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Saturday, 22 March 2008
"Looking Back One Year" A review of stock picks from the week of September 4, 2006

 

 

 

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.

It was a shortened trading week with Good Friday giving us all a well-needed break from the volatility of trading recently.  But one of the things I like to do on this blog is to review past stock picks.  Going a week at a time, I started this process out reviewing stocks from the prior year.  Well one thing led to another, and now I am about a year-and-a-half out from these reviews. 

Last week I reviewed the picks from August 28, 2006 (there weren't any), and going a week ahead, let's look at the pick from the week of September 4, 2006.  As I have pointed out previously, these reviews assume a buy and hold approach to investing.  In practice, I advocate as well as personally employ a disciplined portfolio management strategy (except when I make one of my 'trades'), involving limiting losses on the downside by selling entire positions that are performing poorly, and locking in gains by selling small portions of holdings as they reach appreciation targets. 

For the ease of analysis, I have always assumed a buy and hold approach to these stock picks.  However, the difference in these strategies would certainly affect performance.

During the week of September 4, 2006, I actually posted only one stock pick idea:  NVE Corporation was 'picked' on September 5, 2006, at a price of $34.01.  NVEC closed on March 20, 2008, at $26.10 for a loss of $(7.91) or (23.3)%.  I do not own any shares of this stock nor do I have any options on it.

The post in 2006 was actually a 'revisit' of this stock as it has been a 'favorite' of mine (a previous selection on this blog), having 'picked' it on June 23, 2004, when the stock was trading at $36.61, an even higher price, and yet even though I have posted the stock twice previously, and the stock has declined each time subsequently (!), I would like to explain why

NVE CORPORATION (NVEC) IS RATED A BUY.

What exactly does this company do?

According to the Yahoo "Profile" on NVEC, the company

"...engages in the development and sale of devices using spintronics, a nanotechnology, which utilizes electron spin rather than electron charge to acquire, store, and transmit information. The company provides standard sensors that detect the presence of a magnet or metal to determine position or speed; custom sensors primarily for medical devices; and couplers that use semiconductor input stages, primarily for factory and industrial networks."

How did they do in the latest quarter?

On January 23, 2008, NVE Corporation (NVEC) reported 3rd quarter 2008 results.  for the quarter ended December 31, 2007, the company announced total revenue of $4.77 million, a 23% increase from the $3.86 million in the prior-year same period.  Net income climbed 62% to $1.7 million or $.36/diluted share compared to $1.05 million or $.22/share the prior year.

As is so important with an earnings announcement, it was their performance relative to expectations that was most impressive.  In fact, the $.36/share exceeded expectations according to analysts polled by Thomson Financial which had been looking for $.30/share.  this was enough to have both Broadpoint Capital and Northland Securities upgrade their ratings on this stock to "Buy" and "Outperform" from neutral ratings.

What about longer-term results?

Looking at the Morningstar.com "5-Yr Restated" financials, we find that revenue has steadily increased from $9 million in 2003 to $16 million in 2007 and $19 million in the trailing twelve months (TTM), (except for a dip from $12.0 million in 2004 to $11.6 million in 2005).  Earnings have also been improving recently with a bit of an erratic record between 2004 and 2006, from $.15/share in 2003 to $1.00 in 2007 and $1.37/share in the TTM.  (Earnings dipped from $.45/share in 2004 to $.37/share in 2005 before rebounding and steadily increasing from $.39/share in 2006 to the current levels).

Outstanding shares have been stable with 4 million reported in 2003 increasing to 5 million in the TTM.  Free cash flow has been positive and improving recently with -0- in 2005, $3 million in 2006, $5 million in 2007 and $6 million in the TTM.

The balance sheet is solid with $1 million in cash and $8 million in other current assets, which when compared to the $1.2 milliion in current liabilities yields a current ratio of over 7.  NO long-term debt is reported on Morningstar.com.

What about some valuation numbers?

Checking the Yahoo "Key Statistics" on NVEC, we can see that this is really a tiny company, what we call a Micro Cap Stock, with a market capitalization of only $121.05 million. 

The trailing p/e is reasonable (imho) at 19.12, with a forward p/e (fye 31-Mar-09) estimated at 15.17.  This steady growth in earnings anticipated, results in a PEG of only 0.70, which for me is quite cheap

Using the Fidelity.com eresearch website, we find that the Price/Sales (TTM) ratio is a bit steep at 6.35 compared to the industry average of 3.54.  In terms of profitability, Fidelity reports that the Return on Equity (TTM) is a bit better than average at 24.52%, compared to the industry average of 22.22%.

Returning to Yahoo, we can see that this company has only 4.64 million shares outstanding with 4.62 million that float.  As of 2/26/08, there were 444,640 shares out short representing 9.65 of the float or 5.9 trading days of volume.  This is well down from the 1.08 million shares that were out short the prior month.  This suggests that over 500,000 shares that were out short have been re-purchased as the negativity surrounding this stock appears to be reduced with the strong earnings report....at least that would be my take.  I just don't see what is so negative about this company to be selling short!

Finally, as noted above, not dividends are paid and the last stock split was actually a reverse split of 1:5 on November 22, 2002.

What does the chart look like?

Reviewing the 'point & figure' chart on NVEC from StockCharts.com, we can see the very unimpressive technical appearance of this stock chart which has declined from a peak of $54 in April, 2004, to a low of $11.50 in may, 2005, only to start climbing in an erratic fashion to a peak of $46 in November, 2006, recently dipping past support at $19.50, and trying to find some support for a move higher.  The stock is certainly not over-extended technically (lol), but appears longer-term to be breaking through the downward move from 2004 (?).


Summary: What do I think about NVE Corporation?

Well, needless to say, despite the mediocre chart, I really like this stock.  Am I a glutton for punishment or what?  But seriously, they reported a terrific quarter, beat expectations, and have a record recently of terrific revenue and earnings growth, positive free cash flow, and a solid balance sheet. 

Valuation-wise, except for the rich Price/Sales ratio, they have a reasonable p/e, a great PEG, and a Return on Equity exceeding their peers.  Now, if we could only see a bit more technical support in the stock chart :).

Thanks again for visiting!  If you have any questions or comments, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Covestor Page where you can follow my actual trading account, my SocialPicks page where you can review my past stock picks from the last year or so, and my Podcast Page where you can download some mp3's of me discussing a few of the stocks I write up here on the website.

Have a great weekend everyone!  And a Happy Easter to all of my friends!

Yours in investing,

 

Bob


Posted by bobsadviceforstocks at 11:29 AM CDT | Post Comment | Permalink

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