Gencor: Growth Stock, Capitulation Opportunity

Gencor Industries (GENC) is at the forefront of two major bull markets, namely infrastructure and agriculture. The Orlando-based heavy machinery maker manufactures asphalt plants, soil remediation plants, combustion systems and screening equipment for the road and highway construction industry. They are working on developing different biomass fuels, waste fuel recovery, asphalt recycling etc. The pending global infrastructure upgrade cycle and agricultural secular growth trend should allow this company to benefit from a myriad of fronts. Management has had an excellent track record of creating shareholder value, namely by eliminating most debt, by maintaining a steady growth in R&D spending and by continuing to grow its core businesses.

Nevertheless, small companies do often incur unforeseen capital expenditures, delays in orders and temporary R&D expenses in an effort to better position themselves for the long-term. While GENC has consistently met and exceeded Wall Street expectations, it just reported a dismal quarter. Nevertheless, the company still managed to earn $1.50 for the trailing 6 months. Even after the miss, it is quite conceivable for the company to earn $3 in 2008 and for it to resume its growth trend after that.

The stock hit a classic technical trading bottom today, declining ~35% on almost 10 times normal volume. Investors in small cap stocks often panic way too much when a company with a solid track record misses its earnings. Witness LSB Industries (LXU) and Art'sWay Manufacturing (ARTW), two other high-growth small-cap stocks which, after a tremendous track record, got unfairly beaten up and subsequently rose 25% from their bottom.

This quarter's results may have quite conceivably been affected by a recessionary environment in which municipalities may have held back their spending for the company's products. Since the stock market is a forward discounting mechanism, one should look beyond this quarter's results; the prospects for GENC are fantastic.

The decline in GENC makes for a compelling technical bottom trade, namely buying the stock at these levels with a tight stop at $19.50. I expect the stock to trade back to $25 as week longs have gotten washed out, short term shorts cover and investors who are aware of the fantastic track record of management give it the benefit of the doubt and invest in the long-term at levels that are extremely attractive. For investors with a short term horizon, I expect GENC to bounce back to $25-27. My 12-month target for the stock is $35.

Disclosure: Author is long GENC.

Comments

[seeksome:]

I sold last week at $28.75 will be buying back in at these levels long term prospects are good for this company period. To get what your heart desires at wholesale prices please visit:seeksomething.com

2008 May 12 04:52 PM

[Stockpicker...:]

Great article Dean. I sold most of my stock before earnings but at these levels it certainly makes sense to get long again. This really seems like a classic capitulation and no-brainer, I plan to back up the truck on this one tomorrow.

2008 May 12 05:20 PM

[Stockpicker...:]

Very informative, thank you. I follow small cap stocks quite often...your analogy of LXU and ARTW is quite accurate as both stocks got overly punished after their dissappointing results but that proved to be the bottom and a great buying opportunity. Bought LXU at $14, now trading at almost $18 now...missed out on ARTW but that bounced even more from its lows. My gut tells me this is worth a shot and I plan to buy some of the stock tomorrow with a $18.50 stop.

2008 May 12 05:25 PM

[Aaron Adams:]

You're missing a few crucial points in your article. You completely left out the role that the resignation of Lloyd Miller from the board of directors played in the fall of GENC today. He's an activist investor and the stock had done very little before his involvement. When he got himself on the board this stock tripled in a few months. With that catalyst gone the stock should go back to the low teens. You mentioned LXU and ARTW - those two had huge volume selloffs and dropped another 30% AFTER the high volume panic selling. So you'd still have lost money if you bought the day AFTER the first selloff. This stock will have a bottom like those will but we're not there yet.

2008 May 12 06:03 PM

[Hedge Fund ...:]

"Investors" with too large an unprotected position tend to say these things when they get trapped in a monstrous gap down like this. Much better stocks often drop excessively after excellent earnings reports with disappointing guidance. With the disappointing surprise they delivered, I would hate to think how much more punishment this deserving stock will have to endure before its price can even begin a "bottoming process" and final capitulation. With those twin pillars of infrastructure and ag, how could they not have failed to execute?

2008 May 12 08:47 PM

[TheGoog:]

Author's analysis is very encouraging.

2008 May 12 10:46 PM