Buying At The 52-Week Low: James River Coal and RadiSys

Includes: JRCCQ, RSYS
by: Semi-Standard Deviation

Raise your hand if you want to buy low and sell high. Now that we've narrowed the audience down to the entire investment community, we will take a look at a "buy low" tactic and analyze a couple stocks in the process.

The motivating force behind purchasing stocks at their 52 week low is to move into the contrarian position - to grab the stock when it's down and out, to beat the tide before it shifts the other way and ultimately, to look back at some point in the future and know that you bought in at the lowest point possible.

That said, there are of course some serious questions that need to be asked when looking at a company sitting on its 52 week low: Why is it at its 52 week low - bad reaction to earnings? Faulty management? Consistent downward slope? Reaction to previous overvaluation? And will it simply continue to go down? Let's look at some stocks that will fit into each of these questions.

James River Coal Company (JRCC) was sitting at a 52 week low of $14.93 on Aug 23rd after it had shaved off 66% from its high earlier in the year. The company's operating cash flow had taken a sharp hit in the most recent quarter and its gross profit had been bleeding consistently since the beginning of the year. The company was a former buyout candidate and could have had an upswing if speculators had jumped in, seeing it as a value. But ultimately, the company was in rough shape, the coal industry kept taking a hit and it continued to slide, ending up down 77% for the year. This company had consistently bad earnings, was previously overvalued and in a industry which Wall Street was not looking favorably upon. Here's what happened:

JRCC 1-yr chart:


If we look at another company around its 52 week low, we can hope to see some different results. RadiSys Corp (NASDAQ:RSYS) is a tech company trading on the Nasdaq which has seen its stock price drop around 30% in the last 4 months. The company makes computer hardware for communication networks and measurement devices for medical imagers and other electronic equipment. Their technology "powers products from Comverse, Nokia, Nortel Networks, Philips Medical, and Siemens" ( Business Week has polled 80 market strategists, 28 of which predicted the tech sector to have the best performance in '07, making it the most popular industry pick. This should play out well for a tech company selling to other tech companies.

With regard to financials, RadiSys' numbers are sub-par. The company incurred a loss of income for this last quarter and is in negative territory for the year. Its profitability ratios are below the industry averages as are its growth rates. But it is financially strong - with quick and current ratios well above the industry and sector averages. We can also expect to see a decrease in expenses, as there was a 14 million charge that was a result of their acquisition of Convedia, a provider of VoIP (voice over internet) services, among other products. Their income would have been in positive territory if not for this ongoing R&D charge from Convedia. This acquisition of Convedia will enhance RadiSys' presence in the VoIP market, which I believe has tremendous growth opportunities. In an ever-more connected world, VoIP is seeing increased demand and providers are realizing it. Skype announced that they will be charging for their services, as they realize the profits 8 million users (and counting) could bring them. Comcast has bundled VoIP into their attractive triple-play package of cable, television and phone usage. E-mail's conquering of snail mail might not be a perfect analogy, but if VoIP's advantages over land-line or cellular phones continue to attract users at the current rate (or even higher), then this is an excellent business to be in.

In conclusion, let's look at the prospects for RadiSys. The stock opened today (12/27) at $16 and is currently trading at $16.43. Many analysts have a hold rating on the stock and I can see it hovering around the 15-16$ range for a short period. But I expect the current quarter to produce better results and the stock to begin its ascent then. In the financial statements for this current quarter, expect some increases in expenses, as they move out of their Monterey (Mexico) and Charlotte [NC] plants. They won't have dynamite numbers in the short term, but the acquisition of Convedia was a great use of the cash on hand and will give them an enhanced presence in a growing market (VoIP) and a sector predicted to have a year of outperformance.

RSYS 1-yr chart:


Disclosure: Author has no position in stocks mentioned.