By: Steve Rubis
The recent carnage in the stock market has investors feeling as if they are a French Legionaire at Dien Ben Phu. Certainly, this is a bit of overstatement, but with at least four down days of over 100 points, investors are hurting. The real question is where will the market go from here? We believe that this correction is necessary in order to move forward; at the same time we feel that it has come sooner than expected. Certain market indicators act as road signs as to where the market is headed; you just need to know where to look. In order to answer the question that we posed above three aspects need to be considered: (1) charting and market history; (2) broker call money rates; and, (3) earnings yields on common stocks.
Our starting point is a headline in this weekend’s Wall Street Journal which states that the professional investors see the recent down turn as a minor setback. The professionals believe that you should hold the course. It is no surprise that in light of declining stock prices that professionals say hold; otherwise how would they be able to liquidate their positions? This is why we think it is important to ask, at this juncture, should an investor sell and where is the market headed.
The point of departure for this analysis is a simple chart of the Dow stocks from 1929 through about 1937. In late 2002, Investor’s Business Daily ran an article which superimposed the NASDAQ chart of the late 90’s on top of the chart of the Depression Dow. The similarities were uncanny, which unfortunately pointed to a bottom in October 2002. Unfortunately, the market double bottomed in March of 2003, throwing a minor wrench in our theory. Nevertheless, it seems that the NASDAQ is following the chart of the Dow in its early days. The Dow ascended until a precipitous decline in 1937, based on the time it took to go from bottom to this new high; we predicted that the market would bottom in 2007. Therefore, we think that the current down swing in prices is a harbinger of the carnage to come. Certainly, there might be some near term upswings, but overall we think that the “cream” is off of the bull market.
Secondly, the broker call money rates are indicating that the market is in the final stages of a bull market. The call money rate tells investors how much capital is available to take advantage of speculative operations. It is important to watch this rate, because speculation is ultimately what allows winning stock to continue their advances. When there is little cash available to continue gains the market begins to decline. At this time it is important to mention what type of market each range indicated. If call rates are below 3% that means the market is at an absolute bottom, e.g. in 2002 rates were at less than 1%, brokers could not give the money away. Normal markets operate in a range of 3% to 6%. Once rates move higher than 6%, the market enters an absolute top; in 1929 the rates topped out at around 9%. Currently, rates are at 6.75% and each broker adds another percentage on top of that base rate. At this time we believe that these rates cannot go much higher and are telling us that a correction is in the cards.
Lastly, earnings yields give a telling picture as to the value of common stocks in terms of Treasury Bonds. Many believe that corporate profits and earnings are very strong, yet the earnings yield tells otherwise. At the time of writing, the 10 year Treasury note stood at 5.05%, whereas the yields on the NYSE, NASDAQ, and S&P 500 stood at 4.73%, 2.85%, and 5.72% respectively. This suggests that the overwhelming majority of stocks are experiencing negative equity risk premiums. Remember that earnings yields represent the initial rate of return on a specific equity investment, and allows an investor to easily compare stocks to bonds.
It seems that the market is currently at a cross road. Many are uncertain as to where the market is actually going to go. Pundits like Jim Cramer, believe that investors should stay the course. Here at Researching Stocks, we believe that the market is going lower in both the short and long term. With the Federal Reserve seemingly set to raise interest rates, common stocks will only continue to be overvalued. Certainly, there are stocks that we like at this time, but we do not like the overall climate for investors.
Saturday, May 20, 2006
Wednesday, May 17, 2006
BTU International, Inc.
By: Steve Rubis
Ticker: BTUI
Market Cap: 168.71M
Shares: 9.10M
P/E: 21.52, forward P/E 11.92
P/S: 2.10
REV: 74.55M
EPS: $0.862
EBITDA: 8.40M
Cash: 18.21M
Debt: 10.02M
Current Price: $18.55 up $1.37
Take Out Value: $160.84 based on EBITDA multiple of 16.65
P/B Value: $13.48
P/E Value: $24.87
P/S Value: $28.12
DCF: $9.18
Average: $18.91 (does not include Take Out Value)
A Pure China Play on Solar and Other Alternative Energy
The beginning of 2006 saw the resurgence of the Semiconductor Industry. Today’s stock comes from the Semiconductor – Equipment and Materials sector of the stock market. Our analysis today has two purposes: (1) discuss our successful trade in BTUI; and, (2) to give a simple analysis of this stock. Currently, we believe that the major move in BTUI has occurred and rate the stock a Hold, and would suggest selling if a bear market is confirmed in the near future.
BTUI’s main business is supplying advanced thermal processing equipment to the electronics manufacturing and energy generation markets. The company’s list of customers is impressive: ASE, BP Solar, Celestica, Corning, Hynix, IBM, Inventec, Motorola, Nokia, Samsung, Solectron, and SPIL. Their revenue stream comes from two markets: electronics and energy generation. On the electronics side, BTUI provides PC board assembly and semiconductor packaging for cellular phones. The company also provides solutions for alternative energy companies. The three types of energy solutions offered are fuel cell, solar and nuclear energy. In the solar arena, BTUI purchased Radiant Technology Corporation to generate greater revenue. The company sold its first turnkey fuel cell to a European manufacturer in 2005. Lastly, its nuclear solutions are used in the creation of fuel pellets.
This company was a great turn around story of 2005. BTUI faced great competition during 2004, which caused it to make drastic changes in 2005. Most notably, were restructurings and cost controls; realized through significant cost reductions for the Pyramax line of goods and expansion of its manufacturing facilities in China. Over all, revenue jumped from 54.6M to 66.4M in 2005 an increase of 22%. The company’s bottom line increased 81.4% going from 13.1M to 23.8M. The real story involves the Pyramax line of solar energy. BTUI estimates this market to be worth close to $10B by 2010 with annual growth rates of 25 to 30 percent. Furthermore, the company’s products sell between $50K and $2.5M for each application.
While we think that the company is fully valued based on the simple average, it appears undervalued on a P/E and P/S basis. Here at Researching Stocks, we initiated our position at a price of $3.76 per share and sold out around $13.50. Obviously, this was quite early and our early close of the position left nearly $6 in profits on the table. Our reasoning behind our purchase was simple: (1) a great chart; and (2) a sterling balance sheet. Initially, we did not read any SEC filings which caused us to liquidate our position too soon. At the time of purchase, the chart formed a very strong cup with handle with a breakout in late July 2005. The major catalyst that drove our purchase was the small float – BTUI only has 9.1M shares outstanding.
It can be said that your editor got extremely lucky, since his purchase was based solely on a stock chart. We do not recommend that novice investors make trades of this nature. There is a time and place for such trades, however. Looking at the balance sheet today, it is obvious why the company now trades at $18 and change. Stockholder’s equity now exceeds all liabilities, and BTUI has a decent Net Current Asset Value per share. We really like the long term prospects for this company, hence our article.
It seems that if the share price of BTUI can come down a bit its shares should be accumulated. The major problem is that the cream seems to have left the current bull market. Remember the old adage “a rising tide lifts all ships.” At the same time a decreasing tide will sink all ships. Right now the overall market condition is too dangerous to make any purchases, hence our hold rating.
The author does not own any shares in BTUI, but is interested in purchasing some if the bull market continues. Furthermore, the author is not responsible for any monetary gain or loss an investor incurs after reading this article.
Ticker: BTUI
Market Cap: 168.71M
Shares: 9.10M
P/E: 21.52, forward P/E 11.92
P/S: 2.10
REV: 74.55M
EPS: $0.862
EBITDA: 8.40M
Cash: 18.21M
Debt: 10.02M
Current Price: $18.55 up $1.37
Take Out Value: $160.84 based on EBITDA multiple of 16.65
P/B Value: $13.48
P/E Value: $24.87
P/S Value: $28.12
DCF: $9.18
Average: $18.91 (does not include Take Out Value)
A Pure China Play on Solar and Other Alternative Energy
The beginning of 2006 saw the resurgence of the Semiconductor Industry. Today’s stock comes from the Semiconductor – Equipment and Materials sector of the stock market. Our analysis today has two purposes: (1) discuss our successful trade in BTUI; and, (2) to give a simple analysis of this stock. Currently, we believe that the major move in BTUI has occurred and rate the stock a Hold, and would suggest selling if a bear market is confirmed in the near future.
BTUI’s main business is supplying advanced thermal processing equipment to the electronics manufacturing and energy generation markets. The company’s list of customers is impressive: ASE, BP Solar, Celestica, Corning, Hynix, IBM, Inventec, Motorola, Nokia, Samsung, Solectron, and SPIL. Their revenue stream comes from two markets: electronics and energy generation. On the electronics side, BTUI provides PC board assembly and semiconductor packaging for cellular phones. The company also provides solutions for alternative energy companies. The three types of energy solutions offered are fuel cell, solar and nuclear energy. In the solar arena, BTUI purchased Radiant Technology Corporation to generate greater revenue. The company sold its first turnkey fuel cell to a European manufacturer in 2005. Lastly, its nuclear solutions are used in the creation of fuel pellets.
This company was a great turn around story of 2005. BTUI faced great competition during 2004, which caused it to make drastic changes in 2005. Most notably, were restructurings and cost controls; realized through significant cost reductions for the Pyramax line of goods and expansion of its manufacturing facilities in China. Over all, revenue jumped from 54.6M to 66.4M in 2005 an increase of 22%. The company’s bottom line increased 81.4% going from 13.1M to 23.8M. The real story involves the Pyramax line of solar energy. BTUI estimates this market to be worth close to $10B by 2010 with annual growth rates of 25 to 30 percent. Furthermore, the company’s products sell between $50K and $2.5M for each application.
While we think that the company is fully valued based on the simple average, it appears undervalued on a P/E and P/S basis. Here at Researching Stocks, we initiated our position at a price of $3.76 per share and sold out around $13.50. Obviously, this was quite early and our early close of the position left nearly $6 in profits on the table. Our reasoning behind our purchase was simple: (1) a great chart; and (2) a sterling balance sheet. Initially, we did not read any SEC filings which caused us to liquidate our position too soon. At the time of purchase, the chart formed a very strong cup with handle with a breakout in late July 2005. The major catalyst that drove our purchase was the small float – BTUI only has 9.1M shares outstanding.
It can be said that your editor got extremely lucky, since his purchase was based solely on a stock chart. We do not recommend that novice investors make trades of this nature. There is a time and place for such trades, however. Looking at the balance sheet today, it is obvious why the company now trades at $18 and change. Stockholder’s equity now exceeds all liabilities, and BTUI has a decent Net Current Asset Value per share. We really like the long term prospects for this company, hence our article.
It seems that if the share price of BTUI can come down a bit its shares should be accumulated. The major problem is that the cream seems to have left the current bull market. Remember the old adage “a rising tide lifts all ships.” At the same time a decreasing tide will sink all ships. Right now the overall market condition is too dangerous to make any purchases, hence our hold rating.
The author does not own any shares in BTUI, but is interested in purchasing some if the bull market continues. Furthermore, the author is not responsible for any monetary gain or loss an investor incurs after reading this article.
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