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Stock Picks Bob's Advice
Wednesday, 13 June 2007
A Reader Writes "EML Sometimes it pays to shake the trees."

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on  this website.

I had a very nice letter from Doug S. who had some ideas about the poor performance of Eastern (EML) which hasn't worked out as well as we all could have wishd.  He wrote:

"Got interested in EML on Feb 7 when they reported the earnings that
initiated the recent/ initial move in the stock.

Going through the
report two things bothered me; the heavy influence of a government
contract and certain acquisitions which brought into question the subject of organic growth.

The latter was the reason that BEZ has never turned me on. That said since I probably could have gotten in at around 24 /25 my analysis cost me about a 5 point move(("Even paranoids have enemies" H. Kissinger).

The classic recent example of this syndrome(ie:quality of earning, organic growth) is the activity surrounding ROCM over the last few months where the initial move started with an earnings report that had all the transparency of a Chinese fire drill and I'm sure end in the fact that for every person who went to the bank on the way up ten got crucified on the way down."

Doug,

Thank you so much for writing.  As always, I have come to expect and appreciate your insightful assessment of reports that I have probably read in far too superficial a fashion.  Much like "same-store sales growth" which I like to discuss when looking at retail firms, it is indeed helpful to assess the role of acquisitions and one-time events and settlements on revenue and earnings reports.

If we look at the 1st quarter Eastern Company (EML) earnings report, we can see that even taking into consideration these items, the underlying results were still quite satisfactory. 

The company reported:

"Despite the strong impact of the military contract and the Royal Lock and Summit acquisitions, the Company's core businesses experienced a 12.9% increase in sales as compared to the first quarter of 2006. This increase was primarily in the Industrial Hardware segment." (emphasis added)

You can see that even without these one-time events and acquisition-related revenue/earnings, things haven't been going too badly with EML.

It is hard to know exactly why EML hasn't behaved better the past several trading days.  Even with the indices moving strongly higher today, the stock lagged the rest of the market.  EML today closed at $29.75, down $(.45) or (1.49)% on the day. 

Probably the biggest problem with The Eastern Company is its small market cap and small float: the market cap is only $165.95 million, and there are only 5.58 million shares outstanding with 4.80 million that float.  This makes the stock very volatile from my perspective and difficult for large investors to move into and out of positions without moving the stock price in those moves. 

Again, before I conclude that the 'sky is falling', let me once again post an updated chart on EML for your review (from StockCharts.com): 

Again, as you look at the chart, I think you will see what I see, which simply put means that the stock price has had a huge appreciation over the past two years and that the price decline recently appears more to be 'profit-taking' than some breakdown of the price support of this equity. 

Regardless of all of this head-scratching, analysis, and second-guessing, the fact remains that the stock has indeed declined in price from the stock pick level.  If I owned this stock, and I do not have any shares, I would be selling the stock if it hit an 8% loss and not looking back.  I would not be reinvesting the proceeds unless I was at my minimum investment level.

There is nothing 100% about anything I pick or write about on this blog.  There is much risk with every investment and with the smaller companies the risks as well as the rewards are usually greater.  That is why it is important to have trading rules.  To have a portfolio of stocks.   And to follow rules that dictate your own trading activity regardless of what you might actually think about the true value or the validity of the earnings reports.

Sometimes it is helpful to shake the trees.

(A beautiful painting from the March/April edition of Nexus, by the painter Lynne Loshbaugh)

But sometimes it is helpful to just sit back, think quietly, and appreciate the beauty of each tree as it comes together to make that forest.  And instead of shaking trees that don't seem to fit or work out maybe it is time to remove them from your patch of woods and settle on a new seedling.

Thanks again to all of you for visiting and commenting and adding your thoughts and passion to investing.

Bob

 


Posted by bobsadviceforstocks at 10:08 PM CDT | Post Comment | Permalink

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