Scrubbing The Floors
It has been a while since ive gone looking for stock opportunities based on fundamentals. Mostly because it was impossible, but at least partly because i was making money without doing so. However, after a 40% decline in the S&P500, i feel it is time to start looking at new and exciting opportunities, unrealized by many market participants (small cap stocks). So as long as the market continues to move sideways/higher ill continue to post a few of these opportunities, dig through the fundamentals, and then try to set up a trading strategy around it.
VSE Corporation (VSEC)
From the company website, VSE is;
“VSE is a broadly diversified company focused on creating, sustaining, and improving the systems, equipment, and processes of government through core competencies in legacy systems sustainment, obsolescence management, prototyping, reverse engineering, technology insertion, supply chain management, foreign military sales, management consulting, and process improvement. Our expanded mission now includes providing innovative services and technologies to help our customers succeed in the engineering, energy, environment, information technology, and defense services markets.”
They deal in industries such as security, I.T., shipping, ordinance, ground vehicles, aircrafts, and more. They were named forbes’ 4th best small business, Business weeks 6th hottest company in America, and the Washington Posts #2 top grower in D.C.
In a world where the private sector just got shot through the heart, and a President who has said he is committed to having the Government be the provider of demand, this is a company i believe is well positioned no only to stand out from many other companies, but to position itself as a leader in growth stocks. And other people know it (reference articles mentioned above), which is key.
Financials:
with a book value of 13.87, a ROE of 30% in its most recent quarter, we can use the BV/ROE valuation model discussed previously to estimate there to be value in this stock at or below $38.6. This is not a price target, just a value line. The reason it cannot be a target is it doesnt take into account acceleration or deceleration in the aforementioned numbers.
In addition to this, from 2006-2007 operating income was up 91% while operating expenses were up only 79%. This can often be a great predictor of margin or ROE expansion. Though in that same year liabilities grew more than assets (not a good if it becomes a long term trend) their total debt/capital ratio remains at 0.09–which is outstanding. Combining this with the fact that their revenue per employee is more than double the industry average, im by far convinced this is an excellently run company with superb management.
Insiders: further evidence of the skill on this management team and board, is the insider selling.
When the insiders have sold en mass, it has been at the least a short term top. Sometimes insider selling means nothing, but this is a 5 year lookback. These guys know what theyre doing. The comany does own 3% of equity (impressive), and we have a big time star in Renaissance Technologies which is a 1.3% shareholder. Others worth mentioning, Koonce and Newbly management together own 20% of the outstanding shares.
Trading it:
Pretty story, but there have been plenty of pretty stories eaten alive in the past 12 months. I think this one has staying power, but this is how I’d look to trade it. Weekly Chart
Looking at my weekly indicators without price action presant, It looks to have gone bullish with a weekly MACD and 39 week ROC going positive. My weekly stoch is also showing the momentum to have shifted into a bullish move with some divergence along with MACD divergence. Fibonacci MA’s look solidly higher.
daily chart
It looks as though short term momentum on daily charts may be fading. Or, it is ready for a breakout. each time within the bear trend ROC has reached 50 it pulls back. a break above that would confirm the price break out above the 40-43 resistance. One further look on the daily
Volume study shows us that there has been some steady accumulation, confirmation of the move higher, as well as a lot of people in a profit (stronger holders). The levels highlighted are the 40-43 resistance area, the 38 value line, and a level to stop yourself out of the trade at 35. If that is no your style, and you’d like to add more, i would suggest waiting to see if it breaks lower, then waiting for momentum indicators to turn up again before adding to the position.
Overview:
We have a well run company positioned in a sweet spot that should be a leader if/when the market moves higher. A value target around $38, and longer term technical indicators leading us to believe it is starting to make a bullish run. A swing trading stop below $35, and an absolute stop below $22. Those that like to buy strength should wait until the resistance area is once again broken.
At the time of this writing i had no position in VSEC
