PSUN - A contrarian pick

Pacific Sunwear - a specialty retailer of everyday casual apparel, footwear and accessories primarily for teen between age 12 - 24. It operates 3 brand mall-based chain store under the name "PacSun", "PacSun Outlet", and "d.e.m.o". PSUN fashion influence is driven by snowboarding, skateboarding, surfing and companies that are associated with the sports (e.g. VLCM)

In the last 3 years, PSUN is a typical growth company, with an average 20% revenue growth, and more than 50% EPS increase. In parallel to its fast growth, the company successfully maintains its profitability - ROA and ROE is 18% and 26% respectively.

The company bought back over stocks on Dec30, 2005, and Feb28, 2006, at around 24.9 and 23.8, around 10% premium compared to today's price.

At $22.15, the company P/E is valued at less than 14, a 10-year low since 1996; and 40% lower than its peer group - apparel industry average P/E is 24.

Its Feb2006 sales is lower than the street expectation, and maybe a sign of slowing growth. In my opinion, that is already priced in, and consider the stock a value buy.

While researching this stock, I find fellow investors that echoed a similar view and published fine article1 and article 2 weeks ago, that discussed the subject in greath depth. Recommend reading.

SIMG - Follow OVTI's footstep?

SIMG - a semiconductor company has 3 lines of products - Consumer Electronic, Storage (one new product below - SteelVine System) and Display/PC (see right diagram - SiI 1364 transmitter). Its chip delivers the digital contents in a secure, and high speed way to the device (TV, LCD, etc). SIMG is also one of the founders to a group that promotes HDMI standard. SIMG has a number of IPs in HDMI and Serial ATA (storage).



So far it is a to-be-turnaround story. The company has negative net income since 2002, and 2005 is the first year with profit. Observing stable expenses, and steady increased income over the years. Hard pressed with the management, considering that the company acquired 2 companies, restructured the products (de-emphasize/abandon a few), and engage in the workforce reduction, etc, all in the last 3 years, One has to recognize its management efficiency.

If SIMG may keep the expense level, have moderate income growth, its 2006 outlook will be very bright. This stock, in many aspects, resembles OVTI in later 2002 and early 2003.

Its success, without questions, will be highly dependent on its management execution, technology trends, as well as its financial management. (have some concerns as they continued to issue stocks over the years, and option grant - this need to be further followed). Most of their sales are through distributor - reduce the profit margin and less communication with end customers.

On the downside, support is strong at 9.50, which is ~10% off the current price.

NTE - Nam Tai Electronics

NTE - Nam Tai Electronics manufactures and designs electronic components to original equipment manufacturer. Products include LCD panels, LCD modules, radio frequency modules, circuit subassemblies, and image sensor modules.

Though the company specializes in one of the technology areas, its products already fall into commodities. However, the company keeps its operating margin stable at around 8% over the last 4 years, one of the highest among the industry (comparsion made within the peer group - CLS, FLEX, SLR). 3 out of last 5 years, NTE enjoys double digital revenue growth, in the meantime, it also continues to improve the profitbility, with current ROA and ROE at 17% and 25%, highest since 1998.

At the current price 21.35/share, NTE is valued at $926 Million. It has over $200 million in cash, with only around $10 million debt. On top of that, at the end of 2005, the board approves a total of $1.32 dividends for year 2006 - a yield over 6% now!

On the flip side, profit margin in this industry is declining, and its growth rate slows down since 2005 - which, in my opinion, is overpriced in over the last 12 months, as the stock price falls from $28 to $21, a drop over 25%.

In summary, the company has a perfect financial picture, a proven growth record, and demonstrated its cost efficiency. At the current price, I think the stock has very limited room to go down further.

Before considering it a value buy, one concern remains that insiders hold over 20% of the shares, and NTE's chairman Mr. Koo stepped in the market several times, essentially sold high and bought low, made the stock price more speculative than it should be.

I currently own NTE shares.

ISSC - A cash cow that we bring back home

ISSC - a company develops and manufactures cockpit related equipment, including flat panel display, flight information and monitoring systems, etc.

At market cap of $254M, this company has a total of $82M in cash, with virtually no debt. Though the company didn't demonstrate a continuously steady growth pattern, it manages to maintain an average annual revenue growth of 40% in 2004 and 2005. A remarkable phenomenon along with that is, during last 5 years, irregardless of growth and market condition, the company successfully drived the profitablity up year over year. Operating margin is improved from 30% (in 2000) to 43% (in 2005), while ROE from 13.5% to 21.5%(above numbers quoted from MorningStar) which showcased the management efficiency.

The company is currently under 2 million shares purchase program, to be expired June 2006. Also stated in 4Q2005 Quarterly Report, its net sales is decreased from $19M in 4Q 2004 to $5.8M in 4Q 2005, due to an increased demand as a result of regulatory requirement in 4Q2004. Its 1Q2006 backlog grew by 5.3million or 40% compared to 4Q2005. According to the news in their website, since the publication of the quarterly report, they acquired another 4.7 million orders.

Conservatively, if the company keeps $50M net sales, and generate 15M net earnings in 2006 (assume same profitbility level), at $14/share, it is valued at 19 times forward P/E.

Backlog is its biggest risk, an insufficient backlog will bring fatal damage to its quarterly report, though with so much cash in hand, it doesn't expose fatal and immient risks.

Closely watch its backlog and revenue, and if the revenue could go up, its stock potential is unlimited, as I don't have doubt on firm's ability to turn revenue to profit.

I currently own ISSC shares.

MVK - Maverick Tube

MVK - a company manufactures pipe/tube for energy industry and industrial application. With subsequent M&A activities since 2002, it is transforming itself from a steel/iron tube manufacturer to an oil/equipment service provider (rig). Furthermore, it is a remarkable thing that MVK reports a net income of 1.5 dollar per share for 4th quarter 2005. Traded at $49, its forward P/E is 8.

Given its 1/4 income is derived from industrial application, and 3/4 incomes from oil related products. I calculate the P/E valuation as follows:

A conservative P/E valuation at steel/iron industry is around 8. (I use [NSS] and [SCHN] as peer group), and P/E valuation for Oil equipment services at 16 ( use BJ Service[BJS] and Halliburton[HAL] as peer group).

That comes to a P/E valuation of 14 (8*0.25 + 16*0.75) for MVK, an apparent value compared to its current price with a forward P/E at 8.

It is not without risk:
1). This year's high rig demands and price are factored into next year's projection, any oil industry supply/demand change may bring significant impact to the net income.

2). At a pace of at least 1 merge per year, Marvick already have a number of merged units under its belt. It is yet to prove that all the M&A issues are addressed.

In summary, this is a transformed oil/service equipment company still valued as a steel/iron product company. I expect its P/E to be adjusted in 2006 up to 11, and at estimated 2006 incoe $6 share, it value the stock at 66, a 30% premium to the current price.

Leopard Strategy - a hybrid of growth and value

More often than not, "value" stock is an aging toothless elephant that can hardly move - large in size, but hollow inside, and lack of the most valuable assets - teeth; on the other side, "growth" stock is fish egg that has huge growth potential, but nature does the justice that very few egg ultimately realizes its dream.

Leopard is the hybrid of growth and value, it has fish egg's agility but not fragile; it has elephant's strength, and moves much fast.

This blog tries to discover and analyze hybrid stocks that have both growth and value characteristics. From time to time, it may introduce good investment resource - Book, website, introduce other investment products - mutual fund, bond, ETF, close-end fund, etc.