Friday, July 30, 2010

Buy Low, Sell High

The present stock market conditions - high volatility, lack of clear direction, weak momentum - have driven me back to basics. The strategy of buying low and selling high may seem archaic to some investors, but it still works to deliver strong returns to investors. It requires a close look at a company’s fundamental performance and equal respect for the tactical information technical patterns can provide.

Accordingly, I went hunting for bargains - yes, deep value stocks. Here is an example.

Based in the United Kingdom Xyratex Ltd. (XRTX: Nasdaq) provides data storage solutions for enterprise. The company posted a profit of $79.3 million on $1.3 billion in sales in the most recently reported twelve months, representing a gross margin of 17.4% and a net margin of 6.3%. There is no debt on the balance sheet.

As smart margins might seem, investors have been unwilling to accord the shares a respectable valuation - at least in my view. The stock is trading at 5.1 times trailing earnings compared to an average 25.8 times earnings for the data storage device group. Xyratex is not given an respect for its cash flow, trading at 3.9 times trailing cash flow from operations compared to 21.4 times for the data storage group.

The stock price has recovered from a three-year low set in early 2009. Yet spotty performance over the last year and half while the economy fell down around our ears appears to still have a stranglehold on investor sentiment toward XRTX shares. The company has returned to profitability and appears to have survived the economic debacle with customers and franchise in tact.

In my view, XRTX is now looking very much like a bargain.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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