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.