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Update: Closing My Long Thesis On RadioShack Following The Q2 Earnings Call
- RadioShack’s Q2 numbers show financial position is deteriorating faster than most expected. Stockholders' equity is now negative. Financial rescue talks have dragged on for much longer than I expected.
- This decreases the likelihood of a shareholder-friendly rescue solution. I no longer see attractive reward/risk following the Q2 call, the stock’s price appreciation, options volatility increase and more.
- Therefore, I am closing my contrarian long thesis at ~$1 per share for a 60% profit in a month. The profit was much higher using stock options, as I recommended.
Korn Ferry Beats Estimates Again But Sequential Top Line Growth Has Stalled
- Korn Ferry reported another strong quarter, beating its sales and EPS estimates.
- However, organic top line growth is clearly slowing down sequentially.
- Future growth will need to rely more on margin expansion, cost restructurings and potential acquisitions.
- Weak August jobs reports from the U.S. and Canada are a concern if the weakness proves to be more than just an outlier.
- Over the next two years, Korn Ferry’s stock has a ~20% upside with a target price of ~$37 per share if the current positive global economic cycle continues.
Update: Finisar Earnings - Delivers Solid Q2 Sales But Weaker Margins And Soft Q3 Guidance
- Sales increased 23.3% Y/Y and 7.1% Q/Q on weaker margins mainly due to unfavorable product mix. EPS fell and Q3 guidance was very light on weak telecom customer demand.
- I reiterate my long thesis. My $20 target price offers a ~13% upside within 12 months but the second half of 2014 may be volatile for the stock.
- The long thesis worked well on continued growth, delivering a total stock gain of ~60%. However, since April, this cyclical small-cap lost all gains on weak Q1 results.
TGC Industries: Buy When Others Are Selling
- Land-based seismic industry services sales and stock prices have been in a free fall due to oil and gas exploration companies’ spending cuts and project postponements.
- The sentiment is extremely negative, exacerbated by a March bankruptcy of one of TGE’s peers.
- However, TGE has strong financials and modern equipment. Seasonally strong quarters are coming, and TGE sees a pickup in demand, especially in the wireless services segment.
- TGE has a very favorable reward/risk trading below $4 per share and at 1.2x tangible book value.
- TGE has a $7.50 DFCF fair value price realizable within several years. TGE is also is cheap versus its peers.
ION Geophysical: Attractive Reward/Risk As Growth Segments Will Help Stabilize Falling Sales
- Sales from traditional, lower-margin seismic services and seismic equipment have been falling in ION and across the industry amid overcapacity, price pressures and increased competition.
- Rapid expansion of sales from high-margin, highly specialized, ocean-bottom services and software services will help ION mitigate the fall and stay relevant in the later life-cycle of E&P projects.
- Thanks to these strong growth areas, ION will perform better than most of its peers if the downturn continues, and will excel if the cycle rebounds.
- At a $7 target price, ION’s stock offers a ~105% upside within several years as the cycle improves and growth segments outweigh legacy sales.
- Despite large upside potential, downside risk should be protected as the cyclical weakness may continue.
Update: Regis Q2 Earnings - Sales Still Falling But At A Slower Rate As Turnaround Attempts Continue
- Regis' same-store sales continue sliding but at a much slower pace now. Service sales were flat while retail sales continued falling.
- I reiterate my long thesis but lower my target price to $16 per share on higher turnaround costs and longer turnaround which is still uncertain.
- My thesis correctly expected continued sales weakness but underestimated the costs and length of the turnaround which resulted in a flat stock price performance, underperforming the broad market.
CGG Offers Attractive Reward/Risk - If You See The Oil Through The Soil
- Current seismic industry sales and stock prices are in a free fall, and future visibility is very diminished due to E&P spending cuts and project postponements.
- CGG has a leading market share position in the seismic industry.
- The strong position and low operating leverage in the highest-margin seismic equipment segment will protect CGG’s margins and solvency in a downturn.
- CGG’s restructuring that is under way will align costs with lower sales and will add focus on high-margin equipment and geology/geophysics business.
- At my target price of ~$16, CGG has an 80% upside within a few years but the downside should be protected because CGG’s price could fall further on industry weakness.
Update: RadioShack Reportedly In Talks To Avoid Bankruptcy - Stock Up 60% In A Week
- Several reputable sources reported that a 10% shareholder Standard General LP is in talks with RadioShack’s management about a possible financial rescue package to avoid bankruptcy.
- I remain long RadioShack and reiterate my long thesis and a target price of $13 per share. However, until there is a real deal, the financial rescue is pure speculation.
- A potential financial rescue package and an attempt to lift debt covenants were suggested in my long thesis from three weeks ago.
Dawson Geophysical Offers Favorable Reward/Risk Amid Industry-Wide Slump
- DWSN stock lost 45% in a year, in line with almost all peers amid industry-wide slowdown in seismic data investments by E&P oil and gas companies.
- Current steep sales slump seems to be temporary, caused only by project delays, not cancellations. So far, bookings still remain strong. Nevertheless, there are risks of project cancellations.
- On a positive note, late June and July demand shows signs of a rebound. Margins and earnings should rise going forward thanks to DWSN’s right-sizing of costs.
- DWSN trades at 90% of its tangible book value, at the bottom of its peers and close to a multi-year low.
- DWSN offers a compelling reward/risk opportunity with ~50% upside potential within several years and a target price of $34.
Update: LSI Industries Q2 Earnings - 7% Sales Jump But $0.03 Loss Per Share On One-Time Charges
- While total revenues jumped 7% Y/Y, margins suffered as LYTS logged one-time write-off charges. LED division marched ahead with 16.8% Y/Y sales growth while graphics segment declined at 25% Y/Y.
- I reiterate my long thesis. With my updated target price of ~$8, LYTS has a ~20% total return potential within the next 12 months on improving margins.
- My thesis was precise in seeing the near-term catalyst but also the lower long-term fair value. LYTS quickly jumped 30% on the catalyst only to later give up all gains.
Update: Echelon Acquires Lumewave, A Smart Street Lighting Control Provider
- Echelon announced acquisition of Lumewave, Inc. Terms of the transaction were not disclosed. Lumewave’s current sales were not disclosed either but they will definitely not be material to ELON.
- While my thesis didn’t anticipate an acquisition, Lumewave’s acquisition tries to revive Echelon’s falling sales in the Internet of Things segment where future growth lies.
- I confirm my thesis that investors should wait for a clear signal that the sales and margins stopped deteriorating before buying ELON.
Update: Extreme Networks Q2 Earnings Better Than Expected, Enterasys Integration Progressing Well
- Revenue reached $155.3M and GAAP loss was $0.17 per share. The North American integration issues seem to be over now. EXTR is getting ready for the E-rate program.
- The long thesis has worked very well on continued growth, successful acquisition and renewed E-rate program. The stock was up over 100% at the peak, and is still up ~25%.
- I confirm my long EXTR thesis on expected E-rate program sales bump and strong performance of the acquisition. I raise my target price slightly to $5.5, representing a ~10% upside.
Update: Silvercrest Asset Management Q2 Earnings - AUM And Sales Growth Continue Despite Weaker Stock Market
- AUM and revenue continued to grow, albeit at a slower rate. EPS was $0.18, dividend unchanged, yielding ~3.1% annualized.
- The long thesis was initiated only recently. Due to weaker Q2 stock market performance, SAMG lost some AUM growth speed and the stock is down ~5% since my recommendation.
- I confirm my long SAMG thesis and the target price of ~$18.4 within a year, offering a ~12% upside potential within a year.
Artisan Partners Asset Management: Continued Rapid Expansion Of International Client Base Will Drive Future Growth
- Overall, APAM’s strategies show excellent track record of beating the benchmarks over the full market cycle. Recent one-way, always up market has been hurting short-term relative performance.
- APAM’s international strategies continue to gain traction as investors have been rebalancing from U.S. stocks, especially the small caps, toward international exposure.
- For Q2, APAM reported another solid quarter, with AUM rising 31% Y/Y, revenues up 27% Y/Y and EPS up 10.5% Y/Y. International client AUM and base continue to rapidly grow.
- July numbers show net cash outflows, in line with the general industry trend, as U.S. stocks, and small-caps in particular, have witnessed price weakness and fund outflows.
- APAM continues to be an attractive investment with ~11% upside plus 4% dividend yield within the next 12 months.
Update: Oclaro Reported Improving Q2 Earnings Numbers But Weak Guidance Surprised
- Revenue was up 0.5% Y/Y, margins and EBITDA loss improved but Q3 guidance was surprisingly weak. EBITDA turnaround expected in a year on $100M quarterly sales.
- The contrarian turnaround thesis is taking a pause now as OCLR's Q3 guidance disappoints. The costs are lower but sales are expected to keep falling in Q3.
- I confirm my long thesis but update my target price down to $2.3 per share on weak sales guidance. The stock still offers a ~30% upside within two years.
Update: Applied Industrial Technologies Q2 Earnings - Revenue Regains Some Momentum But EPS Still Down
- Revenue was up 2.2% Q/Q, showing strong momentum after flat sales. EPS was down 6.5% Y/Y for Q2 and down 4% for the full fiscal year.
- The long thesis worked out relatively well until today’s post-earnings 4% dip, which I see as a buying opportunity in the long run.
- I confirm my long thesis and see a target price of $51 within 12 months, providing a 10% upside plus the 2% dividend yield.
Update: Electro Rent Q2 Earnings - Revenues Up Slightly But Margin Pressure Continues
- Revenue eked out a 1% gain Y/Y in Q2 but was down 3% for the full fiscal year. Operating margin fell to 11.9% from 16.2% and EPS was $0.19.
- As I expected, ELRC performance was mediocre. Thanks to high dividends, investors are breaking even on my advice to buy on dips if they didn’t sell the 25% November spike.
- I confirm my long ELRC thesis and the $16.7 target price within two years, offering a 10% two-year upside plus the 5% annual yield but the performance will remain mediocre.
Update: Stantec's Q2 Earnings - Strong Sales And EPS Growth Continues, Guidance Confirmed
- Revenue increased 11.8% Y/Y, of which 3.7% was organic, mainly on continued oil & gas sector strength. Diluted EPS rose 20.5% Y/Y, dividend unchanged sequentially but up 7% Y/Y.
- My thesis is only one month long but already shows signs of strength as STN posted very solid quarterly results and its stock gained over 2% in a month.
- I confirm my long STN thesis and see it reaching a target price of $76.5 within a year, proving an ~18% upside and further 10% to 15% per year afterwards.
Update: Magic Software Earnings - Sales Up 17%, Confirms Forward Guidance
- Revenues continue rising, 17% Y/Y. Margins decreased slightly and EPS was flat Y/Y due to the 11% share dilution from secondary offering. Allstate temporarily hurt by AT&T Direct TV merger.
- My thesis worked well on continued growth. In six months, the stock returned over 60% as it hit my most optimistic target almost precisely. It later retreated after secondary offering.
- I confirm my long thesis and my target price. I see MGIC at $9.89 again within a year as growth continues, offering a ~35% upside.
Update: NeoPhotonics Q2 Earnings: Record Revenue But Falling Margins And Weaker Cash Position
- Revenues increased 3% Y/Y and 13.6% Q/Q, however, margins continued to decline and cash reserves continued to decrease.
- The risks in the thesis materialized and the stock continued to fall and a successful, lasting turnaround remains an unlikely outcome.
- Because of a deteriorating cash position, further restructuring costs on the way and expensive or unavailable downside protection, I cannot recommend a NPTN purchase now.
Update: Multi-Fineline Electronix Earnings - In Line, Showing A Break-Even May Be Near
- Revenues still fell by 4% Y/Y but sales to new customers skyrocketed ~200% Y/Y. While MFLX still posted an EPS loss, forward guidance expects non-GAAP breakeven.
- The long thesis worked well, with a ~20% gain in three months as my target price was hit. However, the stock later fell below the initial level.
- I reiterate my long thesis. MFLX offers another attractive entry point with ~50% upside within two years. However, downside should be fully protected at 10% below the purchase price.
Update: ESCO Q2 Earnings - Revenue Misses But Earnings Beat, Sales And EPS Up Y/Y
- Revenues increased 12% Y/Y, primarily due to an acquisition. EPS improved significantly from $0.24 to $0.43.
- The long thesis has been working well, with waiting for the dip paying off as the stock price otherwise just remained flat Y/Y.
- I reiterate my long thesis but investors should again wait for a ~10% pullback to improve reward-risk. My target price is then $37, offering a ~9% upside.
Update: Houston Wire & Cable Q2 Earnings - Record Margins On Robust Sales Growth
- Revenues increased 4.2% Y/Y, or 7% when adjusted for lower metals prices. Given the tough commodity environment and still reluctant capital investment environment, HWCC is performing really well.
- The long thesis has been working well so far as HWCC was able to remain resilient despite strong metals price headwinds and still uneven recovery in some regions.
- I reiterate my long thesis and confirm my target price at $14.80, giving the stock a ~20$ upside within two years plus the 4% annual dividend yield.
Update: Echelon's Q2 Earnings - Sales And Margins Continue Falling, Outlook Expects More Weakness
- Total revenues fell 40% Y/Y, especially on weak smart grid sales. Company plans to downsize the Grid business after a failed attempt to sell. Restructuring costs can be expected.
- Investors should wait for a clear confirmation that the sales and margins stopped deteriorating. More stock weakness may be ahead due to restructuring and falling sales before things get better.
- My thesis worked extremely well in terms of the advice to wait for a 20% pullback. After the dip, the stock skyrocketed 100% but later fell to the original level.
Update: Seneca's Q2 Earnings - 3.4% Sales Growth But Negative EPS. New Share Buyback And Acquisition
- Sales grew 3.4% Y/Y but EPS disappointed, being negative $(0.01) per share. The stock still trades at 8.32x P/FCF, though and continues to be undervalued.
- I reiterate my long thesis and keep my target price at ~$36, offering ~25% total upside within two to three years. Recent buyback announcement should provide the needed catalyst.
- The stock traded relatively flat since my thesis but was very stable. With no dividends in a hunt-for-yield market, the stock lacked the catalyst for value realization.
Update: Delta Apparel's Q2 Earnings - Falling Sales And Margins Amid Unprecedented Fall Of Cotton Prices
- Sales fell 7% while income fell 44% Y/Y on slumping cotton prices that fell abruptly by ~30% in a matter of weeks.
- I reiterate my long thesis but the downside should be protected as cotton prices may keep falling. However, company restructuring should yield better margins and higher stock price.
- The long thesis has worked well for 7 months, gaining ~10%. But then DLA’s stock started underperforming, helped by falling cotton prices and a small-cap sell-off.
Update: Gaiam's Q2 Earnings Show Decent Sales Growth And Narrowing Loss
- Revenue rose just 2% Y/Y. However, a normalized sales growth reached 9%. Comparable GAAP loss remained roughly flat Y/Y at $0.10 per share vs. $0.11 Y/Y. Margins improved 600bp.
- I reiterate my long thesis and set my target price at $8.5, offering a ~20% upside, as I wait for the Gaiam TV spin-off to materialize in under a year.
- The long thesis has worked well, as Gaiam continued to unlock value and re-focus on its core business. The stock gained ~60% at the peak in June.
Update: National Healthcare's Strong Q2 Results - Revenue Up 12.8%, Comparable Income Up 2%, Dividend Raised
- Revenue grew 12.8%, income decreased on higher start-up costs that will drive future sales, investments were strongly up, dividend increased by 6.25% Y/Y and Q/Q.
- I reiterate my long thesis and raise my target to $70, providing for a total upside of ~25% within two years plus dividends yielding ~2.5% annualized.
- The long thesis has worked well with NHC’s continued expansion of facilities and but also on strong comparable results.
Exar Q2 Earnings: Organic Revenue Keeps Falling, EPS Negative - Acquisition Saved The Day
- Organic revenue has been falling for three quarters now. Total revenue growth was saved by the acquisition of Integrated Memory Logic. EPS was negative again.
- I reiterate my long thesis, but I am lowering my target price to $10, offering a ~8% upside. The downside should be fully protected at 10% below the current price.
- The long thesis has worked well for a year, with EXAR trading in line with the small-cap category which showed weakness. Last month, EXAR started underperforming.
Update: IXYS Corporation's Q2 Earnings Show Solid Sales, Rising EPS And Bookings
- Revenue rose 23.7% Y/Y, boosted by acquisition of Samsung’s microcontroller business, EPS increased to $0.11 from $0.06 while gross margin fell slightly to 28.4% but bookings improved.
- I am reiterating my long thesis, raising the target price due to improving operating results to $13 per share, offering a ~13% upside within 12 months. Volatility likely to continue.
- The long thesis has worked almost precisely, with the stock currently trading at my target price.
RadioShack: Buying The Stock Outright Is Still A Losing Proposition. But With Downside Protection, It Is Becoming A Viable Bet
- Buying RadioShack stock outright is still a losing proposition due to high probability of bankruptcy or a large share dilution.
- Using a downside protection, it is becoming a viable bet. But it remains highly contrarian and purely speculative gambling.
- I hold a small long position using options as a contrarian bet for entertainment purposes only. Investors should not invest in RSH, except for highly speculative, entertainment purposes.
Update: Caesarstone Q2 Earnings Rock-Solid Again - Guidance Increased
- Revenue rose 30.4% Y/Y, driven again by accelerated 55% Y/Y U.S. sales expansion as the company continues to increase production capacity amid surging demand.
- I am reiterating my long thesis and raising my target price to $70 from $58 after the strong sales and guidance increase. CSTE remains one of my strongest-conviction long-term recommendations.
- The long thesis keeps working very well. The stock gained ~50% since November at its peak, and is still up ~28% after the dip which I recommended to buy.