Long-term holders of Abaxis (NASDAQ:ABAX) have been pleasantly surprised by the 30% increase in share price this year. ABAX pays no dividend and over the past 8 years, it has essentially bounced between $31 and $17 per share. In this article, I will detail the fundamental drivers which have shaped the past of this security as well as the elements which may dictate its future. Ultimately, I believe that ABAX is entering a period of breakout growth and investors would be wise to purchase this security in the near future.
A History of Stagnant Returns
In order to objectively study ABAX from a fundamental standpoint, I have relied heavily on return on assets and return on equity. Return on assets is the net income of the firm divided by average total assets. This ratio is important in that it tells an analyst how efficiently management uses its assets to generate revenues. Return on equity is the net income of the firm divided by directly-invested shareholder equity and this ratio tells an investor how well management uses investments to generate profits for the organization. The chart below shows 10 years of return on assets and return on equity for ABAX.
Aside from two noteworthy features, the chart above shows a history of consistent, but stagnant returns. The first prominent feature was a period of growth between 2003 and the second half of 2004. During this time period the firm rapidly grew, as demonstrated by return on assets and return on equity. These quarters were marked with an equally aggressive growth in stock price, in which ABAX increased by 375%. Following this initial period of growth, ABAX encountered heightened competition and between the second half of 2004 and the second quarter of 2005, returns plummeted. This period of declining returns was associated with a likewise decrease of around 50% in the firm's stock price. For the next 7 years, ABAX essentially became a very boring company in which returns went nowhere and share price oscillated within a $15 range. In the most recent quarter, ABAX piqued my interest.
After 7 years of inactivity, ABAX has entered a period of growth. This growth is very noteworthy in that it signals the best performance that ABAX has experienced since its surge in profitability in 2003. As history has shown, returns tend to drive share price performance. This relationship makes intuitive sense in that as an organization improves itself and delivers higher returns, investors tend to flock to the security, driving up share price. What really interests me with ABAX is that it doesn't seem that the market has caught on to the fact that this is the best that ABAX has performed in almost a decade. In my opinion, the market has simply become bored with this security and hasn't intensely analyzed its historic price drivers. In light of this oversight, I believe that we investors can profit. The firm is currently at 7 year highs performance-wise, but shares have been unable to overcome the share price high established in 2007. I believe that when the market realized that ABAX is in play once again, shares will surge past this point and propel us to new highs. Fundamentally speaking, ABAX is already at new relative highs however shares are lagging firm performance. This is an opportunity and investors would be wise to consider purchasing in the near future.
I advocate purchasing ABAX, but I do not believe that investors should immediately buy the security. Even though firm performance has increased to near decade highs, I believe that we should exercise caution in our investments. Specifically, I believe that investors should wait until price overcomes the 5-year established high of $40.00. Even though price has briefly increased above $40 per share, ABAX has been unable to maintain this level, as seen in the chart below. Investors who purchase at $40 should strongly consider placing a stop-loss at $34.50. A break below $34.50 will signal a collapse of the investment thesis and the possibility of further losses due to the fact that the "flag pattern" which led to the breakout will have been invalidated at this point. A flag pattern is essentially a time period in which price trades sideways or downwards within a clearly-defined channel. ABAX has been trading within a flag for the past 4 months and if price exceeds the low of this formation, the profit potential will technically have been invalidated. Investors who purchase the shares at $40 would be wise to consider exiting the position as soon as the fundamental performance of ABAX declines, as measured by a decrease in return on assets and return on equity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.