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Private investor with extensive global management & investment experience with leadings MNCs predominantly in Asia. Financially independent investor and portfolio manager based in an Asian commercial capital. My contrarian investment strategy is LONG / SHORT equity with a 3-5 years investment... More
  • AEP Industries - Soaring Sputnik Sputtering ! 0 comments
    Mar 20, 2013 8:15 AM

    Net sales of AEP Industries (NASDAQ:AEPI) of the first quarter of fiscal 2013 decreased to $267.1 million from $267.6 million (-0.2%) for the first quarter of fiscal 2012.

    Net income surged to $ 6.9 million from $0.3 million i.e. a whopping almost 20 fold increase with net income per share jumping to $1.25 from $0.06 almost 21 fold.

    The five-year period from 2008 to 2012 saw net sales continuously rising to a total $ 1.153 million with profitablilty failing to increase in lockstep with the rising top lines.

    Based on an improving outlook the shares had embarked on a stellar rise since November of 2011 almost tripling from $24.3 to $69.9 by October 2012. After a short retreat to $51.3 in December of 2012 the stock resumed its upward surge all the way up to an unprecedented high of $75.4 on March 2013 in anticipation of the latest blow out quarter results.

    Most of the analysts and rating agencies rate the stock a buy and the general media coverage is almost unanimously positive and/or inconclusive (" Is AEPI a cash machine?", "Why AEP Industries may be about to take off ", The secret reason why AEP's Industries' earnings are awesome "etc.).

    Making positive predictions on the back of soaring shares is fairly easy because there is nothing more convincing than a rising stock price.

    The discerning contrarian investor with a critical mind however will highlight the following red flags of this "continuing success story ":

    1. Stalling top line growth

    The latest quarterly results could indicate that the earlier years of fast growth or the anticipation thereof might finally be coming to an end.

    2.High debt to equity ratio

    The high ratio of almost 3 would indicate that the company has been more aggressive with using debt to finance growth than 85% of its peers in the container & packaging industry.

    In case of a business slowdown, highly leveraged companies in general and for AEPI in particular the high level of debt might quickly become a serious burden when debt servicing is required making it much more vulnerable than its peers.

    3. Short interest and insider sales

    Short interest has jumped markedly by 200% compared to a year ago while inisder sales show no significant increase yet at this stage.

    4. Stock price upside potential

    After the huge run-up and more than fourfold increase the stock price has seen from November 2011 until YTD 2013 additional upside looks very limited indeed.

    Following the publication of the latest quarterly results and despite a huge jump in net profits,the stock only magaed to eke out marginal gains with the emphasis being on "eke out and marginal" and not on gains.

    If you really think the stock will continue its exponential trend unabated you are falling for the extrapolation ad infinitum fallacy.

    5. Recurring boom bust pattern emerging

    An examination of the stock chart over an almost 3 decades' horizon all the way back to 1986 reveals that similar surges in price had taken place before already on 3 different occasions in the past. The stock had touched then all-time highs of $55,$ 59 and $55.3 in December 1996,May 2001 and December 2006 respectively.

    There is a clear recurring pattern emerging here!

    In each of these cases the climaxes reached after fast and powerful upsurges all proved extremely short-lived.

    The mad frenzy that had violently pushed the stock up to insane levels evaporated as quickly as it had been created taking the stock back down with it to significantly lover levels.

    With history repeating or at least rhyming as Mark Twain put it one can safely expect a recurrence of the same pattern from the now all-time historical highs.

    Bottomline:

    Remember the old adage that those who don't know their history (stock market history) are doomed to relive it.

    It is NEVER different this time!!!

    Based on the above findings and my experience the stock has run its course and potential additional upside is therefore extremely limited.

    Expect AEPI to reverse course and fall dramatically any time soon.

    Be quick to grab this SHORT opportunity now!

    Disclosure: I am short AEPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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