Screening for possible Short Candidates
I modified the screen for Appreciated Growth Companies
(http://www.siliconinvestor.com/readmsg.aspx?msgid=14323842)
to locate companies whose price was rising at an
accelerating rate but whose revenue and earnings growth are
slowing. I also removed the Return on Equity and the
positive YTD EPS tests. This query resulted in 11 matches.
I then added one more criteria, that the 5-year estimated
EPS Growth must be less that or equal to the 1 year
estimated EPS Growth. This should select only companies
whose EPS has been slowing and are projected to continue
slowing.
I ran this screen at MSN Money Central
(http://moneycentral.msn.com/investor/finder/customstocks.asp#Top).
The screen identified 3 potential short candidates.
Selection Criteria:
% Price Change Last Year >= 0
% Price Change Last 6 Mos. >= % Price Change Last Year-% Price Change Last 6 Mos.
% Price Change Last Qtr. >= % Price Change Last 6 Mos.-% Price Change Last Qtr.
% Price Change Last Month >= 0
% Price Change 1 Week >= 0
Avg. Daily Vol. Last 2 Weeks >= Avg. Daily Vol. Last Year*1.25
EPS Growth Year vs. Year <= 5-Year Earnings Growth
EPS Growth Next 5 Yr <= EPS Growth Next Yr
Rev Growth Year vs. Year <= 5-Year Revenue Growth
Results:
1-Yr 5-Yr 1-Yr 1Yr Est 5Yr Est 5-Yr 2 Wk Last Yr
Symbol Company Name Price P/E ROE R-Gwth R-Gwth EPS Gth EPS Gth EPS Gth Ern-Gth Avg Vol Avg Vol Industry Name
TNL Technitrol, Inc. 127 35.6 25.9 18.3 28.26 33 16.4 15 37.05 236,500 104,500 Scientific & Technical Instruments
LI Lilly Industries, Inc. 30.63 22.2 15.7 6 14.76 5.4 13.1 8.5 10.25 101,300 73,100 General Building Materials
PNM Public Service Company of New Mexico 21.38 11.3 8.8 6 8.31 -3.7 9.3 4.5 2.84 257,100 163,100 Diversified Utilities
Fundamental Comparison Analysis:
siliconinvestor.com
I used Quicken’s Evaluator for some of the following analysis:
quicken.com
Symbol P/E P/S P/B P/CF PEG ROE ROA PM CR Yield Rating PrevRate
TNL 35.69 4.03 9.28 33.18 1.73 30.41 17.47 11.3 2.47 0.18 2.00 2.17
LI 22.27 1.05 3.49 177.63 2.02 16.66 5.75 4.70 1.50 1.05 3.33 1.67
PNM 11.36 0.69 0.97 10.49 2.17 8.83 2.97 6.14 1.38 3.66 2.21 2.21
(Rating and PrevRate are from Quicken; all other figures are from Silicon Investors)
Industry Comparisons:
Revenue Growth Rates
1-Year 3-Year 5-Year 10-Year
TNL 22 15 28 24
Industry 45 -8 -16 -6
LI 7 3 15 14
Industry 10 8 8 12
PNM 14 5 8 3
Industry 26 14 14 9
Return on Equity
1-Year 3-Year 5-Year 10-Year
TNL 26 23 20 15
Industry 8 6 8 6
LI 16 19 18 17
Industry 21 18 18 14
PNM 9 10 10 8
Industry 11 10 11 11
P/E PEG
TNL 36 1
Industry 103 0.2
LI 22 2.1
Industry 14 0.3
PNM 11 2.5
Industry 17 N/A
All three companies appear to be financially healthy.
Looking at these figures I see that we have three totally different situations.
TNL has an excellent and increasing Return on Equity
compared to its industry, and good Return on Assets, Profit
Margin and Current Ratio. Their industry group has had
negative revenue growth in the past, but had an astounding
45% revenue growth in the past year. TNL is selling at a
low P/E ratio compared to its industry but at a higher
PEG. This is probably due to the negative revenue growth
that the industry has experienced in the past. Notice that
analysts have lowered their outlook for TNL in the past 3
months.
LI is selling at a high P/E and PEG compared to its
industry peers. Their Return on Equity had been in line
with their industry, but they faltered last year. Their
revenue growth had been better than the industry average,
but again, they have been stumbling lately and now lag the
industry. The Price to Cash Flow of 178 is troubling and
should be scrutinized more closely. Analysts have
dramatically increased their outlook for LI in the past 3
months.
PNM is selling at a lower P/E ratio than their industry
peers are but their PEG seems a bit high. Their Return on
Equity has been in line with the industry, but their
revenue growth is severely lagging the industry. Their
P/S, P/B and P/CF all seem reasonable. Their Return on
Assets seems low, but that could be because of the industry
that they are in. Analysts have not changed their outlook
for PNM is the past 3 months.
Looking at company fundamentals:
Technitrol, Inc (TNL)
Technitrol is a worldwide producer of electronic
components, electrical contacts and assemblies and other
precision-engineered parts & materials for manufacturers of
networking, broadband/Internet access, telecommunications &
computer equipment. For the six months ended 6/00, sales
rose 25% to $315.9M. Net income totaled $41.7M, up from
$19M. Revenues reflect higher ECS and MCS unit shipments.
Net income reflects higher margins due to sales mix.
Institutions hold 51% of the outstanding shares but don’t
seem to be net buyers or sellers. TNL recently appointed
two new directors and was a recent S&P Focus Stock of the
Week (http://www.personalwealth.com/cgi-bin/WebObjects/SNP?action=gotoDocumentPage&id=2954869&tracking=PWM2954869).
Here is a brief excerpt of what S&P Personal Wealth had to
say about Technitrol:
NEW YORK, Aug. 07 (Standard & Poor's) - Standard & Poor's
expects electrical equipment maker Technitrol Inc (TNL) to
experience an extended period of solid earnings gains. Most
of that growth will likely be derived in Technitrol's
electronic components segment (58% of 1999 sales and 82% of
operating profit), which serves the fast-growing
information and communications industries. The company also
operates an electrical contact products segment (42% of
sales and 18% of profits), which has been encountering more
challenging business conditions. That division recently
initiated realignment steps to maximize market
opportunities and reduce costs.
Analysts have lowered their expectations for TNL over the
past 3 months, but the current consensus is 1.5 (strong
buy). TNL did beat earnings estimate two quarters ago by
39% but by only 8.6% last quarter.
Lilly Industries, Inc (LI)
Lilly Industries and subsidiaries are principally in the
business of formulating, manufacturing and marketing
industrial coatings and specialty chemicals to
manufacturing companies. The Company also sells various
household products. For the 6 months-ended 5/00, revenues
rose 6% to $337.4M. Net income fell 10% to $13.6M. Results
reflect growth in volume sales of wood and powder coatings,
offset by start-up costs associated with increased
capacity.
On June 26, 2000, Lilly Industries, Inc agreed to be
acquired by Valspar Corp for $31.75 a share
(http://www.siliconinvestor.com/research/story.gsp?id=667710&s=LI).
The next day the stock increased 135%, going from $14 to
$31. The same day, JP Morgan downgraded LI to Market
Perform with a target price of $20. Currently LI has a
consensus recommendation of 4.33 (under-perform/sell).
The merger was generally well received but still needs FTC
and shareholder approval. Institutions hold 54% of the
outstanding shares but don’t seem to be net buyers or
sellers.
Public Service Company of New Mexico (PNM)
PNM, a public utility company, is primarily engaged in the
generation, transmission, distribution, and sale of
electricity and natural gas within the State of New Mexico.
For the 6 months-ended 6/00, revenues rose 22% to $650.3M.
Net income applicable to Common before accounting change
declined 3% to $39.6M. Revenues benefited from strong
regional wholesale electric prices. Earnings were offset by
a decreased gross margin as a percentage of revenues.
On June 6, 2000, PNM shareholders approve a plan to create
a new holding company with separate subsidiaries for the
company's regulated utility operations and its competitive
power generation and marketing business. On July 18, 2000,
PNM reported record revenues and earnings that beat street
estimates by 7%. Then on August 8, 2000, PNM announced a
plan to buy back $35M in common stock. PNM stock jump up
on both announcements.
Institutions hold 54% of the outstanding shares but don’t
seem to be net buyers or sellers. The current analyst
consensus recommendation is 2.29 (buy).
Reading the Charts:
Technitrol Inc (TNL)
bigcharts.com
etrade.com
TNL has been in an up trend most of the year and made a new
52-week high Friday on strong volume. Volume has also been
increasing since the beginning of the year. TNL seems very
strong with no obvious technical weakness.
Lilly Industries (LI)
bigcharts.com
There is a huge gap between 15 and 30 on this chart.
Obviously this was precipitate by the buy-out offer. If
any problems develop with the buy-out, Lilly could quickly
return to its old level around $15.
Public Service Company of New Mexico (PNM)
bigcharts.com
PNM has been trading down to flat for most of the year.
Then in mid July PNM started a strong up trend. This up
trend was initiated by the record revenues reported on July
18th and was on strong and rising volume. PNM then traded
relatively flat on light volume for next 2-3 weeks.
When PNM announced the stock buy back program on August 8,
the stock spiked up to a new 52-week high on very strong
volume. After reaching $22, the stock has traded flat for
the past 2 weeks on light volume and the recent up trend
seems to have come to a stop.
Conclusion:
When I created this screen, I was looking for companies
that have had an unjustified run up in price recently.
What I found was that the screen also revealed turn around
opportunities (TNL) and special situation opportunities
(LI).
Technitrol, Inc. appears to be a standout in a weak
industry that might be turning around. The industry has a
positive growth rate for the first time in years and with
the high industry P/E ratio, analysts and investors appear
to be expecting better things in the future. TNL simply
looks too strong technically and sound enough fundamentally
to sell short at this time.
Lilly Industries is awaiting approval of its acquisition by
Valspar Corp. The future direction of this stock depends
on the outcome of that acquisition.
Public Service Company of New Mexico (PNM) however does
seem to be a good candidate for potentially taking a short
position in. The recent 37% run up from 16 to 22 seems
excessive when you look at the underlying reasons.
Technically, the stock appears to be weakening as volume
has been decreasing since the recent run up.
B.K. |
