The Microcap Speculator submits: All of us have been taught to think of technical price movements in terms of trends. We regularly look at charts and determine whether it is in a trend, whether the trend is strengthening or weakening, and whether there are signs of reversals.
Yet when we look at a stock's fundamentals, most of us are accustomed to thinking in terms of static, trailing twelve months snapshots. I think that's dead wrong.
Take Advocat Inc. (ticker: AVCA.OB), the microcap nursing home operator with the chart below. A lot of investors will look at the chart and think that with the rapid share price increase the rise has become momentum-driven. However, if we look at the fundamentals, as they exist today, it is clear the stock remains cheap by almost any measure. We know from the recent report and earnings call that the earnings are trending strongly upward, that the shareholder deficit was more than cut in half over the past year, that professional liability issues are being resolved, that unprofitable facilities are being sold (providing the groundwork for positive earnings trend to continue), that the company is restructuring its debt on more favorable terms, and that positive deals and announcements are expected in the coming year.
In light of these developments, I think its a big mistake to focus on the fact that the stock is up over 100% in the past several months. More importantly, at today's price it trades at less than 8x conservative earnings estimates. At today's price it trades at a miniscule fraction of revenues. At today's price, there is a lot of room for upside if the company just comes in line with its larger peers. That's what matters, not where the stock was six months ago.
DISCLOSURE: I am long AVCA.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.
AVCA 1-Yr Price Performance: