A Company I Love Can Now be Had at the Right Price


As Aesop once noted, patience is a virtue, and to wait will never hurt you. I had to remind myself of that as a stock I once planned to put in my $100,000 Real-Money Portfolio ran away from me.

In early January, I laid out the investment case behind carbon-fiber maker Zoltek (Nasdaq: ZOLT ) , which you can read about here . At the time,shares traded below $8, but they moved up nearly 8% by the time my self-induced 48-hour buying embargo had been lifted (this gives you a chance to get in on the trade ahead of me). Frankly, my decision to hold off buying at that time caused some distress. Just a few weeks later, shares soared to $13 on the heels of a solidquarterly report , which I discussed here .

At that point, I could only wait and see if shares returned to levels where I consider them to have solid downside support. Well, my patience paid off, and I've gotten a second chance to add this stock to my portfolio.

From risk-on to risk-off
That bipolar stock chart has more to do with investors' current mood right now, and not what is happening at this company. At the start of the year, investors were flocking to companies like Zoltek that had robust growth prospects. This was known as a "risk-on" environment, as investors actually sought out riskier stocks. These days, they are in a different mood. Companies with a strong set of growth prospects are being shunned if they aren't delivering the goods right now. So this company, which delivered a great fourth quarter but merely a good first quarter, is now being seen in a very different light.

Here's what I wrote back in January: "Zoltek looks to be moderately profitable in fiscal (September) 2012, perhaps earning around $0.25 a share. Yet with further sales gains,EPS (earnings per share) could grow sharply, perhaps reaching $1 a share by fiscal 2014." That's still the case, and a stock price below $10 is simply too hard to pass up.

What did fiscal second quarter numbers tell us? Zoltek will continue to deliver erratic results on the way to a higher growth plane. Second-quarter EPS of $0.10 was roughly in-line with forecasts, after first-quarter (December) EPS of $0.28 had blown past estimates of a nickel in profits. The sequential pullback in earnings is solely a function of seasonality. In fact, Zoltek would have beaten EPS forecasts by about 50% were it not for the impact of foreign exchange losses.

Investors would have looked past the numbers if Zoltek offered up robust second-quarter guidance. But management only discusses long-term targets and not short-term ones. In fact, analysts expect merely decent results in the current quarter. Sales are expected to rise just a bit to $49 million (from $47 million in the first quarter) and EPS should be around $0.15. Sales should exceed $50 million by the fiscal fourth quarter, setting the stage for EPS of nearly $0.20. Still, that must be seen as a comedown for investors that saw first-quarter EPS of $0.28 just a few months back.

Net/net, look for Zoltek to enter fiscal 2013 with an annualizedprofit run rate exceeding $0.70 a share. With just a bit better utilization of the company's manufacturingoverhead in fiscal 2014, per share profits, as I've noted, could exceed $1.

The Downside Protection --> Shares have rarely traded below tangiblebook value , and they are back near that level again (That figure stood at $8.47 at the end of March, and should keep rising as long as Zoltek remains profitable.)

Upside Triggers --> One of the challenges for this company is that it has myriad growth drivers, but we don't know when they will all fall into place at the same time. For example, the company has sought to do more business with various wind turbine manufacturers, to reduce dependence on Spanish giant Vestas, which is Zoltek's top customer. Wind-based revenue outside of Vestas now accounts for 20% of that segment's sales -- up from nothing a few years ago -- but Zoltek must keep making headway in this area. Thankfully, Vestas (more than 40% of sales in the first half of fiscal 2012) has a full order book and has given signs of solid order flows to Zoltek in coming quarters.

In the airplane segment, results rise and fall based on how muchinventory key customers are carrying. The inventory build-up and build-downs explains why quarterly results are seemingly erratic. And in the auto segment, Zoltek is just now getting going, having recently signed a business development agreement with auto parts maker Magna International (NYSE: MGA ) . All of these drivers should fuel solid top andbottom line growth during the next few years, but the ride will surely be bumpy.

Action to Take --> I will buy 600 shares (or roughly $5,500 worth) of Zoltek roughly 48 hours after you read this. Shares can be bought under $11.

    All prices are as of Tuesday, May 8.
Security (Ticker) Shares Initial Purchase Date Avg.
Purchase Price
Recent Price Current Value Buy Under Target Total Return
Ford Motor ( F ) 1,090 01/04/12 $11.44 $10.61 $11,565 $13 $20 -7.3%
Alcoa ( AA ) 500 01/06/12 $9.32 $9.21 $4,605 $12 $16 -1.5%
Cree ( CREE ) 300 01/12/12 $23.22 $32.30 $9,690 $25 $40 38.9%
Exide ( XIDE ) 1,500 02/01/12 $3.41 $2.74 $4,110 N/A N/A -19.9%
Citigroup ( C ) 300 02/06/12 $33.28 $31.32 $9,396 $36 $50 -6.0%
Ligand Pharma (LGND) 350 02/13/12 $14.87 $12.72 $4,452 $17 $30 -14.4%
Marathon Oil (MRO) 200 02/24/12 $35.01 $26.17 $5,234 $40 N/A -25.3%
Direxion Small Cap (TZA) 600 02/29/12 $18.42 $19.66 $11,790 N/A N/A 6.6%
Calgon Carbon(CCC) 400 03/14/12 $15.38 $14.32 $5,728 N/A N/A -7.1%
Echelon (ELON) 1,000 03/30/12 $4.51 $4.27 $4,270 $7 N/A -5.4%
MDC Partners (MDCA) 500 04/09/12 $10.57 $9.95 $4,975 N/A N/A -6.1%
Freeport-McMoran (FCX) 200 04/24/12 $37.00 $35.62 $7,124 N/A N/A -3.9%
  Security Holdings $82,939        
  $ Cash Holdings $11,660      
  Total Return since January 2012* $94,599     -5.4%
* Individual security returns are shown as of the date each security was added to this portfolio. However, total returns for the portfolio and the S&P are listed since the portfolio was funded with $100,000 of real money on Jan. 4, 2012.

Visit this link to view a listing of all previously-closed positions.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Investing Ideas

Referenced Stocks: AA , C , CREE , F , XIDE

David Sterman

David Sterman

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