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Last spring, out of curiosity, I asked VectorVest to add Alloy Steel International (OTCPK:AYSI) to its database. Below is VectorVest’s current analysis of AYSI, preceded by a few comments of mine.

The VectorVest system combines a weighted average of three metrics: relative value (RV), relative safety (RS), and relative timing (RT). It overweights timing (i.e. price action) and underweights valuation.

Mainly because of AYSI’s awful price action recently, VectorVest gives it a sell rating — the sinking share price gives AYSI an awful RT and a bad RS, since RS is based partly on price action too (VectorVest is similar to Investor’s Business Daily in that it favors stocks rising in price).

But VectorVest does consider AYSI to have an excellent RV, as it considers the stock to be worth $2.68 per share. In my experience with VectorVest, its RV calculations have seemed to be the most accurate of the three, maybe because its earnings estimates have seemed on-target.

A specific example, with respect to AYSI: at the end of July, prior to AYSI’s most recent 10-Q, VectorVest gave it a forward earnings estimate of about $0.17 (VectorVest has since raised its estimate to $0.25). Considering how much AYSI had earned in the previous two quarters alone, I thought VectorVest’s forward earnings estimate was too low. It turns out that VectorVest’s estimate was more realistic than mine was. I haven’t noticed as much predictive value with their RT scores, which in my experience seem to be more reactive.

A note about VectorVest’s designated stop prices: any time a stock trades below VectorVest’s stop price for it, it gets a sell rating. For AYSI to get a hold or a buy rating from VectorVest, it will need to rise above VectorVest’s stop price.

Below is Victor Vest’s report; selective emphasis on a few positive parts is mine.

Business: Alloy Steel International engages in the manufacture and distribution of Arcoplate, a wear-resistant alloy overlay wear plate. The company offers fused-alloy steel plates for installation and use in structures and machinery that suffer wear and hang-up problems. Its customer base consists of companies involved in the mining industries primarily in Australia, the United States, South America, India, Indonesia, Singapore, South Africa, Japan, China, Canada, and Malaysia. Alloy Steel International markets its Arcoplate products primarily to consultant engineers to incorporate Arcoplate materials into their equipment and plant designs. The company was founded in 2000 and is based in Malaga, Australia.

Business Sector: Steel

Industry Group: Steel (Alloy).

Value: Value is a measure of a stock’s current worth. AYSI has a current Value of $2.68 per share. Therefore, it is undervalued compared to its Price of $0.49 per share. Value is computed from forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. Value increases when earnings, earnings growth rate and profitability increase, and when interest and inflation rates decrease. VectorVest advocates the purchase of undervalued stocks. At some point in time, a stock’s Price and Value always will converge.

RV (Relative Value): RV is an indicator of long-term price appreciation potential. AYSI has an RV of 1.57, which is excellent on a scale of 0.00 to 2.00. This indicator is far superior to a simple comparison of Price and Value because it is computed from an analysis of projected price appreciation three years out, AAA Corporate Bond Rates, and risk. RV solves the riddle of whether it is preferable to buy High growth, High P/E stocks, or Low growth, Low P/E stocks. VectorVest favors the purchase of stocks with RV ratings above 1.00.

RS (Relative Safety): RS is an indicator of risk. AYSI has an RS rating of 0.63, which is poor on a scale of 0.00 to 2.00. RS is computed from an analysis of the consistency and predictability of a company’s financial performance, debt to equity ratio, sales volume, business longevity, price volatility and other factors. A stock with an RS rating greater than 1.00 is safer and more predictable than the average stock in the VectorVest database. VectorVest favors the purchase of stocks of companies with consistent, predictable financial performance.

RT (Relative Timing): RT is a fast, smart, accurate indicator of a stock’s price trend. AYSI has a Relative Timing rating of 0.04, which is very poor on a scale of 0.00 to 2.00. RT is computed from an analysis of the direction, magnitude, and dynamics of a stock’s price movements over one day, one week, one quarter and one year time periods. Once a stock’s price has established a strong trend, it is expected to continue in that trend for the short-term. If a trend dissipates, RT will gravitate toward 1.00. RT will explode from bottoms, dive from tops, and reflect changes in price momentum. VectorVest favors the purchase of stocks with RT ratings above 1.00.

VST: VST is the master indicator for ranking every stock in the VectorVest database. AYSI has a VST rating of 0.91, which is fair on a scale of 0.00 to 2.00. VST is computed from the square root of a weighted sum of the squares of RV, RS, and RT. Stocks with the highest VST ratings have the best combinations of Value, Safety and Timing. These are the stocks to own for above average, long-term capital appreciation. VectorVest advocates the purchase of safe, undervalued stocks rising in price.

Recommendation: AYSI has a Sell recommendation. This reflects the cumulative effect of all the VectorVest parameters working together. These parameters are designed to help investors buy safe, undervalued stocks rising in price. They also help investors avoid or sell risky, overvalued stocks falling in price. VectorVest recommends that investors buy high VST-Vector, Buy-rated stocks in rising markets.

Stop (Stop-Price): Stop is an indicator of when to sell a long position or cover a short position. AYSI has a Stop of $1.10 per share. This is $0.61 above AYSI’s current closing Price. A stock’s Stop is computed from a 13 week moving average of its closing prices, and is fine-tuned according to the stock’s fundamentals. High RV, high RS stocks have lower Stops, and low RV, low RS stocks have higher Stops. In the VectorVest system, a stock gets a ‘B’ or ‘H’ recommendation if its Price is above its Stop and an ‘S’ recommendation if its Price is below its Stop.

GRT (Earnings Growth Rate): GRT reflects a company’s one to three year forecasted earnings growth rate in percent per year. AYSI has a forecasted Earnings Growth Rate of 34.00%, which VectorVest considers to be excellent. GRT is computed from historical, current and forecasted earnings data. It is updated each week for every stock in the VectorVest database. GRT often foretells a stock’s future price trend. If a stock’s GRT trend is upward, the stock’s price will likely rise. If GRT is trending downward, the stock’s Price will probably fall. VectorVest favors the purchase of stocks whose GRT is rising and is greater than the sum of current inflation and interest rates, as shown weekly in our investment climate report.

EPS (Earnings per Share): EPS stands for leading 12 months Earnings Per Share. AYSI has a forecasted EPS of $0.25 per share. VectorVest determines this forecast from a combination of recent earnings performance and traditional fiscal and/or calendar year earnings forecasts.

P/E (Price to Earnings Ratio): P/E is a popular measure of stock valuation which shows the dollars required to buy one dollar of earnings. AYSI has a P/E of 1.96. This ratio may be deemed to be high or low depending upon your frame of reference. The average P/E of all the stocks in the VectorVest database is 46.78. P/E is computed daily using the formula: P/E = Price/EPS.

EY (Earnings Yield): EY reflects earnings per share as a percent of Price. EY is related to P/E via the formula, EY = 100 / (P/E), and may be used in place of P/E as a measure of valuation. EY has the advantages that it is always determinate and can reflect negative earnings. AYSI has an EY of 51.02 percent. This is above the current average of 2.12% for all the stocks in the VectorVest database. EY equals 100 x (EPS/Price).

GPE (Growth to P/E Ratio): GPE is another popular measure of stock valuation. It compares earnings growth rate to P/E ratio. AYSI has a GPE rating of 17.35. High growth stocks are believed to be able to justify high P/E ratios. A stock is commonly considered to be undervalued when GPE is greater than 1.00 and overvalued when GPE is below 1.00. Unfortunately, this rule of thumb does not take into account the effect of interest rates on P/E ratios. The operative GPE ratio of 1.00 is valid when and only when interest rates equal 10%. With long-term interest rates currently at 3.45%, the operative GPE ratio is 0.12. Therefore, AYSI may be considered to be undervalued.

DIV (Dividend): AYSI does not pay a dividend.

Price: AYSI closed on 9/29/2010 at $0.49 per share

AvgVol: AvgVol is the 50 day moving average of daily volume as computed by VectorVest. AYSI has an AvgVol of 43,276 shares traded per day.

CI (Comfort Index): CI is an indicator which reflects a stock’s ability to resist severe and/or lengthy price declines. AYSI has a CI rating of 0.18, which is very poor on a scale of 0.00 to 2.00. CI is quite different from RS in that it is based solely upon a stock’s long-term price history. VectorVest advocates the purchase of high CI stocks.

Sales: AYSI has annual sales of $19,000,000.00

Sales Growth: Sales Growth is the Sales Growth Rate in percent over the last 12 months. AYSI has a Sales Growth of 265.00% per year. This is excellent. Sales Growth is updated each week for every stock. It is often useful to compare Sales Growth to Earnings Growth to gain an insight into a company’s operations.

Sales Per Share (SPS): AYSI has annual sales of $1.15 per share. SPS can be used as a measure of valuation when comparing stocks within an Industry Group.

Price to Sales Ratio (P/S): AYSI has a P/S of 0.43. This ratio is also used as a measure of valuation. Here, too, it is useful when comparing stocks within an Industry Group.

Shares: AYSI has 17,000,000.00 shares of stock outstanding.

Market Capitalization: AYSI has a Market Capitalization of $8,000,000.00. Market Capitalization is calculated by multiplying price times shares outstanding.

AYSI is undervalued compared to its Price of $0.49 per share, has below average safety, and is currently rated a Sell.

Disclosure: Long Alloy Steel International (OTCPK:AYSI)

Source: VectorVest Analysis of Alloy Steel International