NASDAQ Big Movers Battle Royale - First Up, The Losers

You caught me rummaging through the daily lists of NASDAQ 52-week highs and lows.

If you click on one of the sidebar links to NASDAQ's daily tally of 52-week highs and lows for the three major American exchanges, you'll see that it can be a random walk around success (new highs list) or daily Sisyphean failure (stocks appearing a few times a week on the new low list). It's also a list of logos (NASDAQ-only), from the colorful and eyecatching, to the black-and-white descriptive. These lists offer an opportunity to explore companies and stocks that are outside of my interests, and on the margins of the business media's radar. The only criteria on making this list is stock performance.

For this exercise, I immediately filtered out any stock trading below $1 on the new low list. For the new-high list, I left out any stock that's trading much above $10 since I'm also trying to dig up more obscure stocks.

I plugged each ticker into the Key Financials page at SmartMoney.com. I'm generally looking for some sort of profitability, maybe some decent ROE/ROA/ROIC numbers, even a favorable PEG ratio. I entered 25 tickers. Most did not survive initial scrutiny. Maybe that's for the best, because the ones that did will be put through potentially humiliating analysis, stripped naked and prodded, all to see if we can find a stock worthy of inclusion in the oh-so-exclusive Stock Watch List.

Here are the candidates:

First off, from the November 18, 2005 NASDAQ 52-week lows (boo!)

ECGI
MATK
PDCO
SAFM
TARO

And from the NASDAQ 52-week highs (*clap* *clap*)

AZPN
LVLT
RNWK
GROW

I'll review the four winning stocks in an upcoming post, but here they are if any reader cares to comment on them ahead of time.

First, let's deal with the losers, battle royale style. Last stock standing gets a coveted spot on the Pig stock watch list, where the ticker will appear daily, for all Pig readers to appreciate. (I'm going with Iron Chef-style rewards for victory: the respect of one's peers and glory in victory, but no cash or a showcase of prizes.) The others will soon be forgotten in the unvisited archives of the blogosphere. Oh what a damning fate.

First up Envoy Communications Group, Inc. (ECGI) operates Watt International, an advertising consultancy specializing in private label products. What does that mean? They help create, design, and market the no name store branded products you get at stores like Wal-Mart and Safeway. Watt International designed President's Choice-branded foods sold at supermarkets across the United States. They currently work on Wal-Mart's home and garden product line. Previously, Watt consulted on Home Depot store layouts and signage, and designed the CTV news studio, which should mean something if you're Canadian, I guess.

ECGI also operates Parker Williams Design, based in the UK. However, that company's website is currently being re-designed. Hmm, very reassuring.

ECGI just hit a 52-week low, dropping $0.17 to $1.54 per share. A negative 2006 outlook press release probably triggered the drop. Check it out:

Preliminary comment on fiscal 2005 results and 2006 outlook
- PR Newswire
TORONTO, Nov 18, 2005 /PRNewswire-FirstCall via COMTEX/ -- Envoy Communications Group Inc.'s (Envoy) preliminary information indicates that results for fiscal 2005 will substantially meet previously announced earnings guidance of $.28 per share. Fiscal 2005 results will be released in December after approval by Envoy's Board of Directors.

Looking forward, Envoy believes that there are a number of economic uncertainties, competitive challenges and business risks that will impact the client spending commitments of its operating companies. As previously announced with its third quarter results, Envoy is experiencing price pressure on its roll out production services in both the UK and North America. Envoy has recently taken certain efficiency related initiatives, including outsourcing programs to lower cost centres and concluding strategic alliances and joint venture arrangements with business partners in new geographic markets.

As a result of these initiatives, Envoy's Board of Directors has approved the immediate implementation of a restructuring plan. Accordingly, Envoy will incur a restructuring charge of approximately $1.6 million in the first quarter of the current fiscal year. The annual savings in salaries, benefits and other expenses associated with this restructuring is approximately $3.7 million. Management believes that, by implementing the restructuring plan now, Envoy will be better positioned to remain profitable, if its clients' historical spending patterns do not materialize in the short term. At the same time, management will be pro-active in implementing other initiatives to achieve organic sales growth, reduce operating expenses and improve efficiencies.

Envoy has strengthened its strategic and creative services, which has resulted in Envoy winning significant consultation assignments with several of the largest retailers in North America. Although the company will continue to provide world-class production roll-out services, it will increase its pursuit of strategic assignments, as such assignments have the potential to increase Envoy's profit margins in the future.

ECGI is apparently buying back its stock. It is authorized by the NASDAQ and TSX to buy back up to 400K shares per month. As of June 30, 2005, there were 21.6M shares outstanding, giving the company a market cap of about $33M.

According to SmartMoney.com, ECGI has a ROE/ROA/ROIC of 3.83%/3.35%/3.82%. The company is profitable, but ever so slightly. Free cash flow numbers from Morningstar.com were erratic:
'00 (2.8); '01 10.6; '02 (14.4); '03 2.8; '04 (2.3); TTM (2.3)

Martek Biosciences Corporation, MATK, was down $0.60 to $26.37, well off its 52-week high of $70.50. From the MarketWatch.com profile:

The Group's principal activities are to develop, manufacture and sell products derived from microalgae. These products include specialty, nutritional oils for infant formula; nutritional supplements and food ingredients to promote mental and cardiovascular health; fluorescent markers for diagnostics, rapid miniaturized screening and gene and protein detection. The Group also develops new fluorescent detection products from microalgae that connect fluorescent algal proteins to antibodies. The trademarks of the Group include Neuromins (r), DHA Gold (r), DHASCO (r), and ARASCO (r).

Yummy yummy microalgae. MATK is down as analyst earnings expectations for '06 have been lowered recently. However, MATK has an attractive PEG of .98. Its ROE/ROA/ROIC is 10.80%/8.35%/9.18%. Negative free cash flow has been the tune for MATK for each of the last ten years.

PDCO, Patterson Companies, a distributor of dental, veterinary and rehabilitation products, fell $7.19 to $35.01. Dow Jones reported on the 18th that PDCO lowered its second-quarter earnings expectations to 32 cents a share, down from 35 to 37 cents. It also lowered its 2006 profit forecasts from $1.54 - $1.58 a share, to $1.44 - $1.46. PDCO has a PEG of 1.26, and an ROE/ROA/ROIC of 18.88%/10.91%/13.86%. The free cash flow is consistently positive, although lower in the TTM:
'00 52.5; '01 70.1; '02 79.4; '03 75.4; '04 178.1; '05 175.8; TTM 131.3

A quick perusal of news releases on TheStreet.com showed that PDCO is getting sued by a bunch of shareholder-class-action plaintiff's firms over missed earnings in March 2005 and alleged SEC violations. This type of litigation getting pretty typical these days when earnings surprises occur, so it's important to note the potential litigation costs, but not to worry too much. The bigger worry is PDCO's continued inability to meet Wall Street expectations.

SAFM, Sanderson Farms, Inc. produces, processes, markets and distributes fresh and frozen chicken and other prepared food items. The stock was down $1.10 to $31.70. Its ROE/ROA/ROIC of 21.56%/16.62%/20.89% compare very favorably to its competitors' numbers, namely Tyson Foods, Smithfield Foods, and Hormel Foods. SAFM's free cash flow has been positive and healthy, except for TTM, which is (7.5).

SmartMoney.com noted SAFM on September 28 as an appetizing takeover target:

In addition to being oil country, the Gulf Coast states affected by Katrina are also part of chicken country. Mississippi alone accounts for 9% of U.S. chicken production. Sanderson Farms (SAFM: 31.70, -1.10, -3.4%), headquartered in Laurel, Miss., had a bit more exposure to the storm than some of its competitors. About two-thirds of its capacity is in Louisiana and Mississippi. Fortunately, none of the chicken processors fared too badly. Sanderson says it lost about $3 million worth of chickens and $1 million worth of meat ready for export, and that the hurricane didn't have any long-term impact on operations.

Last year Sanderson sold 1.5 billion pounds of chicken, collecting $1.05 billion in annual sales, or about 20% more than it made in 2003. Conditions were ripe as poultry prices had climbed about 17% year-over-year. Since then prices have dipped slightly, and Sanderson's stock chart has flattened. Sales are expected to decrease this year to $1.01 billion and to increase to $1.14 billion next year.

Shares slid about 8% on Aug. 23, when the company released its fiscal third-quarter financial results. Sales fell 10% on a 6% decline in whole chicken prices and a 41% drop in boneless breast meat prices. Profits plunged 29% to $24 million. Per-share profits of $1.19 missed analysts' expectations by 13 cents. Included in the earnings were seven cents per share in start-up costs for a new processing plant in Georgia.

Despite the earnings shortfall — and partly because of the stock's fall — there's much to like about Sanderson right now. Industry watchers say that it's the most efficient chicken processor in the business. Its gross margin of 16.9%, vs. 13% for Pilgrim's Pride and 6.7% for Tyson, supports that claim. We've written in the past about how chicken processors are trying to mix more "value added" chicken products (preseasoned entrées and so forth) into their sales in an effort to boost margins. Sanderson seems to have taken the opposite tack, embracing the fresh chicken business that its competitors are lightening up on. Its new facility in Georgia will increase its capacity for tray-packed fresh chicken by 40%. Analysts say the company is shaping up to be the country's low-cost producer of fresh chicken.

Short-term cost fluctuations aside, analysts say that chicken pricing is more or less stable at the moment, and that the outlook is favorable. Domestic production is growing at about 3% to 4% a year. Domestic consumption is increasing at 2%, but exports are expanding at 10%. Sanderson's export sales accounted for just 6% of its overall revenue pie last year, suggesting that the company has room for growth.

Shares of Sanderson trade now at about 10 times the forecast for 2005 earnings, lower than an average of 12 for the group as a whole. With negligible debt and about $50 million in net cash on the books, the company's EV/Ebitda ratio stands at just under four. The average for meat processors is seven. Add to that a 1.1% dividend yield and Sanderson shares at their current price look plenty appetizing.

The last stock is Taro Parmaceutical. TARO. Its low PEG of .37 drew my attention. Then I saw its low ROE/ROA/ROIC numbers (5.51%/2.96%/4.89%) as compared to its competition. I then found the following bit of terrible news from TheStreet.com:

Shares of Taro Pharmaceutical (TARO:Nasdaq - commentary - research - Cramer's Take) were among the worst-performing health-related stocks Thursday, tumbling 33% after the company posted third-quarter results that fell well below Wall Street expectations.

The drugmaker earned $2.1 million, or 7 cents a share, on sales of $72.5 million. Analysts polled by Thomson First Call expected earnings of 28 cents a share, with sales of $80.7 million. During last year's third quarter, the company earned $4 million, or 14 cents a share, on sales of $73.3 million. "Our results reflect the competitive nature of the generic drug industry and our continuing investment in the development of proprietary and generic drugs," the company said. Shares were trading down $7.12 to $14.78.



The Pig is pleased that Sanderson is a poultry processor, and stays away from the pork. I'm also pleased to add SAFM to the Stock Watch List as the first winner of the NASDAQ Big Movers Battle Royale.

Do you think I made the right call? Did I find a pearl among swine, or did I just polish a turd?