|Written by GSCR Staff|
|Wednesday, 30 April 2014 07:26|
Do we outright sell big winners, take profit, or just hold on thus turning picks from trades to investments. We took a look at our three biggest Market Monitor winners from three big small-cap sectors; biotechnology (LCI), technology (RMBS), and Consumer Goods (RAD), to illustrate the possibilities. The chart below summarizes the price level increases. Initial Price is stock price at the previous day’s close before featured in the Market Monitor.
Price Level Summary for 3 Biggest Market Monitor Winners
Stock drivers vary depending upon the corresponding industry segment and include quantitative and qualitative measures for the company itself and its industry, along with intangibles such as the value of the brand.
For Rite Aid Corporation (NYSE – RAD) we took a look at profitability and operating margin since they have had a big hand in the RAD turnaround over the past year. The chart below illustrates the gross profit margin and operating margin over the last four years for RAD.
Rite Aid Corporation Gross Profit Margin and Operating Margin FY2011-FY2014
We note that larger peers Walgreen Company (NYSE – WAG) and CVS (NYSE – CVS) have generated very different profit margins despite the similar business lines. For FY 2013 CVS gross profit margin was 18.8% and operating margin of 6.3%, while WAG had 2.9% for gross profit margin and operating margin of 5.4%. Comparatively speaking, RAD looks attractive when one considers the 5-year PEG ratio of 0.43. On a technical basis, the stock remains bullish as evidenced by the 50-day Daily Moving Average technical metric. Based on valuations and the shift in the age demographic that drives business, we believe that RAD is a keeper.
For Rambus, Inc. (NASDAQ – RMBS) a hardware and semiconductor supplier, we reviewed a couple of balance sheet ratios as indicators of general health. Good utilization of assets and use of debt can provide a glimpse of the survivability of a firm as well as its status as an M&A target. The chart below illustrates the 4-year annual data for RMBS in two solvency ratios and one liquidity ratio.
Current, Debt/Equity, Leverage Ratios 2010 – 2013 for RMBS
The current ratio of under 2 is low and has been trending down over the last few years is cause for concern. Additionally, the rising long term debt to equity is alarming. The take away, short term and long term debt is becoming an issue for Rambus, Inc. As a reference, Intel (NASDAQ – INTC) had an equity multiplier of 1.65 for 2013. On the bright side Rambus is forecast for a 10% growth in top line revenue for 2014 to $300 million, even with a recent downgrade for 2Q14 revenue. Additionally, on the technical side, the stock is one of the few that remain very bullish in the DMA. We think some profit taking is probably in order for RMBS with a target price of $6.00 for remaining shares.
Lannett Company, Inc. (NASDAQ – LCI) has skyrocketed over the last year and a half as the multi-platform firm has had great news with respect to clinical updates and approvals domestically and abroad. These include a recent green light as the first bioequivalent Diazepam, which is used to treat anxiety, an Oral Solution product approved by the FDA. Lannett has 16 products pending FDA approval and another 55 in clinical trials.
LCI is also one of the few favorable biotechs on the technical side. . At current levels, the stock carries a 5-year PEG of 1.25, and a reduction from 58 on the trailing 12-month P/E to 16 on the FY P/E based on growth estimates from the expected cash flow from the numerous products in the pipeline on the simple valuation front. The chart below illustrates the four year trends in two common cash flow metrics. CFO is cash flow from operations.
Cash Flow Ratio for LCI 2010-2013
With the exception of 2011, the trends for positive (the higher the better for both) indicate potential upside for Lannett. In essence there is more cash coming in for the investors and greater coverage on long term debt with the increased cash flow over this time. This combined with the factors above still make LCI attractive. Again, a little profit taking is probably in order for the stock based on what you can stomach for the rest of 2014. We think LCI can get back to the $40-45 range this year.
Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.
This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.
Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com