Salute Your Shorts – NASDAQ:SWKS

Skyworks Logo

Recent Price: $25.93
Target Price: $31.57
Potential Gain: 22%
Market Cap: $4.48B
CEO: David Aldrich (2001-Present)

Skyworks Solutions (NASDAQ:SWKS) is a differentiated, low-cost provider of analog radio-frequency semiconductors. The company sells its products primarily through a direct sales force, as well as through independent manufacturers’ representatives and distribution partners. SWKS manufactures 80% of its wafers and does 90% of its assembly and testing in-house.

Products include amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, phase locked loops/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, and technical ceramics. The company also offers MIS silicon chip capacitors and transceivers.

Internet-of-Things-1

The global population is still under-connected. Traffic from wireless and mobile devices will exceed traffic from wired devices by 2017. SWKS is uniquely positioned to capitalize on this trend. Product segmentation has moved from an 80/20 to a 60/40 mix of mobile / non-mobile revenues. Management sees a 50/50 mix in the near term. This runs contrary to the theme of many semiconductor producers, who, if anything, have become more closely tied to the big handset manufacturers.

Product Potential

Customers include Cisco, Boston Scientific, GE, Harman, Lenovo, Foxconn, ZTE, Samsung, Google, and Huawei.

SWKS has products which address the mobile-to-mobile, medical, automotive, networking, SmartEnergy, Infrastructure, and mobile devices.

The company also owns a portfolio of approximately 1,000 patents.

Expanding FootprintIf you own an Iphone 4 or 5, or a Samsung Galaxy, you have already bought this company’s products.

Key restrictions in the mobile space revolve around two things:

  1. Power – That little device in your pocket has to be able to reach a cell tower 10-30 miles away. SWKS started out in power amplifiers, and that skill-set has a very direct technical relation to number 2.
  2. Spectrum – Different providers use different radio-wave frequency ranges.  Furthermore, different countries regulate their RF spaces as well. More information can be found here: http://en.wikipedia.org/wiki/Frequency_allocation . Transmitting on a specific frequency requires minute changes in power amplification.

What about the competition?

Comps

It is worth noting that Skyworks has lower employee turnover than the industry average. Glassdoor.com ratings by employees are also very positive. In the tech industry, your most important assets are people. These trends bode well for Skyworks, and are reflected by revenue/employee.

Gross Margin Comparison

SWKS has expanded its gross margin at a time when the semiconductor industry, and the company’s main competition, experienced a downturn. Management has been guiding margins up!

The secret sauce here is the manufacturing process and the deep relationships with clients. Skyworks is rolling out products which are manufactured as one total package. This reduces manufacturing costs, and limits opportunities for OEMs to plug and play with competitors. In addition, they have been able to consistently improve chips per wafer.

The semiconductor industry is notoriously cyclical. SWKS manages these risks with a hybrid model. They manufacture in-house in segments where they feel they have a competitive advantage, and partner up with others when they do not. Vertical market discipline is something management talks about quite a bit in their earnings calls.

Shorts

We should all be thanking the shorts for keeping a lid on the stock. Having painted Skyworks with a broad, industry-wide brush, they have realized their mistake and are now hitting the eject button. Current short interest is around 3%.

DCF Assumptions

I settled on a WACC of 12%, based upon comparisons to competitors, and to company information on cost-of-capital available on the website. No debt certainly made the calculations easier.

WACC and Terminal

The bear case assumes a more tepid sales growth rate than average Wall Street estimates.

The base case is pretty much in line with Wall Street estimates.

The bull case assumes management can grow margins to 30%, which is their stated goal, as well as strong revenue growth as the internet of things picks up speed.

Platform Agnostic – Samsung, Apple, HTC who cares? Any way you slice it Skyworks wins and is pushing out into growing wireless device markets

Tax Advantaged Dividends (Buybacks) – $250M share buybacks announced recently, represents about 5.6% of the common stock

China – movement from 2G to 3G networks is still ongoing. 3G is only ~30% of market in China

Internet of Things – Growing demand for wireless devices of all flavors (NEST home devices, keyless FOB, GPS guidance, UAVs, etc)

Mr. Market is forecasting the typical semiconductor woes on a superior management team, with a superior business model, yielding ROIC well above the cost of capital (5-10% above cost FY10-FY13)

I have put 2% of my portfolio into this company, and may buy more as opportunities present themselves.

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Possible Research Paper – Covered Puts on Deep Value Stocks?

I am wondering if a systematic process of writing deep value puts could be done successfully. We define deep value stocks here as stocks which are undervalued to their intrinsic or tangible book values. Consider the case of Blackberry (NASDAQ:BBRY):

Recently the stock has been selling around $8.25, below the Tangible Book Value(TGBV) of $9.38/share. Interest in covered puts extends all the way down to $4/share, or just 43 cents for one dollar of TGBV. I recently wrote 5 covered puts for December at the $4 price for a sum of $38. Obviously, this is not a lot of money, but I think this might be a viable way to earn interest on my cash with almost no risk.

If Blackberry plunges below $4/share it will almost certainly be worth more. The company is sitting on piles of cash with almost no debt. I would love to get into this stock at such a low price. The company may not be a going concern, but the breakup value will be more than $4.

If Blackberry does not drop below $4/share by December then I will have made a 1.9% return on cash which is basically sitting idle anyway. The strategy matters here a bit. I always try to keep between 5-10% of my portfolio in cash. Lately, it’s been hard to find many good places to put it, and I actually plan to take gains on a few other positions. So if my cash is reserved in case of a major plunge, why not write puts to employ it for a plunge now? The theory is probably sounder than the reality. The problem I have with puts/calls is timing. Writing puts, you only get to buy the stock when the put owner is willing to sell. Blackberry might plunge below $4 in a panic, but it will not stay there. Still, perhaps by splitting purchases between covered puts and limit orders, one could eke out a slightly higher return at very little risk.

Half of my initial planned purchase of Smith & Wesson (NASDAQ:SWHC)is employed in a similar manner. I would love to get into the company under $10/share, and hope that my put holder exercises their right to sell me the shares under $10.

This is definitely something I want to research further.

A Second Look at BP (NYSE:BP)

I had a chance this weekend to deep dive further into BP (NYSE:BP). What did I find? A whole lot more to like.

A few helpful students at my school as well as a mentor of sorts pointed out that there may be better valuation metrics for oil and gas firms. The reality is that oil and gas assets are everything to these companies. Without them, they have very little intrinsic value. So I decided to create a new metric, Price or Market Cap / Barrels Oil Equivalent (a metric of combined oil, natural gas, and other hydrocarbon resources). Market Cap/BOE really displays the disparity in pricing between BP and the other majors. Though it is probably not new to those who follow the oil industry, I would not mind if they kept that fact to themselves and granted me a glimmer of hubris.

Better Valuations
Market Cap/BOE = Market Capitalization / Proved Reserves of oil and natural gas in equivalent Barrels of Oil

The market is saying that, pound for pound, BP’s reserves are worth less than half as much as Exxon’s or Chevron. With commodities such as oil and natural gas, this is highly unlikely. While there is some variety in refining and production costs between grades of oil, I don’ think that reflects the huge disparity above. With global energy demand expected to rise 56% by 2050, this is a truly exciting investment opportunity.

After re-reading the prospectus it is clear that BP is slimming down and toughening up. While the company’s reserve replacement ratio slipped below 100% this year, next year’s replacement ratio should be back over 100%. From the standpoint of the assets they currently own, the company is undervalued by a significant margin. When the market finally wakes up to this fact, the stock should hit at least $55-60.

Legal concerns are obviously a huge factor here, but historical oil spill litigation points to some serious upside here.

Exxon (NYSE:XOM) – Initially hit for $287M in damages and $5B punitive fines for Exxon Valdez, after 11 years of litigation later reduced to $0.5B punitive

Chevron (NYSE:CVX) – Sued for $19B punitive damages by Ecuador, case thrown out, ended up paying $0 in damages, $1B in legal fees

BP (NYSE:BP) – Paid out more than $42.2B in fines, claims, and fees, additional Clean Water Act settlement pending ($4-20B est. cost); expect result of $4-13B fines, a protracted legal battle favors the company; in worst case (≈$80B) the total cost would be approximately 13% per gallon spilled vs. Exxon Valdez

Base Case Forecast

Bear Assumptions

  • -3% Annual Revenue Growth
  • Rosneft cancels BP stake, resulting in lower reserves and revenue
  • 5-6% Net Margins
  • $90/Barrel Trading Range
  • Full $20B Clean Water Act fine levered, additional loss claims hit I/S
  • Legal resolutions speed approval to export U.S. LNG

Base Assumptions

  • 1% Annual Revenue Growth
  • Reversion to slightly below pre-Deepwater margins, cost of capital, and dividend growth rates
  • $100/Barrel Trading Range
  • $7-15B Clean Water Act fine, additional loss claims thrown out

Bull Assumptions

  • >$110/Barrel Trading
  • Worldwide Energy Consumption Growth 2010-2020 > consensus 20%
  • Leaner organization leads to permanently higher margins: 10-15% gross, 5% net
  • $4-10B Clean Water Act fine after prolonged litigation

Summary of Model Values

The market bear case is baked into the stock. The multiple potential catalysts within the next few years have not been properly appreciated. I have decided to up my personal stake to between 10-15% of my portfolio. My buy orders will be set under $42/share to factor in the worst-case scenarios above.

The Long Road to Aaron’s (NYSE:AAN)

Storefront

Recently for an Investment Club project, we (first-year MBA students) were tasked with pitching one long stock from the retail sector, with a market capitalization over $500M. Now retail is NOT my bread and butter. The P/E ratios right now are astronomical. Price/Book and Price/Cash Flows are almost as bad. Consumers are fickle, and tastes change constantly. My wife will even tell you that I am a terrible shopper. So I was definitely concerned about what sort of horrors I would find. We ended up with a list of 254 stocks. I went through and removed the companies with what I felt were bad business models or extremely high valuations. That left me with about 150 stocks. From there I screened for various criteria (P/E, P/B, P/S, P/CF, PEG, etc). I looked for stocks which were running below their five-year averages in two or more categories, and which were also undervalued compared to their competitors.

To make the research process more interesting, I committed myself to putting a small amount of money into whichever stock I end up recommending. I believe it is very important to have some skin in the game. It certainly kept me honest. I spent 12 straight hours looking hard at Francesca’s (NASDAQ:FRAN). I loved the growth potential there, but found some disturbing stuff in the end.

Essentially, FRAN follows the Uniqlo business model, but tweaks the end-user experience with customizable boutiques designed to make the shopping experience unique. The margins were high. And it was only after significant time and effort that I discovered FRAN was a short favorite (something like 14M shares shorted), due to questionable subsidiary/founder relations. I thought long and hard about whether I should recommend the stock to my school fund. What kept me honest was asking myself “Am I still willing to put my own money into FRAN?” The answer was a resounding no.

After that I looked at Corner Shop Brands (NYSE:CST), a recent Valero spinoff. CST looks like it might go places, and I am still interested. There simply wasn’t enough data to support or reject a growth thesis there.  I even asked for, and received, supplementary materials from CST’s investor relations. At the same time, valuations are too high to support a deep value thesis. I agonized over this one for a while too, but ultimately I had to reject the stock for now.

Aaron’s (NYSE:AAN) on the other hand, was a very interesting prospect.

With a market cap of $2.1B, and 2012 sales revenue of $2.25B, Aaron’s is a serious contender to Rent-A-Center (NASDAQ:RCII). 46% of Aaron’s rental agreements go to ownership, far more than the industry average (29%).The company operated 1,854 stores as of FY 2012, with 125 new stores planned for 2013, and has averaged a 5% store growth rate over the past 5 years.
AAN has three fully owned subsidiaries: HomeSmart, Rimshop, and Woodhaven Furniture. HomeSmart uses the same model but bases payments week-by-week. Rimshop sells custom car rims. Woodhaven Furniture manufactures most of the furniture Aaron’s sells, which helps Aaron’s keep costs low and quality high. Aaron’s is also a 10% stakeholder in a British rent-to-own company.

Segments

First let’s talk about the macroeconomic environment. Aaron’s customer base is primarily working class. What does this income inequality graph indicate about Aaron’s growth potential?

income_distribution_over_time

Walmart has been wondering where the customer’s wallets are this year, and it is highly likely that Aaron’s has been suffering from the same tax increase issues. This is whacking estimates way out of line of the underlying business. Ultimately, the long-term customer prospects for both Aaron’s and Walmart are strong. In the meantime, the company generates tons of cash flow and has almost no debt. It could pay off all its long-term debt tomorrow.

Sales Revenue

Now this is not growth for growth’s sake. Note the equivalent growth in Tangible Book Value.

Tangible Book Value Per Share

Now a quick comparison of some key figures.

Comparables

Aaron’s doesn’t need leverage to grow, and is therefore independent of rates rising or falling. At the same time, the company stands to benefit if consumers cannot obtain credit to buy durable goods outright. It is clearly operating its business better than the competition, and is doing a great job stealing market share.

Google Trends

Indeed.com ratings support the thesis that Aaron’s maintains a better relationship with its clients than Rent-A-Center or Conn’s. The company has built up a loyal user-base and has not had to go into serious debt to do so. The big question revolving around Aaron’s right now is the cash.

Use of Cash

Bear Case

  • Founding CEO retired in 2012. We can’t say for sure that the new CEO will continue the same policies.
  • Management salaries have doubled each year for the past several, resulting in SGA increases of ≈ 1%/year. Sales growth is still strong enough to support this but SGA needs to stabilize.
  • Though it has a progressive dividend policy, current yield is a meager 0.25%.
  • Management stated shareholders will see increased dividends and buybacks “soon” but that was two quarters ago and some investors are becoming restless.
  • Sears is making a small effort in rent-to-own. I’m not sure I consider this a serious threat since Sears has been promising everyone the moon and stars lately. Really, the best option for Sears would be to acquire Aaron’s.

Share Price

Analysts are predicting a retraction for Aaron’s in the near-term followed by continued growth. We can’t predict the future, and we don’t know the company as well as management does. What we can do is look at past earnings/growth ratios. Since our thesis is growth-based, PEG seems to be the appropriate measure by which we will judge the stock.

PEG Calculations

A fair value price with five-year growth rates to consider should be $27.87.

The economics of the business are sound, and management is doing a better job than its competitors. My one reservation with this company is a big one. Management is not rewarding shareholders. The current CEO owns very little stock and has been accepting cash pay raises. The dividend is paltry and so far, a share buyback has not been announced. That should lead to some serious thought. The business prospects are great. Shareholder prospects are not. From an investor standpoint, what is the point of all this cash flow if none of it is going to the owners?

I really enjoyed the mental exercise here. Retail is a hard sector to be in right now. The P/Es suck and you can’t patent a fashion style or a retail business model. I looked for the safest stock I could find which offered growth opportunities at a reasonable price. Aaron’s fits that bill from a business model perspective. The market is anticipating lower revenues for 2013, and that may be the case. But in the long-term the market does not understand the business model. Aaron’s is like a bank in the sense that it will benefit from a rate rise, as much or more than it loses. Analysts are only seeing a reduction in rental interest revenues, but remember that 46% of product which goes to ownership? Aaron’s is in very little danger here. Additionally, the macro-economic trends are in its favor.

While I believe Aaron’s is going places, I’m not sure it is going to take shareholders along for the ride. Until I can be sure of adequate returns I cannot advocate a stock purchase. One thing I will be keeping a close eye on is whether or not the new CEO takes a large stake in his business. So far that has not happened. Which leads me to a much more conservative price point, call it a lack-of-ownership penalty – $18.50. That would put it under a P/E of 10. At which point, I will be willing to take the risk.The founder pictured below still owns more stock than the new CEO. That needs to change to make Aaron’s a resounding Buy. loudermilk.0417_BH024

A Lesson In Setting Low Limit Buy Prices (Thank You High-Frequency Algorithmic Traders) NYSE:GLW

In mid-2012, I began to look hard to Corning Incorporated (NYSE:GLW). The stock was undervalued because of decreased earnings from flat-screen makers. Cash flow was good and management had been doing a great job strengthening the margins. I wanted in, but the stock was trading around $13/share, and I was only willing to get into the company at a conservative price because of its dependence on glass.

I set a limit buy order at $10.79 just in case the stock sank that low, though I was far from sure that it would. I pretty much left it alone for 3 months.

And then Knight Capital Group came along. Knight Capital’s modus operandi was to utilize high-frequency algorithmic trades to make tiny profits on many trades. On August 1st, 2012 an unknown glitch caused their algorithm to go haywire. This triggered a dumping mechanism whereby Knight Capital had an instant fire-sale. One of Knight Capital’s holdings was Corning. My buy order triggered at the very bottom of the sell-off.

Since that fateful day. My GLW holding is up over 30%.

Corning Purchase

Amazingly, a second sell-off occurred in the fall due to a layoff announcement which was overblown. I could have bought in again, but was fearful of throwing good money after bad. Ultimately, the stock rebounded nicely.

I continue to appreciate Corning’s potential. The company maintains strong margins and is working to diversify its revenue streams away from touch-screen glass.Corning continues to innovate new solutions for its clients, large cap companies such as Apple and Google. Corning’s recently announced Willow Glass is going to change the game for mobile electronics yet again.

Cash Flow Financing

I was a bit concerned about the issuance for new debt, but it turns out Corning has done the same thing Apple did. They have been utilizing low-interest rates to finance share buybacks and pay dividends. It is worth noting that Corning has generated positive net cash flows for four years running.

The lesson I learned is stick to your price no matter what the markets do. If there is one thing I can be certain of from my experience as a programmer, it is this: we have not seen the last of algorithmic trading glitches.

Bear Case

  • Company is overly focused on glass screen for revenues
  • Underfunded pension and relationship with unions
  • High R&D Costs
  • Operating cash flow is shrinking

Bull Case

  • Management is controlling costs and maintaining net margins around 20%
  • Progressive dividend policy tied with stock repurchases for the past two years
  • Cash flow supports increased dividends and repurchases

I am confident management will do everything in its power to enhance shareholder value. Wendell Weeks, the Chairman and CEO himself owns approximately $10M worth of common stock and has historically sold shares between the $16-20/share range. GLW is currently around $14.40.

BP (NYSE:BP) A Safe Dividend Play with Near-Term Catalyst

BP (NYSE:BP) has been one of the more interesting investment options over the past several years. The highly publicized Deepwater incident pummeled the stock immediately. People freaked out. The stock went as low as $27/share in June of 2010, then recovered back to $49/share by January of 2011. Since that time, the stock has gone sideways after adjusting for dividends.

Faltering oil prices, lawsuits and compensation claims tied to Deepwater, a messy TNK-BP breakup, and subsequent partnership with Rosneft’s predatory Igor Sechin has only served to depress the stock further. We can speculate about the intangibles of the legal process and the trustworthiness of Igor Sechin, but from a numbers and timeline perspective, BP looks attractive at its current levels of operation. In spite of diversions of cash to legal costs, and a lower dividend from Rosneft than TNK-BP provided, BP continues to generate large free cash flows.

BP’s margins are still sub-par compared to the other majors, though improving. Management has recognized this fact in the annual statement. Nobody is getting a free lunch in the executive lounge.

Margins

 

Kind of amusing that they think they possess any goodwill at all. Thankfully it represents a very small portion of total assets compared to most companies.
Kind of amusing. Thankfully it represents a very small portion of total assets compared to most companies.

What is impacting the stock?

1. Litigation regarding the Deepwater Horizon.
2. A flood of natural gas and oil from the U.S., which is helping to moderate oil prices.
3. Rosneft ties.

Catalysts

  1. Resolution of law suits. BP has been running adds in the Wall Street Journal recently claiming that it has fulfilled its legal obligations for the Gulf oil spill. Frankly, having been there, the Gulf seems like it is doing OK. It’s likely that BP will succeed in its efforts to wrap up litigation for the Deepwater Horizon spill within the next year or two barring some sort of unforeseen environmental impact.
  2. Rosneft made its first payment recently. Rosneft dividends will represent a great long-term deal for BP if they continue but we should not count on that.
  3. Stock buybacks announced this year to the tune of $8 Billion dollars worth.
  4. 5% dividend, more than many bonds pay now.
  5. The first round of stock options for executives post-Deepwater will vest in 2014.
  6. Inflation.

I think the strongest catalyst, the true driver for catalysts 1, 3, and 4, are the stock options. Never underestimate the self-interest factor. Unless they can coax the stock prices to a reasonable level a large portion of BP’s long-term executive salaries will be worth less now than four years ago. Resolving the legal obligations would provide even more cash to spend on stock buybacks and dividends.

Use of Cash

While BP’s future largely rests upon high demand for oil, valuations for the company are well-below the other major oil producers. Further, oil represents an excellent inflation hedge. As the Fed unwinds QE, inflation is a danger.

This is why I am going long BP for under $42/share. Approximately 10% of my total portfolio is currently invested in the U.S. ADR shares. The potential short-term catalysts at an incredible price is simply too appealing for me to pass up.

The underlined data points were particularly interesting to me
The underlined data points were particularly interesting to me

I intend to hold the stock until a legal resolution is reached, at which point I will re-evaluate the performance of management regarding net margins and shareholder returns. I estimate this will take 1-3 more years to play out completely but will be very happy to receive the dividend in the meantime. The stock has no room to go lower. All the bad news is priced in. Mr. Market has not factored in the catalysts.

(NASDAQ:FHCO) The Female Health Company – A Well-Managed Company with an Unfortunate Name

The Female Health Company (NASDAQ:FHCO)” might be the worst ever name for a company. There’s no sex appeal here, despite being in the business of contraceptives. There IS value if you can get over the awful name.

This is an indexed chart comparing the past five years of performance FHCO versus the S&P 500. FHCO shares sell around $9 currently.

Indexed Stock Performance Comparison

Company Profile

The Female Health Company is obviously not a well-managed brand like Apple and Amazon. And that is one of the reasons it is a great buy. Most investors heard the name and disregarded it, completely ignoring the 60% gross margin. FHCO also comes with astounding 46% net margins, rock-solid balance sheets, zero debt, and exponential growth opportunities in the developing world. Management is heavily invested in the company, and therefore has expressed a healthy desire to continually increase shareholder returns. Unfortunately, FHCO is only fairly priced currently. If the market continues its downward momentum over the next month or two, great buying opportunities could present themselves. The other catch is that the company makes only one product. This is not a diversified conglomerate.

Female Health Company makes the FC2 female condom. Its fortunes basically ride or fall on this one product, and it has the odds stacked in its favor. The FC2 condom is the only FDA approved female contraceptive on the market to protect against AIDS/HIV and pregnancy. Now to American men, and perhaps some American women, female condoms have a negative or exotic perception, so how do the reviews stack up on Amazon? 4/5 Stars. The product is available in 143 countries.

The majority of purchase orders for the FC2 come from organizations such as the U.N. which then distribute them in places like Sub-Saharan Africa where AIDS/HIV has been running amok for the past several decades. The FC2 and other female condoms are being given away for free to women there, women who may have never possessed a contraceptive before are now being empowered in a fundamental, demographically altering way. More information about World Health Organization findings and programs can be found here: http://en.wikipedia.org/wiki/Female_condom .

The takeaways are mind-boggling. Female condoms are a cheap, effective way to empower women in developing countries, costing less than $1 each. They exhibit effectiveness when re-used (though this is not encouraged it has been proven to work). Female Health Company has committed to giving away a portion of its inventory to help with these efforts. Men and women in developing countries are going to become familiar with female condoms. The potential market share being captured in places such as South Africa is staggering.

Check out the size comparison between FHCO’s major competitors Dwight & Church (maker of Trojan condoms) and Actavis Inc. FHCO is around $270M. There is significant room to grow here.

Market Cap Comparison

Now let’s take a quick look at the margins. I could trim out the bad years to suit my thesis, but I chose to leave them in. This shows a clear progression for the company, transitioning from small-cap start-up to profitable enterprise. Note also that 2007 was the year the FC2 gained approval for purchase from the WHO.

Margins

Strong growth over the past 10 years and management continues to aggressively improve manufacturing cost margins.

Next we look to cash flow. If the FC2 can be improved, FHCO has the cash to invest. If not, expect dividend and share repurchase increases. The pile continues to grow.

Cash Flow

Conclusion

The stock has moved since I bought my initial position in April, but is still fairly priced for a great company in this industry. I suspect the name turns people off, which is fine for those of us looking at the numbers. Growth has slowed down this year after 2012’s explosive earnings increases, but there is still plenty of room to run and management believes that it will.

Valuations Comparison

How long until the party is over, the word gets out, and major institutions bid up the price and own 50-70% of the shares? That’s hard to say. Currently only 34% is owned by institutions. One lonely analyst follows the stock according to Factset (they recommend it as a Buy).

Insiders own approximately 25% of the stock worth about $66 Million dollars between 12 individuals. That’s a LOT of confidence that their company is going places. FHCO’s high margins compared to its competition are an expression of that commitment.

Currently FHCO represents around 4% of my portfolio. It should serve as a good counterweight to the stalwarts I own such as GE and Toyota. I intend to buy at or below $8.00/share. I believe that macro-market trends will push the price down to at least that low and perhaps lower in the short-term. Being a small-cap, the stock is inherently more sensitive to macro trends. This is a 5-10 year stock. I do not expect to get rich overnight holding it but I do believe that if I hold it over that time frame the stock will at least double in price and perhaps more. In the meantime, the dividend compares favorably with bond yields. If management continues to capture market share and keep margins low I might never sell. Long term, this company has immense potential.

Margins Comparison