APEX
Doug, APEX's earnings report came in slightly above expectations yesterday. How's the TA looking?
An interesting look at APEX's ratios from Micro Cap 100:
sites.stockpoint.com
Did you see Dale Baker's write-up on APEX at Tiger Investors? Nice job on how to DD a stock.
tigerinvestor.com
June 13th, 1999 - Sunday
Dale Baker : What You Know
50% Gains Investing
Let's go back to last week's scenario where your good buddy Jim just gave you a hot stock pick.
Jim's pick is APEX PC Solutions (APEX). He likes APEX because he heard that hotshot mutual fund manager Van Waggoner likes it. After a dismal 1996 – 1997, Van Waggoner's funds are among the top performers in 1999.
You don't say so, but Jim isn't the best stockpicker in the universe. You need to do some due diligence on your own.
Where do you start? I always go to the Yahoo quote service (http://quote.yahoo.com) first. Lots of sites have similar info, but I keep my portfolios on Yahoo and I like all the info they have right at hand for the online investor. Another great free site is StockSheet (http://www.stocksheet.com) but Yahoo's charts and links are better.
Just go to Yahoo, type in APEX and get the Detailed view. This gives you a one-year thumbnail chart, the market cap, daily and 52-week price history and the trailing 12-month PE. APEX looks pretty ordinary in this view. Time to dig deeper.
Hit the "Profile" tab and a wealth of information appears. First of all, you find out what APEX does and whether they make any money:
Business Summary
APEX designs, manufactures and markets stand-alone switching systems and integrated server cabinet solutions for the client/server computing market. Apex's systems enable network administrators to manage multiple servers from a console. For the three months ended 4/2/99, sales rose 32% to $20.7 million. Net income rose 19% to $4 million. Results reflect increased demand for private-label products, partially offset by increased project spending and payroll.
If I don't see decent revenue growth, I will stop right here and move on. The market doesn't reward companies that don't grow. But APEX is growing at a nice rate.
Next I look at the total shares outstanding and the float. That tells me that insiders and institutions still own more than 40% of APEX – a good sign since they have a significant stake in how APEX's share price performs. Current short interest (on the right) is 647,000 shares in a float of 11 million. That's not enough to cause a short squeeze, but not many people think APEX is worth shorting at these levels either. The float is small enough for a significant upward move with good news.
Time to look at the cash situation. APEX has positive After-Tax Income ($16 million on $80 million sales) and $59 million Total Cash on hand, a tidy sum for a small cap tech company. Equally important, there is no long-term debt and the Current Ratio is 16. This is a sparkling clean balance sheet. No hidden time bombs like discount convertible financing deals which could dilute the common shares.
If a company is losing money and doesn't have much cash on hand, dig into the SEC filings to see if they have sold discount convertible shares to private investors. Look carefully at any filing marked S-3 at freeedgar.com or sec.gov. Since most small caps don't have the leverage to sell bonds, they sell more shares to stay alive.
APEX's Valuation Ratios have more good news. The Price to Book number isn't very important for tech stocks but it's nice to see APEX with a P/B under 5. The fact that most of APEX's book value is cash tells you that they don't have a lot of inventory, accounts receivable or "goodwill" from acquisitions cluttering up their books. The Price to Sales ratio is also under 5. Trailing Price to Earnings (PE) is only 22. The average PE for an S&P 500 stock is well over 30.
Does management know how to make money? You betcha. The net Profit Margin is 20%, a great number. Return on Assets and Return on Equity are 23.81% and 25.24%. It doesn't get much better than this. By now I am wondering why this stock doesn't trade significantly higher.
My next stop is the Yahoo Research tab, easily accessible at the top of the Profile page. Does anybody else like APEX? They should, since APEX is projected to make 96 cents per share this year and $1.26 in 2000. The projected 5-year growth rate is a whopping 35%. Three analysts rate APEX as a Strong Buy with one Moderate Buy.
Equally important, APEX is ranked #9 in Zack's Computer-Networks group of 60 companies. And they beat least quarter's estimates by 11%. The Earnings History chart at the bottom of the page shows that APEX beats estimates every quarter by a penny or two (which could make it a good buy before each earnings report).
One school of thought says a stock's PE ratio should equal its projected growth rate (the PEG ratio – Price Earnings divided by Growth). A stock is fairly valued at a PEG of 1 - the PE equals the growth rate going forward - and undervalued beneath that.
According to PEG, APEX should have traded in the 30's long ago (35% growth times .96 in 1999 or 1.26 earnings in 2000). The fact that it doesn't tells me that the Street isn't applying a straight PEG calculation to APEX. Why is the subject for another column.
The Highlights tab takes you to a detailed picture of APEX's performance since 1996. Nothing but steady growth everywhere you look. But we do see one strange item – all the other Yahoo pages compare APEX to the Computer Peripherals category, not Computer Networking.
Obviously there is some confusion about where APEX really belongs.
The Performance Report page has the first hint of trouble – even among Computer Peripheral companies APEX consistently underperforms its rivals. Its best performance period is a 23% gain in the last 13 weeks, but that only scored 67 on an industry scale of 99.
Another warning sign comes in the one-year high for 1997 and 1998. APEX hit $27 in 1997 and only $24 in 1998 (adjusted for splits). This is a rangebound stock, not a consistent grower like DELL, CSCO or MSFT.
The Comparison Report really shows APEX's inability to keep up with the rest of the sector. The trailing PE of 22 is not only less than APEX's projected growth rate, it is less than half than the average sector PE of 53(!). Other peripheral companies are valued at 11 times sales and 13 times book value. This despite the fact that APEX blows away the competition in almost every financial performance category.
One huge difference – the data here show APEX is 95% held by institutions. The sector average is 49%. Overall those institutions have been net buyers in the last 3 months, soaking up another 25% of the available shares (this is probably Van Waggoner at work, plus other managers who are copying his picks). Put simply, there aren't many shares left to buy but there also aren't many retail buyers jumping in to drive the price up. The institutions seem to be strangling the stock.
APEX can only take off if really good news triggers a wave of new buying and the institutions don't sell into the rally. Mutual fund managers will determine the fate of APEX stock.
The next stop is BigCharts (http://www.bigcharts.com) to check out the chart. I start with a 3-month daily chart, candlestick display, Bollinger bands on top and MACD on the bottom (BigCharts has an excellent Help section which explains these indicators).
APEX's chart doesn't tell us much; the MACD may give a buy signal soon and the 50-day moving average is headed up, another good sign. But APEX recently broke the upward channel it started in March. Overall, APEX is caught in a trading range roughly between the low teens and mid-20's. Wallowing like a pig is another way to put it.
Next I turn to Silicon Investor, hoping a good discussion thread will solve the mystery of APEX's chronic underperformance in the market. Hmmmm. No posts there since May 10 and only twenty in the last year or so. Apart from the Van Waggoner connection, not much useful info at all. No one home.
Where would you go next if you really wanted to find out what makes APEX tick? Some investors go to the company Web site, but that rarely tells me anything except whether the company knows how to hire a decent Web site designer. Web sites are just a giant press release, as far as I am concerned.
It's harder to stretch the truth in SEC filings. But SEC filings are written by lawyers. Long on facts and short on comprehensible context.
(What do you get if you cross a lawyer and a godfather? An offer you can't understand.)
Sometimes the news clips help. But APEX's latest earnings release has the usual cliches (http://biz.yahoo.com/bw/990414/wa_apex_pc_1.html) and nothing else. No articles from an outside source like Marketwatch.com or News.com show up. The industry press certainly isn't paying much attention to APEX.
I could bite the bullet and try to find some useful information on the Yahoo thread or discussion boards somewhere else, but that is usually like trying to find a needle in a haystack.
What's the verdict? APEX is certainly not a bad investment based on the balance sheet, their financial performance in recent years and the earnings projections. I would want to know more about their technology and potential competitors before I plunked down my hard-earned cash to buy shares.
Hope you enjoyed our little journey down the DD road. If anyone really likes APEX and has more information, please E-mail me at dabmu@yahoo.com or post on my Silicon Investor 50% Gains In Value Tech Stocks thread.
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