7/25/2011

Creating Alpha by Using Multiple Value Selection Techniques

Changing economics, market conditions and time may impact the usefulness of specific and prior successful alpha seeking methods. Maybe the approach has been exploited and the inefficiency no longer exists to the same degree. So having said that I believe it's important to have new, modified and multiple approaches to seeking  alpha. For example a low P/E or P/B may work at times but highly leveraged  companies  paying down debt with consistent FCF may significantly outperform as we saw with radio or media stocks after the 2008 bottom. Some approaches may be highly correlated  hence impacting the diversification of the portfolio. The point is the benefits of diversifying and developing your stock selection technique is critical just like holding a diversified group of individual stocks. So seeking continuous improvements by creating, modifying and using different stock selection methods may safeguard , improve your investing skills and hopefully maximize your portfolio's return.

Organizing and Data Mining Stocks Posting Significant Negative 3 Month Returns
Over Sold Value or Just Trying to Catch a Falling Knife??
Tonight I was organizing and data mining stocks posting significant negative 3 Month Returns that have seen selling pressure decelerated based on last week's performance.
The initial + 5,000 company data set was cleaned and modeled for stocks with a prior 3 month return less than negative ~20% but selling pressure abated based on the last week performance. The markets strong 2 year run has created a mindset of sell quickly at the slightest hint of negative news creating in some cases an oversold opportunity.
Several worthy but currently very troubled ideas are being looked into.


I started  with  potential stocks  that met the criteria above along with further analysis. Unfortunately I spent too much effort on AMSC only to find the risk is significant. So I will give you some ideas i began analyzing including AMSC.
ISNS: Image Sensing Systems Inc
Down -18.60% for the prior 3 months and down over 1.62% over the past week, 48% off the 5 year high.
Current Price = 10.33
Reasons to look further:
Profitable but with declining margins: double digit top line growth for 2010 and the TTM. solid balance sheet evident by a current ratio of 6.56,quick ratio of 4.57,value based institutional ownership, book value 9.43, YOY quarterly revenue increase = 13.70%, Market Cap = 50.43, EV = 42.55,
From Google:
"Image Sensing Systems, Inc. develops and markets video and radar image processing products for use in traffic applications, such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. The Company provides software-based, computer-enabled detection (CED) products and solutions for the intelligent transportation systems (ITS) industry. Its family of products is marketed as Autoscope and RTMS. The Company’s technology analyzes signals from sensors and transmits the information to management systems and controllers or directly to users. In June 2010, the Company acquired CitySync Limited."
MSN: Emerson Radio Corp
Reasons to look further:
current price = 1.82
outstanding ROIC =  31.42% TTM, 21.30% 2010, improved efficiency based on cash conversion, strong balance sheet and capital structure (stable share count and reduction of debt);Market Cap  49.37M; Enterprise Value  13.74M;note YOY qrtly revenue change = -20.20% but  still profitable
SPIR: Spire Corporation
3 monnth return = -49, 1 week return - 2.45% and off 52 week92%
Current price = 1.99
Resons to consider:
Market Cap =  16.72M
Enterprise  = 12.30M
Revenue (ttm): 79.42M
Qtrly Revenue Growth (YOY): -2.20%
attracting value investors lilke Royce

SRT: SRT: StarTek Inc
Industry = staffing and outsourcing
"StarTek provides various integrated outsourced services. The company's services include product order teleservices, supply-chain management, product assembly and packaging, product distribution, and technical support teleservices. Its clients are generally in the computer software, computer hardware, electronics, telecommunications, and other technology-related industries. The company also owns and operates Internet sites, such as airlines.com and wedding.com, through its Domain.com subsidiary."
Current price = 3.62
Price performance: 5 year range = 2.05-15.46: 52 Week Range= 3.30-6.00: 3 month performance = - 27.09%. 1 week return = 6.71%
YOY Quarterly revenue change = -11.70%
Market Cap = 54.95 mil
EV = 34.57 mil
Book Value = 6.59
Cash per Share= 1.36
AR per Share = 2.83
Total Liabilities per share = 1.86
SGA  as % of revenue = 16.34%
Gross Profit (ttm): 27.70M
EBITDA (ttm): 3.69M       
AMSC: American Superconductor Corporation
The current price (7/22/11) is 7.75 or 79.63% off the on 52 week high of 38.88. 26 week stock price change was -71.0%.
note: the analysis may need to be updated as they had a material revenue restatement. But you may want to keep an eye on the stock as this may be in the current -71% 26 week stock return. The revenue recognition issue was notified to the public on 06/01/11; On 07/11/11 "quarterly reports on Form 10-Q for Q2 and Q3 of FY 11 should no longer be relied upon. Co. expects that revenues for Q3 and Q4 FY 11 will be reduced to about $98M and $43M, respectively." Please consider these events as my numbers below are based on published financial results.
Positive Attributes:
ROIC: trailing twelve months = 10.45
Revenue : Average YOY % revenue increase TTM = 41.58%: 2010 = 72.88%: 2009 = 62.60%: 2008 = 115.39%
3 year sales growth 82.3%
Gross Margins%: TTM = 39.90%,2010 = 36.40%,2009 = 28.40%: 2008 = 28.50%
Price/Book = .80
Brokerage view of the stock is negative and has weighed heavily on the stock price.
Strong Balance Sheet: Cash per share = 4.79: Total Liabilities per share = 2.77, no long term debt
Net strong positive insider buying for 2011
Hundreds of patents
reduction of large short position

Negative attributes:
07/11/11 AMSC was forced to notify the public "quarterly reports on Form 10-Q for Q2 and Q3 of FY 11 should no longer be relied upon. Co. expects that revenues for Q3 and Q4 FY 11 will be reduced to about $98M and $43M, respectively."
06.01/11: revenues associated with shipments to customers in China during Q2, Q3, Q4. Expects to reverse the recognition of a material amount of revenue that it had included when estimating revenues of "less than $355 million" for FY 11 in its 4/5/11 press release
FCF has been erratic; going back to 2008 to TTM the cumulative FCF was -24,231,000: CFFO 109,647,000 and capital expenditures of  -133,878,000 to give them FCF of -24,231,000.But the cumulative FCF from to 2009 to the TTM was 3,454,000 :CFFO 12,74,70,000 less CE of -124016000 for 3,454,000.
Bottom Line:  balance sheet is too strong with opportunities to move off the 80% drop in stock  price. But the restatement negative FCF, growing share count makes the stock risky but the share price and strong balance sheet make the idea worth a look.


 

4 comments:

Anonymous said...
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ShadowStock said...

Accidently deleted

Anonymous has left a new comment on your post "Creating Alpha by Using Multiple Value Selection T...":

I'm a beginner in value investing and I'm currently in my 3rd year of college as a biochemistry major but was thinking about dropping it to switch into Accounting and Finance. Will that help me to become a Financial Analyst? Also PLEASE never stop all these analysis, cause this blog is like a hidden gem. It can give me the edge while learning these complex things. Could you also do an article with a rough basic rubric of the terms and their relations to each other so when reading an article like this one, I can actually have a foundation? Thanks and very much appreciate

ShadowStock said...

Hello Anonymous

Please DONT drop out of biochemistry! You're in your third year. Unless you will fail out struggle to finish if possible.
One of the great value investor is Dr Michael Burry. You should watch on why he left neurology from Stanford. He is in the book the big short by Michael Lewis.

http://www.bloomberg.com/video/72756316/

The rigor of a biochemistry major is an advantage and separates you from the crowd. You can take one or two accounting classes and one or two finance classes but you can also learn this on your on time. I was brain washed in college with efficient markets and it took years for me to embrace the obvious inefficiencies in the market. I made up for lost time. But I rather hire a biochemistry major than a finance major assuming all other factors are the same. The biochemistry major tells the world I'm disciplined and have the tenacity to get through rigors of chemistry.

You can learn investing from reading books, blogs, WSJ, Barronsfar better than in a college class.

Good luck
John

Anonymous said...

Hey John, alright I'm taking your advice heavely. Here's the problem, I'm my program is Pre-Pharmacy so you're saying to just stick with my major and eventually become a Pharmacist and just teach finance/economics to myself. I just feel like whenever I read anything economical I feel like a complete idiot andd can't comprehend everything and I was thinking school would help me. Should I not become a financial analyst? Also can you do a 10pg article on actual real-life options investing, like a video of you doing it and why you made certain moves the way you did.