There is really nothing like good old fundamental research. Ultimately, a company’s future and therefore the performance of their stock depends on how much they sell, and what percentage of that revenue is profit. When you think about it, nothing else matters. Technical patterns are wonderful for day traders, and some even use them for longer term investing, but compared to sales and profitability, they mean little. Every now and again, however, the technical and fundamental analyses come together and send a signal that is hard to ignore. Such is the case at the moment with Polypore International (PPO).
Polypore is a chemical company that specializes in the manufacture of components for lithium-ion batteries; the ones in hybrid and electric cars. The battery industry has a fascinating history. Five or ten years ago, when the Toyota Prius was beginning to achieve some commercial success, the future for the industry looked rosy. Sales of hybrid cars were predicted to explode at any time and a host of companies sprung up to supply the resultant anticipated demand for batteries. Sales of hybrid and fully electric vehicles did grow, but still only represent just over 4% of sales in the important US market. The recession in 2008/9 hit a relatively new industry hard, and many fledgling companies went under. That, and the nature of exponential growth, has many predicting that supply, rather than demand is the problem of the future.
My attention was drawn to PPO because, even as markets in general have flown, they have had a bad couple of days.
Rumors of the company losing market share with important customers, LG and NEC (suppliers to GM and Nissan respectively) put the stock under pressure. Despite that, Stifel released a report reiterating their “Buy” rating with a target price of $51.00
This confluence of events stirred my interest, and I pulled up the above chart. Now I’m really interested. The gold lines were additions I made that indicate a basic rising channel that has defined the stock’s movements so far this year. As you can see, the recent drop has brought the price to the bottom of that channel. From a technical perspective, this not only suggests a move up, but also allows for a reasonable stop-loss level just below that trend line should you buy now.
With CAFÉ standards tightening in the US and both Europe and China mandating lower CO2 emissions, says Stifel, it is reasonable to expect substantial demand growth in the near future. Given that, their 2014 EPS estimate of $2.25 looks more than reasonable. 21x that EPS puts the stock at $47.25, back at the top of the channel.
So, in almost every way, PPO looks like an opportunity at these levels. It is a well run company with a history of profitability in an industry that is growing, yet market sentiment has pushed the stock to the bottom of a clearly identifiable technical pattern. My only hesitation would be that sometimes, in a rumor driven market, logic goes out of the window.
If this worries you, then combining PPO with another company set to benefit from growth in the hybrid market, yet with a very different current market conventional wisdom may make sense. I am thinking of Johnson Controls (JCI), who have had a great year and continue to be darlings of the market.
JCI provides auto parts of many kinds, but it is their position as market leader in the “stop/start” technology incorporated into vehicles for fuel efficiency that is of interest here. Recommending a stock that is up around 50% on the year goes against my fundamentally contrarian nature, but flexibility is a good trait for investors and traders alike to have, and prospects for JCI still look good.
I believe that the market for affordable electric and hybrid vehicles will continue to grow, and that PPO, given recent price action, is the best way to play that potential growth. However, my mom taught me a long time ago not to put all of my eggs in one basket, so splitting an investment between PPO and the more diversified, less rumor challenged JCI has more appeal than a straight play on the depressed stock.
That said, it does appear that Polypore is in that happy place where the fundamental and technical analyses lead one to the same conclusion, and, given a decent risk/reward ratio, it looks like a buy at this level.