Swedelo,
Thank you very much for your well thought-out responses to my previous post. Like I said to Dr. Link, this is a forum where ideas are intended to be exchanged. I am glad to have you join in to provide the balance necessary for a well-informed investment decision.
Let me answer some of the questions you posed:
"How was the decline in RADAF in the last 6 months any different than the punishment taken by small-caps in general?"
The technical damage has been rather severe; It now underperforms the large caps, mid-caps, and small-caps on a technical basis. Plus, it hasn't participated in the recent small cap recovery I've seen (from the S&P 600 Small Cap Index). It makes one wonder.
"Have you ever sold a stock at a 4.9 PE?
I'm very aware of its P/E ratio and its other value measures. As a person who considers the down side of the stock, I must also take this into consideration, as it will indeed attract the bottom fishers and other P/E ratio-based value players.
But also I must take into consideration the reality of the current situation: the trend is sharply negative, and it is/has caused a chain reaction of sellers who wish to protect their previous profits from last year. Those who bought and held from the December 1997 through August 1998 base are sitting with a negative return on their investment. Also, the current tax-selling season is a concept here that I would rather use to my advantage than disadvantage.
Plus, another word on the trend. Several years ago, academic papers revealed that momentum in the market truly did exist: "...stocks that moved up or down the most in relatively short periods (3 - 6 months) tended to continue that movement for the next three to six months. This is consistent with another tenet of behavioral finance, the idea that investors react slowly to information." (SmartMoney, May '98)
Generally, I try not to fight the trend. Experience has shown this to be a simple, and profit maximizing/loss minimizing concept. Even if the negative trend was based purely on sentiment, it's not going to help me to hold a stock with perceived great fundamentals when everyone's selling it. I'd rather sidestep that negative sentiment and let it dissipate before establishing a position. I have found that Technical analysis will aid in that purpose.
Experience has also shown an interesting relationship between a declining stock price and the propensity for problems to occur and recur. Is there something the market is anticipating in RADAF? I pointed out the potential consequences of stock price performance when balance sheet items develop in the same manner they have developed for RADAF.
Three-Five Systems (TFS) and Advanced Digital (ADIC) were two I noted. Watch ADIC from 5/19/98, the date I recognized the problems in sales, inventory, and receivables. Sunbeam is a favorite. Snapple was a similar casualty bearing similar fundamental developments. I'd rather not fight that historical precedent, especially when the trend in the stock price is confirming a negative sentiment.
"How long have you been interested in RADAF?"
I've watched it on a technical basis since about October of last year, with only brief notations of its fundamentals. Friends had owned it, and they asked my opinion of it.
Its recent trend piqued my curiosity, and as a mental exercise for my CFA studies, I thought I'd analyze it both from a fundamental and technical standpoint to see if I could find an explanation for the reversal in price trend for the stock. It surprised me to see the same relationship between sales, inventory, and receivables crop up with this particular stock, so I investigated further. The result was the initial RADAF analysis that precipitated this conversation between you and myself.
"Have you been to any of the stores and seen RADAF's new line of toys? Stealth Assault, Sub Hunt, Tank Assault, Trail burner, Tracer Ace, Deep Sea Fishing, Nascar Racer....etal."
I think the approach you have taken is a good one. However, I don't have time to go to toy stores, nor do I have much interest in doing so at this time, as valuable as it may be to my overall analysis. (Let's see...CFA studies...or toy stores..) I let the financial statements do the talking, and will try and see the rest from what I can find from the internet.
"Are you aware of the Girltech aquisition and managements discussion of the future diversification of their product line..."
Yes. However, the website didn't appeal to me, nor did the name, unfortunately. Diversification for its own sake doesn't help much if it will only attract mediocre businesses into the fold. While it has advantages, still doesn't substitute for the fact that RADAF has only one outstanding product line, that of the fishing products, and its life cycle is continuing to age, without yet a suitable successor that has reached "hit" status.
"RADAF holds a 34.6% interest in U-tel, Inc. A private company Incorporated in Nevada, which is engaged in research and developement of futuristic telecommunications equipment. Were you aware of this?"
Yes. I'm wondering, however, what relationship a hand-held game manufacturer has to futuristic telecom equipment. It seems like a rather unrelated business line. (Ever heard of Zapata?) That'll be great if it works.
"RADAF has no debt."
Yes, that is good. A company with no long-term debt, however, gives up some profits it could earn from borrowing at a lower rate and investing the money at a higher rate. A balance is needed for optimum profits, and the leverage can be safely extended in accordance with its cash flow strength.
"P.S.: I noticed in one of your previous posts you mentioned Mr. Buffet with a certain amount of esteem. Isn't Mr Buffet a Disciple of long term investing in companies that you know and understand? It would be interesting to see what Warren would think of your very narrow short-term technical views on RADAF as an investment opportunity."
He would commend me for doing my homework and actually taking the time to examine the financial statements, compared to the numerous others who don't. At least my decisions are self-generated, and are not induced by a more subjective third party. He would probably pause at the thought of going short given the valuation level of the stock. But he would recognize the weak barriers to entry that could invite competitors to topple its market share.
You are correct in that I mentioned Warren Buffett with a certain amount of esteem. I practice his teachings in long term investing with issues that I am long and I believe have merit as long term investments.
"It would be interesting to see what Warren would think of your very narrow short-term technical views on RADAF as an investment opportunity."
He doesn't understand technical analysis nor does he implement it (at least openly), therefore I seek a different role model when applying the concept to other investment opportunities. Buffett is as much an authority on my use of technical analysis as I am about writing hieroglyphics.
RT |
