This column is for investors willing to take more risk and potentially receive more reward.  The stocks mentioned in this column are not recommended to buy or sell.  They're brought to your attention so you can investigate them further to determine if they fit your risk profile.  Most of the stocks will have less than $1 billion of market capitalization, have more volatility than other stocks, and oftentimes no earnings.  And some will have tremendous stories.

June 10, 2008 - Photon Dynamics (PHTN-NASDAQ) helps flat-panel display makers keep their photons in line. The company makes flat-panel display (FPD) test, inspection, and repair equipment, including array test systems that detect electrical contamination and flat-panel inspection systems that identify optical defects. The company's top customers include AU Optronics, LG Display (formerly LG.Philips LCD), HannStar Display, Innolux Display, Samsung Electronics, and Sharp. Nearly all of Photon Dynamics' sales comes from FPD makers in Asia, primarily those located in Japan, South Korea, and Taiwan.

The main structure for the roller coaster: earnings. Start in 2000 with $1.26. Follow that with a negative 28 cents, then a negative 34 cents. In 2003, it goes to a negative 95 cents (notice the trend here). In 2004, jump up to a positive 65 cents, then crater to a negative $1.05. In 2006, go positive again with 26 cents. Last year, take earnings down to a new low of negative $2.09. Get the picture: earnings are what they call on Wall Street highly unpredictable. This year, analysts look for 45 cents in the black and $1.00 next year, again to the positive side.

These earnings tell you the company operates in a very cyclical industry, boom and/or bust. When things boom, it's great. When they don't, it's not. Right now, it looks like the boom is on. The March quarter showed bookings were at an all-time record high of $80 million, shippable backlog went to $125 million (total sales las year were $74.3 million...this year look for $150 million and next year $175 million). Overall sales tripled on a year over year basis in the first quarter.

One way of smoothing out some of the earnings problem is to shift costs to a variable model which would drive more operational efficiencies. Just to that purpose, the company signed a supply agreement with C. Sun Manufacturing which should make for better margins and more flexibility.

Another strategy: diversify revenues. Photon bought Salvador Imaging which should add more stability to sales. It focuses on low light camera technology used in survelliance, and homeland and border security. It's a small part of total revenues but should grow to a meaningful level.

Some numbers: (Most of these are for this year since there was a large loss last year.) Return on Equity should be 5.5% this year and 11.5% next year. Net profit margin this year: 5.3%, next year, 10%. There's no dividend. There's also no debt. Market Cap is $225 million on 17.754 million shares.

Tread carefully in these waters. While the stock is off its recent low of $7.80 (earlier this year), it doesn't take much to change direction, especially if earnings come up short in any way. Investors have been burned many times on this stock and will quickly bail at the first sign of disappointment. But then all the stocks in this column are only for aggressive investors.

- Company Web site: www.photondynamics.com

- Ted Allrich