Previously, I wrote Round 7 of this article in which I listed and reviewed three low-priced stocks that I believed should be avoided. The stocks I reviewed in Round 7 were Emerald Oil, Inc. (EOX), Seabridge Gold Inc. (SA) and Turquoise Hill Resources Ltd. (TRQ).
For Round 8, I will once again focus on stocks that are currently priced at under $10. In determining why I find that these stocks should be avoided, I will be looking at each company's financial performance, current valuation, recent trading activity, dividend policy, earnings and future outlook.
Stock No. 1
Arch Coal, Inc. (ACI) is a coal mining and processing company that mines, processes, and markets bituminous and sub-bituminous coal throughout the United States, selling mainly to power plants, steel mills, and industrial facilities. ACI was founded in 1969 and is headquartered in St. Louis, Missouri.
|Gross Profit Margin (Quarterly)||12.96%|
|Profit Margin (Quarterly)||-16.22%|
|Return on Assets (TTM)||-5.76%|
|Return on Equity||-20.08%|
|Revenue Quarterly Growth (YOY)||-18.86%|
Looking at the chart below, you can see that ACI's revenue and gross profit have been a bit up and down over the past five years, and pretty much just down since the beginning of 2012. Over the past five years, ACI's revenue has increased by 22%, but the company's gross profit has actually decreased by 30% over that same time period.
Current Valuation and Recent Trading Activity
ACI has a current price-to-sales value of 0.25x and a price-to-book value of 0.35x. As you can see from the chart below, these values are on the low end of the stock's recent history, making it an attractive valuation.
ACI closed Wednesday at $4.23, $3.72 shy of its 52-week high and $0.76 higher than its 52-week low. It is trading above its 50-day moving average of $4.15 and below its 200-day moving average of $4.40.
ACI has seen the following price returns:
|1 Month Price Return||9.04%|
|Year to Date Price Return||-42.35%|
|1 Year Price Return||-38.75%|
|3 Year Price Return||-86.07%|
For its latest quarter, ACI reported adjusted loss per share of $0.01 per share. This was a positive surprise according to estimates but was well below the earnings of $0.20 per share reported for the same period last year.
From the chart below, you can see that ACI's earnings have fallen somewhat steadily over the past five years.
ACI currently pays a $0.03 quarterly dividend that yields 2.85%. The company's dividend was cut drastically last year from $0.11 to its current $0.03 price. I don't expect to see much growth from this dividend any time soon and wouldn't be surprised to see an eventual suspension of the dividend if the company continues to struggle to post positive earnings (having reported negative earnings in 6 of its last 7 quarters).
ACI, like most coal companies, has had its fair share of challenges recently. To its credit, the company has done an admirable job of reducing costs and capital spending while increasing its financial flexibility.
The problem is that I don't think there is much more room for ACI to improve these areas. There is only so much you can cut or optimize; eventually you need to see increased revenue and I'm not sure that is in ACI's future. The Tennessee Valley Authority recently announced that it plans to reduce its coal use by approximately 50% as it will shut down eight coal-fired plants. The TVA isn't alone, as coal usage is declining all over the United States. International demand could eventually increase, but with the amount of reserves that ACI and other coal companies currently have, coal exports have dropped from their 2012 highs.
I believe that it will take some time before coal prices rise significantly, which is what ACI needs in my opinion in order to see substantial revenue and earnings growth. With the high amount of political and environmental risks associated with coal stocks currently, I don't see enough positives going forward for ACI to warrant the increased risk exposure. And I'm not convinced that increased international demand will happen soon enough to offset the falling U.S. demand for coal. Even with its seemingly attractive current valuation, I would recommend avoiding this stock.
Stock No. 2
CYS Investments, Inc. (CYS) is a specialty finance company that invests in residential mortgage pass-through certificates in the United States. CYS is taxed as a real estate investment trust and was founded in 2006. The company is based in Waltham, Massachusetts.
|Profit Margin (Quarterly)||34.18%|
|Return on Assets||-2.07%|
|Return on Equity||-20.04%|
|Revenue Quarterly Growth (YOY)||-68.71%|
Looking at the chart below you can see that CYS has seen a recent steep drop in revenue as well as book value.
Current Valuation and Recent Trading Activity
CYS has a price to book value of 0.79x. This is on the low side of the stock's recent history.
CYS closed Wednesday at $8.03, $5.33 shy of its 52-week high and $1.29 higher than its 52-week low. The stock is trading below both its 200-day moving average of $8.89 and its 50-day moving average of $8.33.
CYS has seen the following price returns:
|1 Month Price Return||-5.48%|
|Year to Date Price Return||-32.05%|
|1 Year Price Return||-35.49%|
|3 Year Price Return||-39.98%|
Last quarter, CYS beat estimates with its $0.23 earnings per share, although it was still $0.02 less than the same period last year.
Looking at the chart below, you can see that CYS' earnings have been flat or falling since 2010.
CYS currently pays a $0.34 quarterly dividend that is yielding 16.94%. As you can see in the chart below, the stock's yield has pretty consistently maintained its position between 15% to 20% (briefly reaching as high as 30%) over the past five years, but you can also see that during that same time the growth of the dividend has actually been negative.
I admit that a double digit dividend yield always looks appealing, but investors shouldn't be blinded by it. Even with the consistent double digit dividend yields, long term investors would have seen a 1% total return loss on their initial investment over the course of three years.
The outlook for CYS seems to be improving, but I think there are still some valid concerns to consider before investing in this stock. One of the biggest issues is the declining book value of the company. If and when CYS resolves this issue and shows a bit of consistency with its dividend, I would lean more favorably towards it. While the yield has remained fairly consistent, the dividend has seen some cuts and if you take into account CYS's $14+ price from last year, the yield would be less than 10%. Because of these issues and the high risk associated with interest rate hikes, I recommend avoiding this stock.
For investors who are looking to invest in REITs, take a look at my article Low-Priced Stocks Worth Buying: Round 8 for a REIT that I think is worth considering as a buy. I believe its overall financial position is better and I have seen steps the company has made to increase its growth and hedge against associated risks with the REIT industry, providing me with more confidence for a positive outlook compared to CYS.
Stock No. 3
VASCO Data Security International, Inc. (VDSI) develops, markets, and supports open standards-based hardware and software security systems that manage and secure access to information assets. VDSI was founded in 1991 and is headquartered in Oakbrook Terrace, Illinois.
|Gross Profit Margin (Quarterly)||63.99%|
|Profit Margin (Quarterly)||8.48%|
|Return on Assets||5.28%|
|Return on Equity||6.28%|
|Quarterly Revenue Growth (YOY)||7.89%|
Looking at the chart below, you can see that VDSI's revenue and profit have been sort of up and down over the past five years, with a downward trend since early 2012.
Current Valuation and Recent Trading Activity
VDSI has a current price-to-earnings value of 29.19x and a price-to-book value of 1.74x. VDSI's PE ratio is higher than last year and early this year, but not as high as it has been in previous years.
VDSI closed Wednesday at $$7.20, $1.85 shy of its 52-week high and just $0.01 higher than its 52-week low. It is trading below its 200-day moving average of $8.11 and its 50-day moving average of $7.57.
|1 Month Price Return||-1.74%|
|Year to Date Price Return||-9.80%|
|1 Year Price Return||0.68%|
|3 Year Price Return||-16.46%|
For its last quarter, VDSI reported earnings per share of $0.08. This was 1 cent less than estimates, and 4 cents less than the same period last year. If you look at the full nine months of this year so far, the results are worse at $0.20 per share this year compared to $0.35 per share for the same period last year, a loss of 42%.
One of the problem areas VDSI has dealt with is its Enterprise and Application Security investments. In its latest quarterly report, the company stated it has plans to make this segment of its business profitable by focusing on things like efficiency and cost awareness, but I'm not sure when these discussed changes will take effect, or more importantly when they will begin to reflect in the company's bottom line.
Many seem to view VDSI currently as a buy, with a strong emphasis on its current price. On Nov. 12th, the Street published an article stating the stock was entering overbought territory and said investors should look for entry points. I'm not convinced. Especially because it was nearly identical to another article it published back in August when the stock was trading over $8 a share.
I'm not a huge fan of trying to time the market and instead try to look at the companies I invest in, more than the technicals of the stocks. I'm sure VDSI will bottom out at some point, but I'm not sure when that will be. And based on the company's recent decline in revenue, profit, and earnings, I have to consider this stock as one to avoid, especially with its PE ratio still near 30x.
Each of the companies reviewed above are all facing similar problems of declining revenues, profit, and earnings. And for each of the companies, I haven't seen enough evidence that this trend is going to end in the near future. I don't think any of the stocks are currently trading at enough of a discount to warrant the high risk associated with owning these stocks.
While both ACI and CYS provide dividends to investors, I don't think it makes enough of a difference for them to be considered buys. ACI's yield is relatively low and can be found in much safer stocks. CYS's yield is extremely high, but part of the reason for that is its declining stock price. Even with its double digit yield, investors have found it difficult over the past several years to see positive total returns from the stock.
Because of the issues described above, I recommend avoiding these stocks when looking for long-term investments for your portfolio. As always, I recommend individual investors perform their own research before making any investment decisions.