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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: Grantcw who wrote (1084)	6/7/1998 4:42:00 AM
From: HeyRainier	Read Replies (3) \| Respond to of 1720

[ ORFR ] Hello Grant, I'm glad you could join us; having another who operates on the combined concepts of fundamental and technical analysis is always a plus for the group. We look forward to your continued contributions. I'm approaching your question piece by piece, as there currently isn't enough time to provide my views on all three issues. Let's start with ORFR: Technically, it has one thing going for it, and that is the downward price momentum is beginning to decelerate. I wouldn't call it out of its downtrend yet, though by the strict definition that Victor Sperandeo provides, the primary downtrend has been broken. For guidance on how to draw trendlines, I refer you to the following link: members.aol.com When I have fuzzy readings on assessing the trend (like in this case), I sometimes like to add Gann Fans or Speed Resistance Lines for added perspective. Peter Eliades is a proponent of such Lines (see Technically Speaking: tips and strategies from 16 top analysts) The varying slopes of the lines, when broken, tell me that a possible change in trend strength is occurring. ORFR is nearing the vicinity of one of these trend lines. Let's look at the fundamentals: The company has fairly low debt at 14%, $2.47 in cash, an ROE of 21%, and a current ratio of 3.97. The impressive part is that analyst estimates call for approximately 60.1% compounded growth for the next seven quarters, making this issue particularly attractive at a P/E ratio of only 17.4. To perhaps lend to the credibility of these estimates, one can see that the company has grown earnings by 119% on a compounded basis for the past five quarters. These smoothed numbers, however, mask recent troubles as the company has stumbled for the last few quarters on a top-line as well as bottom-line basis: on a sequential basis (Q3 to Q4, etc.)and year-over-year basis (Q1 to Q1), sales have stumbled: 1997 ----- Q1: 4,906 Q2: 5,314 Q3: 6,298 Q4: 5,536 1998 ----- Q1: 4,315 Given the softening trend in revenues, I am a bit hesitant to accept the estimates outlined for this company. I will be a greater believer once the top line resumes its growth. Growing the bottom line in the face of a decreasing top line, while admirable, is not a sign that the company is out of the woods yet. Despite analyst estimates, I have in the course of my experience learned to avoid blindly accepting these numbers. Doing so can be hazardous to your wealth. A piece from A Random Walk Down Wall Street has some revealing numbers: "...Bluntly stated, the careful estimates of security analysts do very little better than those that would be obtained by simple extrapolation of past trends (which we have already seen in a past study to be no help at all)...." Another massive study from Harvard and MIT researchers from 1977 to 1981 showed that annual forecasts by analysts were off by an average rate of 31.3%. These error rates were remarkably consistent--the lowest error rate was 27.6% in 1978, the highest 33.5% in 1981. Dave Horne provides an excellent article reference on earnings estimates: exchange2000.com ...but I have rambled with this aside. To conclude, the technical picture still shows weakness, but appears to be approaching a critical point where the market must make a decision whether or not to accept the future prospects that have been outlined for this company. Despite the bright forecasts, I remain cautious because of weakening revenues. The next quarter should serve to better clear the fundamental and technical picture for this issue. Regards, Rainier