MASC Update

Refer to the post on MASC a couple days ago. I said that the buy point would be if it convincingly breaks the long resistance at $9. Well, it appears to be doing just that now. It has headed into the monetary catch-up move I had outlined in the previous article, so I am adding it to the recommend list at about the $9.27 it is trading at now.  The valuations are crazy good, the fractal and technical condition is good. The main thing I don't like is some recent light insider selling, but if you look, it is all by just one officer. That usually is nothing to worry about, and the overall condition of the insiders is pretty confident. They are buying back their own shares as a company, as the article I linked to highlights, and the insider ownership level is high at 24%.

Is There Another Silver Shake-Out Coming?

The long year-plus consolidation in the precious metals may be coming to an end soon. And it behooves us to be mindful of how past long consolidations ended with silver, because it tends to be very fractal, that is, self replicating. The wave counters (my derogatory name for Elliott Wave enthusiasts) seem to be thinking that the recent down move of the last month isn't done, and they target about a $26 price before a very large wave up to "well north of $50" as one of them says. They've been calling silver right lately. Silver is EW friendly as well as fractal.

Well, I tend to depend more on fractal than Elliott Wave. So I took a look at the past long consolidations in silver, and found some things of interest. The first consolidation was in the sleepy beginning of the bull market back in 2003 (click on images to enlarge):

Here we see a descending, flat bottom triangle with 4 bottoms. What followed?

It presaged the first monster climb of the bull market. Then in 2005, there was a similar long consolidation:

The same flat bottom triangle with 4 bottoms, only the 4th bottom went lower than the others on huge volume, a "shake-out" where the impatient, short-term weak hands are shaken loose from their holdings at precisely the wrong time. What followed?

That's right, weak hand remorse. There also was a long consolidation in 2007:

Again with the flat bottom triangle and 4 bottoms with the big shake-out at the 4th one. What followed?

The same pattern with the same result. So how is the current long consolidation of over a year looking?

Pretty much the same as the past ones. The wave counters are targeting 26 in this move down, which would also be a more discouraging low than the previous 3 for maximum shake-out, same as the others. If you are a holder of silver or gold, and we get this kind of move, do not be surprised.

Materials Science Could Soon Climb

Materials Science Corp (MASC) is one of those snubbed, abandoned stocks I just fall in love with. They are a deep cyclical being tied heavily to the automotive industry. Their sound deadening and other coatings are what the recession killed, but it's been 5 years now since drivers began making do with their older cars. These cars, with their old car problems, are building up some pent-up demand for new car smell. Total new light vehicle sales for 2012 are up 15% over 2011. That's very non-recessionary like. Investors may soon stop hating MASC so much.


A Seeking Alpha article back in October, 4 Industrial Suppliers Buying Back Shares by Debra Fiakas, featured MASC with the sub-title Unappreciated Materials Science:

 Even if its sales have been stubbornly flat over the past few years, Materials Science Corporation (MASC) consistently delivers strong profits. The company develops and sells acoustical and coated metal products to industrial customers. MASC is valued at multiples well below averages for its peer group. The appearance of slow growth and reduced earnings may be at the foundation of this rebuff by investors. The year-over-year earnings comparison is difficult in the current fiscal year after the company reported a one-time income tax benefit in last year. Only one analyst has published sales or earnings estimates for Materials Sciences, so the company's prospects are getting little scrutiny.

I like the "little scrutiny" part, but I don't like things like one-time tax gyrations in the eps.  That's one reason I place little importance on PE when valuing a company and look at the cash flow from operations history. With MASC, the revenue is flat, the earnings are one-time warped, but the cash flow is really good:

Despite the tax issue, the trend is clearly there toward better results, and the cold shoulder being shown to this stock makes me want to buy it. It started to warm up from the cellar in 2010 along with the better cash flow, but has been stopped by a big resistance level at $9 that I think may be giving way soon:

It has built some nice valuation numbers since being stalled here - price / cash flow is 6.4, price / revenue is 0.7, and the PE is absurdly low at 3.6 with maybe some tax distortion. It has a very strong fractal profile right now suggesting a high energy move either up or down. I would wait until it breaks the ascending triangle formation one way or the other. Right now it looks like that would be up, but a decisive break hasn't happened yet.

Is DROOY The Dog Finally a Buy?

 

DRDGold Ltd (DRD) is a beaten down gold miner with as many names as it has problems. Back when it was called DURBAN ROODEPOORT DEEP and had the ticker DROOY,  I called it Drooy The Dog. That's about the nicest thing this stock has ever been called as it has been a poster stock for miner disenchantment for the entire 10 plus years of the gold bull market. I wrote an article at Seeking Alpha back on July 15, 2011 on this called "DRDGOLD Limited: Also Known as Drooy the Dog" wherein I discuss a possible major bottoming basement forming in the stock after some overly starry eyed outlooks by management in the early years of gold's bull market ran into one major mining problem after another. It looked like an abandoned stock to me. These can be very powerful climbers if a turnaround happens. Well, a rsing from the ashes is happening apparently. There was an article on November 1 at Seeking Alpha "From Iscarus To Phoenix - A Tale Of A Miner" describing some of the past tribulations, CEO swaps, and reinvention of the business. They have pretty much given up on gold mining per se, changing to a gold processor.

The company now focuses almost entirely on extracting gold from tailings. These are the scraps thrown away by miners as uneconomical to mess with but with significant amounts of gold in them. They are also called by such dog-like names as mine dumps, culm dumps, slimes, tails, refuse, leach residue or slickens. This is quite the letdown from the days of  "megalomaniac CEO's that managed the firm in the late 90's to the mid 2000's" as Pater Tenebrarum describes the company back in the day in his November article. But with established processing abilities for tailings, they are developing safe, dependable cash flows now. You have to have capital already paid for and operational for this to be worth doing, and DRD has it. And they got the cashflow with a very cheap price/cashflow multiple of just over 4:

Their cashflow from operations is growing much faster than revenue, what I call an inverted cashflow curve, suggesting they are doing more with each revenue dollar. It has "abandoned stock" written all over it.




They have long since thrown away their hedge book and, as I noted in my other article, were rated by Wikinvest as one of the top 4 stocks in leverage to a rising gold price. The other three - Barrick, Newmont, and Anglogold - all have market caps at least 80 times that of DRD. Where you really want to search for fast movers is in the sub 50 million share float range. DRD's float is a measly 34 million, an infinitesimal portion of the 3 big names ahead of it in the leverage rankings..

In my July, 2011 article I was wary about jumping on it:

The stock hasn't followed the miners' movements very well, drifting lower throughout most of 2010 while the HUI index did a nice climb. Only lately has DROOY started twitching a finger promising an escape from the coma. Last September saw a brief rally along with the miner group as well as this March. But it is still a technical basket case while being a valuation marvel. It is certainly one to keep a close technical eye on. I wouldn't buy it until it gets its 140/200 ema moving average act together, unless you want to accumulate it and perhaps be a poodle for awhile.

In perfect 20/20 hindsight, I wish I had jumped on it. It's up 41% YTD. Since, that first article, it has definitely got its technical act together, so I'm adding it to the blog's portfolio now at $7.68 (still wary of it). It lacks a high insider ownership, but its unusual stronghanded ownership characteristics prompt me to award it an honorary high IH.

If you are looking for gold miners who are established in stable production with good valuation but small enough to really move in response to gold, you might want to think about the Dog.

Selling Seagate Technology STX

I am moving STX off my recommend list. This was on my "supplemental smartphone index" list I made up in response to Jim Cramer's Smartphone Index he introduced on Mad Money back on August 11, 2009. As my previous posts explain, I thought his original list of 21 names left out some good ones, so I picked a list of 9 supplemental choices. Originally, I had another 3 China domiciled names included, but I soon implemented a ban on all stocks reporting out of  The People's Republic - the "people" don't report there as much as the government. And I don't trust their reporting (Cramer has a similar ban, tolerating only BIDU). By the way, I made an error in my 2/18/12 post followup on the smartphone index. I had SYNA grouped with the 3 China stocks, CHU, CHA, NTE.

From the start of the index August, 2009, STX has returned +192% and still has a price/cash flow of only 4.7 and a PE of 4 ! I hate to sell something so cheap, it still looks good as this recent article over at Kiplinger attests. But it has evidence of a tiring climb, and a triple in 3 years probably already reflects a lot of good developments. If they move more forcefully into smartphone and cloud storage, there could still be a lot of climb left in this one.

I took ARMH out of the index on 3/7/12, so that leaves 7: LLTC, WRLS, SYNA, EA,OVTI, CREE, AKAM.

Selling JBSS

John B. Sanfilippo & Son (JBSS) is being rotated out of my recommend list here at around $19 today. It was put in at my Instablog at Seeking Alpha 11/20/09 at $13.90. This nets a +36% result. That's not too bad since the Dow is up just 27% since then ,+ 9% worth of alpha.

But there are some things going awry with the stock. The valuation numbers are no problem - price-to-sales 0.3, price-to-cash flow 9, forward PE 7. The earnings are on an upward trek with that nice 7 PE, but the cash flow from operations is flat over 5 years now and down over 3 years and has gotten erratic (counting TTM), and the 9 ratio is just market average. This is a basic food stock, which will probably be a good area for awhile, but I like to look mainly at cash flow and technicals. On both counts, this looks precarious. The nice climb the stock has been in is starting to gather a lot of volume and the action lately is starting to look like a churn top. It's fractal condition is toast. So I'm kicking it out to make room for some better stuff.

GRZ An Interesting Buy

Gold Reserve (GRZ) is a small US based gold miner. They used to be the epitome of high risk having only one big project located in Venezuela. They were a speculation spending $300 million on developing the property, but not quite ready to build and start bringing out the gold. Then a twist of  fate made them into maybe the epitome of low risk. This ironically happened as a result of Hugo Chavez seizing their project back in 2008. Oh, that's bad. No, that's good, because they filed a case with the World Bank demanding payment of damages caused by the Chavez government. Oh, that's good. No, that could be bad, because now they're at the mercy of what a pact of lawyers do. Oh, that's bad. No, that's good, because lawyers do what other lawyers did in similar past cases. And by that reckoning, GRZ will be granted a good portion if not all of the $2.1 billion demanded in damages. And that would be around $13 a share if only half of it were awarded - that's very good return on the $3 the stock now trades at.

I published an article on all this over at Seeking Alpha a couple days ago here. The comment by "The Vet" lays out the likely course of action the World Bank will take and its effect on the share price. All I know is this stock has some of the strongest hands holding on to it I've ever seen, as I illustrate in the chart in the article. Since then, the stock has actually dipped a little to some very strong support: