems,including temperature and moisture control, plus a four-person environmental payload capability makethe RDM ideally suited for a broad spectrum of microgravity research. Increased power supply, with ACand DC current supplied to all experiment locations, further extends the capability of the RDM. Andhigh-data rate communications increase the monitoring, command and control functions available toRDM customers.

SPAB has a whole assortment of other products and services. Heres a list:

l Astrotech transportation support, communications assistance, sampling, protective space suits,emergency medical assistance

l SGS (Spacehab Government Services) engineering/training

l Space Media STARS Program and Academy, The Space Store (the largest online space related

retail site in the world)

But since the RDM was lost in the Columbia tragedy, SPAB has been quiet. Well, except for an earningsrelease.

Q4 revenue increased approximately 17% to $32.8 million as compared to $28.1 million for the threemonths ended December 31, 2003 and 2002, respectively The increase in revenue at the Astrotechbusiness segment of approximately $15.0 million is due primarily to the termination payment by Boeingof $17.5 million partially offset by fewer payload processing missions in progress in the period endedDecember 31, 2003; one mission, as compared to four missions in the same period last year and reducedpayments under its long-term contracts due to the Boeing termination.

Net income for the three months ended December 31, 2003 was approximately $3.5 million or $0.28 pershare basic and $0.25 per share diluted on 12,401,291 and 13,897,126 shares, respectively, as comparedto net income of approximately $1.2 million or $.10 per share basic and $0.9 per share diluted on12,234,266 and 13,606,199 shares, respectively, for the three months ended December 31, 2002.

In looking at SPABs mission schedule, they dont appear to have too many missions on tap. I believeonce the broader market gets past geopolitical strife, new opportunities for space exploration will openup.




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As I said before, space exploration is set to explode here real soon. Research crews on missions willneed a place to work, and SPAB will be there. As I write, SPAB is trading for $3.89.

Actionable Advice: Buy Spacehab Inc. (SPAB-NASDAQ) under $4.00 a share.

Trend #6: Cryotechnology (Life Preservation)

Founded in 1984, CryoLife, Inc. (CRY-NYSE) was the first biomedical company to commerciallydevelop low temperature preservation of human tissues for implant. With the founding of CryoLife,preserved human tissue became available for cardiac, vascular and orthopaedic surgical reconstruction.

A little more detail may be required

Cardiac Tissue

CRYs cardiac tissue program has one main goal: provide cryopreserved heart valves. Today, there aremore than 1,000 surgeons, at over 250 medical centers in the United States that routinely transplantCryoLife preserved human heart valves. At this point, CRYs heart valves have a 10-year 91% success

rate.

Vascular Tissue

The main focus here is preserved human saphenous veins. Basically, the veins used in cardiovascularreconstruction and other operations.

Cryopreserved vascular tissue is also being used to treat abdominal aortic aneurisms. CRY has aorticgrafts that are used to strengthen the aortic wall. If aortic aneurisms are untreated, the aortic wall willswell up and eventually explode.

Orthopaedic Tissue

In an effort to provide better results in meniscus surgeries, CryoLife scientists initiated a program forpreservation of human meniscus tissue, providing orthopaedic surgeons with the tissue necessary tocompletely restore the knee to normal function.

Athletes suffering from meniscus damage that would have been career ending are now able to have theirknee restored and resume their normal sports activity. Orthopaedic surgeons have implanted more than3,000 CRY-preserved menisci.

Still working with the knee, CRY deals with patellar tendons. If someone snaps an ACL like yours

truly did a few years back surgery is usually required. In ACL reconstruction, doctors use part of thepatellar tendon to restore strength to the knee.

Rather than cut away part of already healthy tissue, CRY preserves and ships patellar tendons.

If you think cryopreserved tissue is a niche market and is only pulling in minimal money for CRY,youre wrong.

CRY has some decent financial backing at the moment. Q4 and full year 2003 results were excellent.




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Revenues for the fourth quarter 2003 were $12.8 million, compared to $12.2 million for the fourth

quarter of 2002. Net loss in the fourth quarter of 2003 was $7.2 million, compared to $5.7 million for thesame period in 2002. On a fully diluted basis, loss per common share in the fourth quarter was $0.37,compared to $0.29 for the fourth quarter of 2002.

Revenues for the year ended December 31, 2003 were $59.5 million, compared to $77.8 million in 2002.Net loss for full year 2003 was $32.3 million, compared to a net loss of $27.8 million for full year 2002.On a fully diluted basis, loss per common share was $1.64 for full year 2003, compared to $1.43 for fullyear 2002.

BioGlue

BioGlue is CRYs answer to stitches and staples. Its a two-component surgical adhesive composed ofpurified bovine serum albumin (BSA) and glutaraldehyde. The glutaraldehyde molecules bond the BSAmolecules to each other and, upon application, to the tissue proteins at the repair site, creating a flexiblemechanical seal independently of the bodys clotting mechanism.

Within 30 seconds, your wound is sealed tighter than a mob informants lips.

Worldwide Q4 BioGlue sales increased 39% to $7.8 million, compared to $5.6 million in the fourthquarter of 2002. BioGlue revenues increased 33% to $27.8 million for the full year 2003, compared to$20.9 million for the same period in 2002. BioGlue revenues are expected to increase to $32 to $34million in 2004. BioGlue revenues for the first quarter of 2004 are expected to be between $7.8 and $8.0

million.

So, thats fine. Theyve done all that in the past, but what makes CRY a New Market Leader? Here aretheir thoughts straight from their website:

In the new millennium, living implantable biological devices, once the subject of science fictionnovels, will suddenly become science fact. The development of implantable devices that grow as ahuman recipient matures and that recellularize and rejuvenate themselves will become the norm.Implantable biological pacemakers will replace the present day pacemakers that are powered by




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batteries and programmed by microchips. Xenograft organs will be reprogrammed, through cell nucleusmanipulation, so that they manifest human characteristics and, therefore, will not be rejected by thehuman body after being transplanted. Modified xenograft tissues will form the basis of living implantssuch as heart valves and connective tissues that remodel themselves from the cells of the transplantrecipient and turn into the patient's own tissue structure in vivo

All of these technologies fall under the umbrella of a new scientific frontier that has been defined as

"tissue engineering." As we enter the new millennium, major U.S. universities are in the process ofdeveloping stand-alone departments and facilities to advance these new ideas and discoveries. Theinvestments in tissue-engineering technology, already made by universities in faculty and brick andmortar are in the hundreds of millions of dollars.

The US government is also supporting the development of these new biologically based implantableproducts with research grants of tens of millions of dollars. In the past several years, scores of start-upcompanies have been financed through venture groups seeking to commercially exploit many of thesenew ideas and concepts.

At last check, CRY was trading at $6.17. For their bright future and financial strength, $6.17 is an

absolute steal of a price.

Actionable Advice: Buy CryoLife, Inc. (CRY-NYSE) under $6.00 a share.

Trend #7: Oil Exploration

They call oil exploration The Greed Game.

The process that launched a TV show and killed Larry Hagmans J.R. Ewing is starting to boom again.New oil drilling/exploration companies are popping up left and right.

And theyre finding new ways to locate oil. The process has gone from a hillbilly shootin at somefood to using seismic technology to locate precious reservoirs of black gold. Thats exactly whatInput/Output (IO-NYSE) does.

Input/Output, Inc. is the major independent provider of seismic imaging technology and equipment forland, marine, and seabed applications. In addition, through its GMG/AXIS group, I/O offers specialtyseismic processing services, including anisotropic imaging, that allow oil companies to more accuratelyimage subsurface features in petroleum reservoirs.

The company's technologies are applied in traditional 2D and 3D surveys along with rapidly growingareas like time-lapse 4D reservoir monitoring and full-wave, multicomponent data acquisition.

As you could guess, I/O is headquartered in Texas and has a history dating back to 1968. By 1991, IOhad constructed both the System 1 and System 2 seismic imaging devices. Now, before I get into this, Ihave to tell you about the buying rampage I/O went on in the 90s.

During the entire span of the 90s IO opened up their checkbook and bought 6 companies. Heres thelist:

l Green Mountain Geophysics Inc.




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l AXIS Geophysicsl Tescorp Inc.l DigicOURSE Inc.l Western Geophysicals Exploration Products groupl Pelton Company Inc.

With all that technological power gained through the years, you could almost consider I/O to have been

a New Market Leader from the beginning.

I could honestly spend a separate report explaining the intricacies of I/O. That reportwould be full of pie charts, bar graphs, and some very odd-looking diagrams.

But its best to save all that for the companies who need I/Os technology, not people who want to investin this new market leader.

So, heres the digs on Vectorseis. Its pretty much the best representation of what I/O can do.

VectorSeis is an all-digital sensor capable of recording full-wavefield seismic digitally and with thehighest vector fidelity of any sensor in the marketplace, thus improving the quality of the final image forthe oil company geoscientist. At the same time, VectorSeis built-in, tilt-sensing capability dramaticallyimproves the operational efficiency of seismic contractors during the sensor deployment operation.

The best thing about VectorSeis? Well, besides being accurate in worldwide tests and having the ability

to pinpoint exactly where a hidden reserve is located?

VectorSeis placement doesnt have to be accurate. Where most digital sensors have to be placed inexactly the right spot, VectorSeis is fully functional if its off the mark a bit. Lets call that the Joe Oilmargin for error.

Now, we already know how I/O works, but how do they make their money? Its a sweet package dealwhen you boil it down

When a company wants to drill an area for oil or gas, theyll get in contact with I/O through a contractor.




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I/Os technology is just sitting there like a freshly-picked, juicy apple.

The drilling company can then acquire one of I/Os various technologies. Or they can - or may have to get a complete system.

A complete system could cost the drilling company between $4 and $10 million. And thats fine by I/O.If they get any new clients this year, that money will just add on to what they managed to rake in during

2003.

Net sales for the year ended Dec. 31 increased $31.5 million, or 27%, compared to the correspondingperiod last year. Land Imaging's net sales increased $45.5 million, or 72%, to $108.5 million comparedto $63.0 million in the corresponding period of last year. The lift was due to an increase in land seismicactivity with non-Western contractors, primarily in China and the CIS.

Marine Imaging's net sales decreased $17.7 million, or 33%, to $35.7 million compared to $53.4 millionin the corresponding period last year. The decrease was due to continued overcapacity and reduction incapital spending in the marine contractor market. In 2003, I/O formed a new reporting segment calledProcessing. Processing's net sales for the twelve months ended December 31, 2003 were $5.8 million

compared to $2.2 million recorded from the date of acquisition in July 2002 to the end of 2002.

Gross profit of $27.8 million for the year ended December 31, 2003 increased $10.3 million, or 59%,compared to the corresponding period last year. Gross profit percentage for the year ended December31, 2003 was 19% compared to 15% for the year ended December 31, 2002. The improvement in grossprofit was driven mainly by volume improvements as well as sales of VectorSeis System Four landacquisition system which was commercialized in early 2003.

Gross profit percentage for the year ended December 31, 2003 was negatively impacted in part due to acharge of $2.5 million related to the write-down of rental equipment associated with first generationradio-based VectorSeis land acquisition systems to its net realizable value, and inventory-related charges

of $1.0 million. Inventory related charges for the year ended December 31, 2002 were $4.3 million.

Heres an interesting fact: 77% of I/Os total sales for 2003 came from overseas. Dont be surprised atthat large number. I/O is seemingly spread out to the four corners of the Earth.

I/O has offices in the following:

l Canadal Russial Europel Chinal Africal Latin Americal Indial Middle Eastl Pacific Rim

If youre a seasoned trader, youd expect a stock like I/O to trade at ghastly levels. Maybe $25-$40.Think again, my friend. I/O trades at $8.65 a share. As a matter of fact, just a few days ago, I/O made abrand new 52-week high of $8.75. This stock has legs.




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Oh, and theres one more thingI/O is undervalued.

When investors look for stocks, sometimes theyll try to hunt out ones with a low PEG ratio. If youre avalue Edge member, then PEG ratios are old hat to you. This is purely for the newbie who may have justpicked up this report

PEG is an acronym for P/E to earnings growth. Its a ratio that measures whether a company is fully

valued, overvalued, or undervalued based on its own earnings growth. To get the ratio, you divide theP/E by earnings growth.

I personally look for stocks that trade at a PEG below 1. If a stock has a PEG ratio above 1, it means thestock is overvalued and may be due for a drop. You dont want to be left holding the bag on these typesof stocks.

A PEG ratio below 1 means a stock is undervalued and is in prime position for a rise. I/O is in that boat.Its PEG ratio is 0.87. Undervalued and then some. Buying I/O at current levels of $8.65 is like robbing akids lemonade stand.

Actionable Advice: Buy Input/Output (IO-NYSE) under $9.00 a share

Three Supplemental Picks:

Insiders are Buying These 3 Stocks with Both Hands

While we were doing our due-diligence, we came across three companies wed like to feature as bonuspicks in this special report.

No, theyre not considered New Market Leaders. Theres a different reason why were recommendingthese 3 companies. During the recent market sell-off between late January and late March, I noticed that

the CEO's and insiders of these three companies were buying shares in their own stock all the waydown.

l The first stock, Fastenal (FAST - NASDAQ) saw three insiders (their Chief Executive Officer,Chief Financial Officer, and Executive Vice President) all buy a block share on the same day.




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FAST sells 448,000 different types of industrial and construction supplies in 10 product categories,

including threaded fasteners, tools, metal cutting blades, fluid transfer components for hydraulic andpneumatic power, material handling and storage products, janitorial and paper products, electricalsupplies, welding supplies, safety supplies and raw materials (metals).

Actionable Advice: Buy Fastenal (FAST - NASDAQ) under $56.00 a share.

l The second stock, Vitesse Semiconductor Corp (VTSS), trades at just $7.05 a share.Nevertheless, it has seen a total of 37 different insider buys versus just 3 insider sells since August30th, 2002. The President, Vice President, Chief Financial Officer are buying shares with bothhands, and aren't afraid to reveal to Wall Street that they think their stock's going much, muchhigher.

Vitesse Semiconductor Corporation is a designer and manufacturer of silicon solutions and opticaldevices used in the networking, communications and storage industries worldwide.




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Actionable Advice: Buy shares of Vitesse Semiconductor Corp (VTSS) under $7.00 a share.

l The third stockPrudential Financial (PRU NYSE) is up an even 50% since May 2003. Itsseen a total of 5 insider buys and 0 insider sells since April of 2002.

Prudential Financial, Inc. is a financial services institution. Through its subsidiaries and affiliates, theCompany provides a range of insurance, investment management, securities and other financial productsand services to individual and institutional customers in the United States and over 30 other countries.

Actionable Advice: Buy shares of Prudential Financial (PRU NYSE) under $45.00 a share.

*Editors Note: As we said earlier, most of these New Market Leader stocks dont fit into a system.

Other than Input/Output (IO-NYSE), the Forward Earnings Forecaster didnt find them. These stocksrepresent what we think are the freshest innovations for the future.

Weve also elected to eliminate our Global Position Systems technology stocks simply because therewas too much competition in the sector to identify a run-away winner. Although this technology willsoon be as standard as power windows in ever car and truck in America, the one stock positioned to leadthe way has yet to surface. Should this situation change, well let you know.

For future updates, stay tuned for Value Edge Hotlines, Value Edge Investment Briefings, and monthlyValue Edge newsletter.


value_edges - new market leaders report apr 04

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