AYSI macro trends are encouraging

AYSI is probably my second favorite holding right now. One thing I like is that in the bigger picture they have the wind at their back.

They sell alloy wear plates primarily to mining interests in Western Australia.

The Australian government is good enough to put out a report on mining statistics and I think this graph says it all.



There was 10% sequential growth in exploration activity in Western Australia this quarter. Once again the growth picture for their customers is just outstanding. I still think with EPS of .043 last quarter and growing it will have a long way to run from here. The February earnings report should be quite interesting.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1367.5Main%20Features8Sep%202007?opendocument&tabname=Summary&prodno=1367.5&issue=Sep%202007&num=&view=

Portfolio moves today

I took an opportunity to do some spring cleaning on my portfolio to get rid of some things that just don't have a place there.

Some of this I should have done long ago but a market panic has a way of prioritizing things you procrastinated on in the past. Got rid of 1000 shares of APT I thought I had already sold after an aborted trade (oops)

Took an opportunity to sell 500 shares of TBTC at 3.89. I still like the company but I expect this quarter to be weaker and I think I will be able to buy back lower.

Also sold some AXLE that I really shouldn't own anyway. I did trim my ZYNX position. There have been too many form 144's coming out as of late for insider sales and I am concerned they may provide alot of overhead resistance for the stock plus form 144's especially lots of them are rarely a good thing.

I did make a couple small buys adding to both ELSE and CIMT and took a small trading position in AEY that I intend to close out pretty quickly. ELSE and CIMT I have mentioned before. AEY is a stock I was just never enamoured of as a business but I have had good luck trading in and out of small blocks. It got beaten down hard enough today that I felt it was due for a bounce. I didn't hit the bottom but got some shares at 4.47 which isn't too bad. There is a tiny bit of trader in me to go with the bargain shopper.

Overall it could have been alot worse than it was. I lost some money but basically came out feeling pretty unscathed. I am looking to deploy some cash now although I don't see much that is attractive. If anyone has any suggestions feel free to call them out.

The silver lining?

There has been alot of talk about a speculation factor driving oil prices. Safe to say with recession terror gripping the markets worldwide that bullish oil speculation will become a very unpopular hobby. We should get an idea of how much oil prices are effected by speculation right now.

Lower oil prices generate lower gasoline prices and lower gas prices certainly make people feel better about their economic situation. If this doesn't turn out to be a true economic disaster than 4 or 5 months from now could look alot better to the average consumer.

In the meantime make sure all of you run to the store and buy every last gallon of milk and loaf of bread its going to be ugly today.

TCCO on the move this week

There hasn't been much to cheer about in the overall market but right now TCCO is hinting to me I may have made the right call.

Despite the carnage it hit a 52 week high and closed at 6.52 on 130k shares traded friday. I can't find a volume day this high going back several years so it could very well be their highest volume day ever.

This certainly bodes well going into earnings that should be out in the next 3 weeks. They reported on February 6th last year. These kind of indicators are not the most reliable measures but it is certainly trading like someone thinks they know something. Given the awful state of the market they must be pretty confident.

If they manage to beat last Q's .34 especially if backlog shows up higher than last quarters 3.7 million I think it still sees a double from here.

With new orders in Q1 of at least 1.7 million per their 10k I think that scenario is very plausible.

Personally I would love to be flush with cash and confident right at the time the market is throwing everything out the window. TCCO could have things playing out just that way if our happy buyer is right.

Unfortunately I am still not seeing much I am downright excited about.

ELSE new position

Bought a tiny bit of ELSE this week. As I said previously I am getting much more cautious about deploying money. The knives are falling everywhere and I am waiting to see if things stabilize a bit before moving in with any real force.

Still I thought the move down in ELSE was worth picking up a small speculative position amounting to about 1% of my portfolio.

ELSE's primary business is making sensors that gauge and control movement of machinery in manufacturing processes. So if you need to make sure that gizmo is rotating 2000 time a second ELSE has something to do it. They also have a trivial software product that does OCR (optical character recognition I think). In effect it scans text in paper docs and turns it into computer characters. This was cutting edge in 1985 perhaps but is of little interest today IMO.

They have had a good deal of strength on the sensor side partially due to the biofuels and agriculture industries.

EPS last quarter was .11 capping a nice recent trend of growing earnings.

If you look at earnings growth over the last 3 quarters you get this trend (in thousands)

152
213
378

Over the last 3 years
172
761
1,7243

Balance sheet is solid with only about 2.7 million in total liabilities and about 1.70 in cash on the books (roughly twice their total debt level). Book value is over 3.00/share.

In addition it dropped hard this week from the high 5's to the 4.75 range on light volume. I am making a small bet that this corrects itself when things settle down and with all that cash on a nice balance sheet I am figuring I have a solid margin of safety if I am wrong.

AYSI results out today

I am hoping they will issue a PR because the results were stellar. EPS over .04 a share and more if you count the currency translation gain.

Margins were up well over 50% which is a nice suprise. In addition they spent 350k on property plant and equipment in Q4. There has been some speculation for several months that they would start a second line. This has been on the drawing board for AYSI for awhile.

The unusually large expenditure on equipment may very well be for that second line. I would in fact suggest it probably is.

A second line ups their theoretical capacity to probably over 8 million a quarter from under 4 right now. Given their high margin levels alot of that would flow to the bottom line. With revenues up almost 300% year over year and mining in australia continuing to boom I believe it deserves a forward PE of 20. That puts fair value to me around 3.00 a share right now which means it remains a good value in the current price range.

I am not sure if there will be a reaction tomorrow. For long time holders who are astute enough to bother to read the filings these results were tipped in the NT-10k. For anyone not astute enough to do that I am going to assume they are not going to bother to do the math to figure out what Q4 earnings were.

If they decide to issue a PR that could of course change the dynamic.

In the meantime I am happy to hold for Q1 which is only about 4 weeks away and should show continued improvement over Q4. I am figuring on about .06/share for Q1.

PNS new position

I have taken a smallish position in PNS over the last week or two. The stock looks attractive to me in the current price range for a few reasons

PNS has 2 business lines. First they are a contract manufacturer for OEM's. The second line of business is in service and repair of equipment.

PNS earned .10 last quarter against what is right now a 2.48 share price. As I see the narrative for this company they went from a company where the former CFO took over for the CEO and the CEO stayed on as chairman. My view is that the CEO was good at either selling or technology and under his direction the company grew revenues substantially but they were not able to flow those earnings to the bottom line.

Since the CFO has assumed the CEO role sales have dropped but margins have expanded significantly as they have taken on more profitable business and turned away the lower margin stuff.

Now that profitability has been established I believe you will see some growth but that you will see it at higher margin levels and hence with greater profitability.

Per the companies conference calls backlog has grown from 13 million in December to over 18 million currently so while sales have been weak backlog has been growing implying eventually one has to catch up with the other. In addition they have an acquisition pending of their partner in the netherlands that should help the bottom line. Finally margins on the service side have been unusually low as they ramp up projects. The company has suggested they can return to more normal margins on the service side in the future.

All of that sounds like a recipe for earnings growth. The only question is can they maintain their margins on the product side. That is a legitimate concern as their margins there are considerably higher than one would expect in their niche. Still those margins have been growing so it is perfectly plausible that they maintain margins in one business line while growing them in the other all while growing their revenues.

At 2.48 a share it is already trading at a rather low PE which provides some margin of safety even if the business does not do as well as I am hoping.

I will have another short writeup on another new position later in the week. Unfortunately due to either good or bad timing depending on how you look at it the price started exploding this morning just as I was starting to create a position.

There is nothing more infuriating than spending time researching a company only to have it run away from you just as you decide to buy in.

Additional portfolio moves

Its been a tough 08 so far. I haven't taken as much of a beating as I could have but I am still down a few percent for the year. As ugly as its been I'll take it.

CXPO was a case study in why you take profits to rebalance a portfolio. Much to my suprise they announced a drop in production for the current quarter and are now predicting production to be flat for most of next year.

I mentioned a few posts back that I sold some in the 18's to rebalance my portfolio. When the news hit I sold all but about 20% of what I had in the 16's figuring the fair value was now lower and it would likely be dead money for a bit. The brutal selloff to the 12's took me by suprise.

I still have just a few shares left and at current prices I think I will hold onto them but I am extremely glad I was taking profits.

I also lightened up a little on ZYNX figuring sales numbers for December were lackluster and that the weak numbers would give me an opportunity to buy back cheaper. In fact buying cheaper is my current theme right now. There are a couple things that are starting to look attractive to me but I have no urgency to buy when the market as a whole is in freefall.

My current plan is to avoid most buys until things have stabilized. While running away and joining the circus might sound like fun to some I have no interest in taking up a career catching falling knives.

Of course if the market offers me a deal I just can't refuse I will take it.

Economy and recession in 2008

I have been reading blogs and newsletters for alot longer than I have been writing one and one of my favorites is John Mauldin

I like his broad perspectives without all of the political BS that often accompanies financial bloggers. We are certainly a political bunch as a whole for some reason or another

Go Ron Paul!

But I digress

Mauldin had a very interesting article this week outlining the case for recession in 2008. Definitely worth a read

http://www.frontlinethoughts.com/index.asp

I am in the camp of those who think employment is the one thing that could hold up the economy in the face of the numerous headwinds. If jobs are being created and people are working and getting raises they will definitely buy that 827 inch plasma whether they can afford it or not. Its as american as farmers gouging us all via subsidies and price supports but I digress again.

The market tanked hard on friday in the face of a weak jobs report. What Mauldin points out is that the report was not only anemic but we likely actually lost jobs in December

The thrust of the argument is that to get the number of jobs created or lost in small or new businesses they estimate based on the averages for previous years. That means when the economy is slowing down these numbers are likely overstated. This estimate is called the Birth Death or BD ratio.

I'll claim fair use here and paste a bit of his argument

"This month the BD ratio created 66,000 new jobs for the establishment survey, or 48,000 more jobs than the headline number. Let's look at a table directly from the BLS web site.
Does anyone seriously think that 17,000 jobs were created in the financial services world this last month?"

I have to admit I don't think there were any net jobs created in financial services.

He goes on to point out the household survey showed a net loss of 436,000 jobs. The reality may be somewhere in between but safe to say if his analysis is correct and I believe it is we lost jobs in December. Lost jobs means fewer plasma TV's we don't need which would put lots of pressure on the economy and likely tip us into recession.

Take that for what its worth but I do highly recommend people check out the full article. Its very persuasive.

first trades of 2008

Mentioned a new pick in my last post. As it turns out that pick is already bought and sold. The stock was APT. It looked kind of cheap based on recent earnings and longer term growth however 2 things caused my quick exit.

1. Comments in the quarterly filing make it sound as if their next quarter will be weak.

2. Management seems to be rather lavish in their compensation. From what I can tell the CEO and president get 1/6th of the companies net income in bonuses alone.

There is no reason to think we will get a good earnings pop on this one with the next quarterly report. The longer term outlook is always murky when a management team does not seem to have shareholder interests at heart.

With no short or long term reason to own it I bailed at what I think was probably about a 10 dollar profit.

This is a case where I bought a small position based on someone elses recommendation after a quick look at the financials. The one nice thing about that approach is it forces me to do some DD since I actually own it.

In other news I added to my TCCO today. I am doing so in bits and pieces primarily because it looks very cheap against last quarters .34 earnings that should be repeatable and I like the business niche.

Not much else I am buying although I am contemplating more CIMT based on today's acquisition announcement.

After a big drop in the markets today I think a degree of caution is warranted. I am holding off some new positions I was considering last week looking for a better price. I have been on a hot streak lately and when things are going well its easy to get overconfident and over pay for stocks that are a bit questionable. I am trying to reign myself in a bit and not do that this time around. I will take supremely good risk/reward plays when they are available but will be happy to stick with cash until that happens.