Friday, September 12, 2014

Two Stocks Trading Near 10X Earnings

Who doesn’t like a bargain?  I found two especially interesting deals in Crystal Equity Research’s alternative energy indices.  Both are trading near ten times net earnings.  Yet, the enticing earnings multiple might be only part of the story.

FutureFuel Corporation (FF:  NYSE) is trading near $13.50 per share.  The stock has gapped down in price twice in the last six months, trailing off after each leg down.  The stock now appears oversold. 

Based in Missouri, FutureFuel produces biodiesel and biobased speciality chemical products.  In the twelve months ending June 2014, the company reported $396.9 million in sales, providing $53.5 million in net income or $1.52 per share.  The company converted 9% of sales to operating cash.   That might seem impressive, but what has investors in a funk is that sales are shrinking.  In the June 2014 quarter the company reported a weak $68.0 million in total sales, compared to $106.0 million in the same quarter in the prior year. 

Thus FutureFuel probably is not the bargain that the low earnings multiple suggests.  A review of recent trading patterns suggests the stock has so much negative sentiment that it could trade as low as $5.00.

The other stock trading near ten times net earnings is Flexible Solutions International (FSI:  NYSE).  The company develops and sells specialty chemicals that slow the evaporation of water.  Its HEATSAVR, ECOSAVR and WATERSAVR products are marketed to owners of large water bodies such as swimming pools, potable water storage tanks, livestock watering ponds, aqueducts and irrigation canals.

Flexible Solutions reported $14.5 million in total sales the most recently reported twelve months, providing $1.9 million in net income or $0.12 per share.  Trading near $1.40 per share, the stock is valued at 11.6 times trailing earnings (ok, this one is priced at a bit more than 10X).

FSI is a micro-cap stock and might not appeal to some investors. Unlike the stock of FutureFuel, which appears to have been broken, FSI shows considerable strength.  A review of recent trading patterns in a point and figure chart suggests that stock formed a ‘bear trap’ in late July 2014.  This would suggest that a reverse is in formation.  Indeed, the price objective for FSI is a remarkable $4.00.

There is some risk in investing in small companies like Flexible Solutions.  It might be easy enough to put on a long position, but liquidating a position in a small-company with limited shares in its public float can be a cumbersome and expensive proposition.  Average trading volume for FSI is 360,000 shares per day, which might make it tough to beat a hasty retreat if things go bad.

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. FF is included in the BioFuel Group of the Beach Boys Index.  FSI is included in the Water Conservation Group of The Mothers of Invention Index.


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