In the face of a tough second-quarter
economy
, these two portfolio holdings managed just fine. Here's why
looking out a year or two, these businesses should really
flourish…
It is purely coincidental that two of my favorite companies
delivered decent second-quarter results on the evening of Thursday,
Aug. 2. Both companies are dealing with the near-term economic
challenges in decent fashion, posting quarterly profits and laying
out the case for robust growth in the years ahead. Yet these stocks
remain really undervalued when you look at where their businesses
might be in a few years. For investors who haven't checked in with
these stocks, now is the time.
I'm talking about my
$100,00 Real-Monday Portfolio
picks
Maxwell Technologies (Nasdaq:
MXWL
)
and
Zoltek Inc. (Nasdaq:
ZOLT
)
.
Let's take a closer look at each one…
Maxwell Technologies:
Remaining profitable, even in a slow economy
I added this stock to my portfolio
less than a month ago. Maxwell makes "ultracapacitors,"
which can pack in much more energy than traditional capacitors,
opening up the door to many new applications for a seemingly old
technology, as I noted back then.
At the time, I noted that
shares
had plunged from $21 in the spring to just $6, and that "at this
point, the stock price clearly reflects expectations that business
will remain muted for the rest of 2012. Well, second-quarter
sales of roughly $40 million were nearly in line with forecasts,
and based on management's just-reiterated guidance, sales are
likely to average about $50 million in each of the next two
quarters.
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As I wrote a few weeks ago, "If Maxwell simply reiterates
forward guidance, then shares could post a powerful snapback
rally." As a result, shares opened up above $7 for the first time
in a month (before seeing mid-day profit-taking). Frankly,
I'm surprised to see shares post only a modest gain in today's
trading (Aug. 3). After all, Maxwell earned nine cents a share in
the quarter, well ahead of the consensus forecast of a penny. The
fact that the company remains profitable (for the ninth straight
quarter), even as economic headwinds are in place, removes a great
deal of risk from owning this stock. (The only red flag I spotted
that might account for the weakness was a comment by management
that some customers have become slow to pay their bills).
Of course, this stock is really built for the next few years,
and not for 2012. As I noted a month ago, demand for Maxwell's
ultracapacitors had been steadily rising until this spring. I also
said the current year likely represents a pause before growth
resume. Though analysts see sales rising at least 20% in 2013 and
again in 2014, I wouldn't be surprised to see the top line expand
at a more modest 10%-15% pace -- assuming a still-weak global
economy. Then again, ultracapacitors are getting designed into so
many new products that this company could easily outpace the
consensus growth forecasts, as had been the case from 2008 through
2011.
Right now, Maxwell's ultracapacitors are being primarily used in
Chinese transit systems, Chinese wind turbines and French cars (as
part of a stop-start system). The company noted that a U.S. auto
maker is testing the technology, and a contract win with a large
auto maker would give the stock a significant boost. On a
recent
call
with investors, management ran through a series of other systems
that ultracapacitors are being designed into. In light of this
company's robust long-term outlook, the recent stock price plunge
from $21 to a recent $6.75 makes little sense. Yet this affords new
investors to this stock a great entry point.
Zoltec: Wind is back
Curiously, Maxwell spoke of a rebound in demand for its electronics
that go into wind turbines. "Q1 was bigger than Q3 and Q4 last year
and Q2 was bigger than Q1 of this year. So we're starting to see
that
market
come back," said the Maxwell's President David Schramm.
And that's a sentiment echoed by carbon fiber maker Zoltek,
which has just posted a solid 10% gain in Friday, Aug. 3, trading
on the heels of rising demand from wind-turbine manufacturers.
Zoltek is positioned perfectly for this market for a pair of
reasons. First, it is the leading supplier to Vestas, the
world's largest maker of wind turbines. This company has recently
noted a growing
backlog
, which bodes well for Zoltek's order book. Second, the wind
industry is slowly migrating offshore, which allows for bigger wind
blades. And this spells a higher need for carbon fiber per
turbine.
Zoltek had $48 million in second-quarter sales -- right in line
with consensus forecasts -- while the
profit
of 16 cents a share was three cents better than expected. Still,
this business needs even higher sales to really impress investors.
That's because a quarterly sales base in the $47 to $48 million
range, which has been the case for the past three quarters, yields
only modest
operating leverage
. Management has made it clear that additional revenue carry much
higher incremental margins, so a $5 million hike in quarterly sales
would lead to very strong profit growth.
I'm waiting around for that day to come. It may be later this
year, or perhaps some time in 2013, but when such a quarter
arrives, this stock has traditionally zoomed into the mid-teens.
Shares are up only modestly since I bought them at $9.15 on May 11,
but I see much more upside ahead.
Risks to Consider:
These two companies are in the small-cap class of stocks, and
investors tend to feel them when the going gets especially tough.
So these stocks could see 10% pullbacks in a market rout.
Action to Take -->
For sharply undervalued stocks like these, you need to have
considerable patience. Each management team is currently taking all
the right steps to build great businesses down the road. The tough
economy may mask those efforts, but behind the scenes, I like these
stocks more and more with each passing quarter.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MXWL, ZOLT in one or more if its "real money"
portfolios.