Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
power installer Solar City (SCTY:Nasdaq) has attracted a
swarm of shareholder lawsuits in recent weeks.The stock is trading at a price level 44% below its 52-week high of
$88.35 set in February 2014.That has to
be disheartening for those who were on the wrong side of the trades at those
February when traders were bidding $88 and change for SCTY, the stock was
trading at about 50 times revenue and 47 times cash flow from operations.Of course, since the company had yet to
produce a profit, the price/earnings ratio was negative.What was it about those valuation metrics
that looked appealing?
a technical standpoint SCTY shares had begun to look precarious even before the
end of December 2013.For example, the
Commodity Channel Index (CCI) began signaling that the stock had entered
overbought territory as early as the third week in December.I frequently use the Moving Average
Convergence/Divergence (MACD) line in combination with the CCI to make certain
higher highs are not still in on the way.Even with that nuanced analysis, the show appeared over by the end of January
2014.Granted as the temperatures
dropped in February, trading in SCTY was hotter than ever.Unfortunately, it was more flame-out than
solid price appreciation as the stock has been on a steady decline ever since.
now that the stock price re-entered the atmosphere, is it a better value?First quarter 2014 results, did not change
the profitability picture for Solar City.The company is still reporting substantial expenses that eat up
profits.However, in the twelve months
ending March 2014, the company turned sales of $197 million into $150 million
in operating cash flow.The current price
level near $50 per share implies a multiple of 30.7 times operating cash
flow.That is still rich, but an
improvement from three months ago.
one of my last posts on Solar City-“Where is the Shine in SCTY?”in March 2013- I suggested that management
needs to spend a bit more time in explaining the company’s business model and a
bit less time fanning the flames under the trading of its stock.Apparently, they did not listen.Analysts following Solar City do not expect the
company to report a net profit any time soon, but it is clear the company has
conjured a business model that generates positive cash flow.Despite reporting net losses, the company has
the cash resources to grow.Management
needs to fan the flames under that story.The stock may not experience one of those dramatic climbs again, but
there might be fewer lawsuits.
Neither the author
of the Small
Cap Strategist web log, Crystal Equity
Research nor its affiliates have a beneficial interest in the companies