Market pullbacks can offer windows of buying opportunity for investors intrepid enough to enter. At the beginning of March 2014 the US NASDAQ Composite Index began to tumble off its highs, dragging internet and technology stocks around the world down with their US counterparts. The following chart shows the carnage:
Source: Yahoo! Finance
The impact on the ASX was felt by three of our largest Internet stocks – REA Group Limited (REA); Seek Limited (SEK); and Carsales.com Limited (CRZ). First let us look at a share price movement chart for the top two stocks by market cap, REA and SEK, over the last three months:
If you compare the chart against the movement of the NASDAQ Composite you can see REA and SEK, although still positive for the year, began to drop about the same time the NASDAQ began its descent. Also note that like the NASDAQ, both ASX stocks have reversed course and are moving upward again.
So was this a buying opportunity missed, or is the window still open? Some analysts point to the lofty P/E’s for the three (REA – 47.45; SEK – 17.91; CRZ – 28.5) as evidence the stocks are simply too ripe to pick right now. The solid shareholder returns over the last three years (REA +57.1%; SEK +37.1%; CRZ +32.6%) are past history, and the market is all about the future, analysts tell us. The following table looks at the share price movement of the three stocks over the past month and for the past year along with forward growth estimates for earnings and dividends:
Each company has dominant market share in Australia in its respective field. All are Internet based. REA is the leader in property; Seek in employment; and Carsales.com in, well, cars. In addition, all three have added ancillary services over time, opening new revenue streams. Recently reported Half Year Results for each were solid. Here are some highlights:
• REA – Revenue up 30%; NPAT up 37%
• SEK – Revenue up 38%; NPAT up 29%
• CRZ – Revenue up 10%; NPAT up 17%
Finally, all are expanding globally. Carsales.com recently acquired a 49.9% stake in the largest automotive site in South Korea. REA is opening a website in China this year. In 2013 the company supplemented its existing operations in Italy with the purchase of Italian property site Attico.it. Through one of its subsidiaries, Seek recently acquired 100% ownership of online employment business JobStreet that serves markets in Malaysia, Singapore, Indonesia, the Philippines, and Vietnam.
Despite valuation concerns, a substantial number of analysts are still bullish on these stocks. REA has 4 analysts with Buy and Strong Buy recommendations; Seek has 10 at Buy and Strong Buy; and Carsales.com has 132 analysts with Buy or Strong Buy recommendations.
Conservative investors are likely to find long-term safe havens in shares of REA, SEK, and CRZ. Investors with risk appetites that border on punting look for other possibilities. High-risk tech investors often gravitate towards stocks of companies with technological capabilities that could be termed “state of the art” and perhaps even revolutionary. We have three candidates, all having dropped more than 30% from 52 week highs. Here is the table:
Codan Limited (CDA) looks like a candidate for only the most extreme of extreme punters. The share price has dropped about 80% from its 52 Week High with a growth forecast that spells little relief in the immediate future. The company designs and manufactures high tech products in three business segments – Metal Detection; Radio Communications; and Mining Technology. Metal Detection and Radio Communications account for more than 90% of the company’s revenues. The company’s gold detectors have been credited with significant finds in Africa and have been the most profitable revenue source historically. The radio communications segment is also deemed “state of the art” but sales of both have been hampered by counterfeit products. In June of 2013 the company issued profit guidance with good news and bad news. The good news was the expectation of a record profit of $45 million for FY 2013. The bad news was the deteriorating conditions in the African market for the company’s gold detectors. Civil unrest, according to the company, would impact revenues into FY 2014, pending the results of elections.
The share price collapsed and it did not recover when in August the company reported formal Full Year 2013 Results showing a 36.2% increase in revenue and a 96.2% profit increase. In December of 2013 management issued another profit warning and the shares got hammered again. Here is a one year share price chart for CDA:
The company reported 2014 Half Year Results in February, showing a drop in NPAT from $26.5 million a year ago to $4.8 million. Management reiterated the problems in West Africa, especially in the Sudan, but remained confident cost controls now in place and new products in the pipeline would stem the tide. Analysts are cautious, with 3 at Hold, but none at Underperform or Sell, according to Thompson/First Call. Consensus revenue growth for FY2015 stands at 8.7%. Earnings per Share (EPS) for FY 2013 came in at $0.24 per share. For FY 2014 the estimated EPS is $0.067 per share, rising to $0.114 per share in FY2015.
Silex Systems Ltd (SLX) is a self-described high-tech company researching and developing technologies focusing on Nuclear and Solar Energy, and Advanced Materials and Instrumentation. The company operates in four business segments – Silex; Solar Systems; Translucent; and Chronologic.
Understanding what this company does is challenging at best. The origin of its name perhaps says it best – Separation of Isotopes by Laser EXcitation (SILEX). This is a method for enriching the uranium needed for nuclear power plants and it is more efficient, both in terms of cost and production. The company signed an exclusive licensing arrangement for the technology with US based General Electric Company back in 2006. In 2007 GE took on Japanese based Hitachi Corporation as a partner which led to the formation of the Global Laser Enrichment (GLE) subsidiary in 2008. In 2012 the US Nuclear Regulatory Commission approved GLE’s licence application to construct and operate a commercial uranium enrichment plant utilising the SILEX Technology.
The share price began to rise with the prospect of the licensing agreement but peaked in early 2007 and has been on a rocky ride since. Here is a ten year chart for SLX:
The company’s other business segments boast potentially revolutionary technologies as well. Solar Systems created a proprietary technology called the “Dense Array” dish concentrator system that could enable solar power stations of a size capable of large scale electrical utility generation. The company is now studying the economic feasibility of the technology.
Translucent has developed technologies using rare earth oxides (REO) that could be used for advancements in semiconductor, power electronics, and solar applications.
ChronoLogic has developed the USB-inSync™ platform, with potential use in electronic instrumentation ranging from tests and measurements to data acquisition to precision timing.
Of course this all sounds exciting, but throughout history investors have been burned by companies with technologies guaranteed to change the world as we know it that somehow never pan out. But in May of 2013 Silex received its first payment under the GLE licensing agreement in the amount of US$15 million. The Solar Systems segment has a power station in operation in Australia with another under construction in Saudi Arabia.
Company management acknowledges its immediate future rests in the continued success of the GLE nuclear plant construction. Investors who keep an eye on macro-economic events have surely noted the possibility of a renewed interest in nuclear energy in Europe, given that regions reliance on Russia for natural gas and the current political upheavals there.
Finally, note the outsized earnings growth forecast for this company. This assumes an estimated EPS loss for FY 2014 of $0.062 per share rising to a positive $0.113 in FY 2015.
Although the final stock in the table, Dyesol Limited (DYE) has rewarded its shareholders year over year with a 114% increase, the last three months have not been so kind. Here is the price chart:
Dyesol’s technology for improving solar cells – Dye Solar Cells (DSC) – has the capability to be truly revolutionary. However, this is not a proprietary technology. The use of DSC has been limited to small applications due to its lower life span and efficiency in energy conversion.
Dyesol announced a series of breakthroughs in energy conversion efficiency and durability throughout 2013 and the company now has a product that should be commercially viable, with manufacturing to begin in FY2015. In the meantime, the company sells supplies and equipment for use in smaller scale applications.
Funding for the larger scale commercial application is not an issue for Dyesol as one of the many positive announcements that drove the share price over the last year came on 28 February 2013 when Tasnee, a Saudi Arabian industrial giant with the full name of The National Industrialization Company of Saudi Arabia, announced an initial investment of AUD$4 million in Dyesol, with the promise to pursue additional strategic partnerships. In November Tasnee proposed an additional AUD$16 million, subject to shareholder approval. Approval was finalized at a March 2014 General Meeting.
So what is this DSC technology and how revolutionary could it be? Here’s is a web definition for dye solar cells:
• A dye-sensitized solar cell is a low-cost solar cell belonging to the group of thin film solar cells. It is based on a semiconductor formed between a photo-sensitized anode and an electrolyte, a photoelectrochemical system.
A simpler way to conceptualize this is to a think of a series of very thin layers of material coated with a special dye that allows light to penetrate and produce electricity in a process similar to photosynthesis. The applications are impressive, as standard building materials like steel roofing and glass – think home and car windows – could generate electricity. Dyesol already has an impressive list of partners including Tata Steel and Merck in Europe and Pilkington North America in the US, a manufacturer of glass building facades and vehicle glass.
Despite the promise, Dyesol is a high-risk stock. The company’s recent dismal Half Year Results were released prior to shareholder approval of the second part of the Tasnee investment. Approval was required since it raised Tasnee’s ownership stake in the company above 20%.
The Half Year Report from the auditors including a warning that should Dyesol’s Directors be wrong in stating in the report the Tasnee deal would receive approval, there would be an “existence of a material uncertainty that may cast doubt on the Company’s ability to continue as a going concern.”
Scary stuff that never happened but it underscores the risk of investing in companies that have yet to achieve profitability, no matter how solid the development funding.
This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article.
Click on the links below to read other articles from this week’s newsletter