PRAGATI: PROGRESS TOWARDS PROFITS IN THE STOCK MARKET May 1993 /Volume 2 CONTENTS Introduction Summary of Recommendations Recommendations for the Month Champion Parts Chrysler Corp. Defiance, Inc. Patrick Industries Plum Creek Timber, L.P. TEPPCO Partners, L.P. Basics of Stocks Chapter 6: Strategies for Buying Stocks Disclaimer Introduction Welcome to the May issue of Pragati! Thank you all for your continual support and encouragement. A reminder: This is the last free issue. As informed earlier, Pragati goes commercial next month. See the end of this article for subscribing for Pragati from next month, if you haven't already requested for your paid subscription. For an uninterrupted delivery of Pragati, please respond by the end of this month. Thanks to all of you who responded to our survey last week. 58 people have responded to the survey so far. Most of the current features of Pragati got high marks from them. 58% liked the Basics of Stocks, 75% liked the descriptions of companies, 62% liked the stop order recommendations, 48% liked the updates, 79% liked the reasons, and 41% liked the variety of stocks recommended. 44% of them wanted to see charts in Pragati, 53% wanted to be informed by e-mail when stop-orders were reached for recommended stocks. We were pleased to note that 35% of the responders said they would be interested in investing in a Pragati fund. About 35% indicated that they were not active in the stock market and 75% of these 35% said that Pragati subscription was expensive; this is reasonable because $59.95 per year is expensive if one is not going to use the information provided. There were many interesting suggestions such as a question and answer column, graphs, market analysis, and so on. Thank you for your time and interest. We hope to work on improving Pragati along these lines in due course. The last month saw the market see-sawing. It looks as though the investors are resting after the hectic running they did from November last year till March this year. This seems especially true of their appetite for hi-tech stocks. Many hi-tech stocks have taken a beating. Keeping in touch with the current fashion, we have stayed away from hi-tech stocks in this month's recommendations. In the past month we saw Cohu and Callaway Golf surge ahead by almost 50% above our recommended price. While Callaway has pulled back, Cohu seems to have other ideas. Andrea Radio and Global Industries are doing well too. You must have got out of Callaway Golf by now; please remember to update your stop-sells for the others. On the down side, HEI Inc, New Image, Decorator Industries and Grossman's got sold out at our recommended stop-losses. A look at the table of updates makes it clear that the strategy is working. We have consistently cut-down on our losses and kept our profits up. So on the average we are doing pretty well. We were wrong about the stop-loss on Decorator Industries by three-eighths of a point or so; it fell to 9-5/8 and immediately started rising. Our recommended stop-loss was 9-15/16 (split-adjusted). Summary of Recommendations In the past few days Callaway Golf and Cohu came out with record earnings reports for quarter ended March 31, 1993. Callaway Golf reported 43 cents per share compared with 20 cents per share for the year earlier. Cohu earned 64 cents per share compared with 30 cents per share for the year earlier. We are recommending Decorator Industries again at 12-3/8. Company Name Date Rec. Rec. Price Hi Since %Chg. at Hi Stop Loss Coachman COA(N) 11/92 10 18.75 87.5 AudioVox VOX(A) 11/92 5.13 9 75.4 Sunward Tech.SUNT(O) 12/92 1.94 3.25 67.5 Seagate SGAT(O) 12/92 21.88 -10 * Devon Group DEVN(O) 1/93 12.88 19 47.51 New Image NIIS(O) 1/93 19.13 22.25 16.3 Western Beef BEEF(O) 1/93 6.38 8.5 33.22 Callaway Golf ELY(N) 2/93 24.63 37 50.22 Cohu Inc. COH(A) 3/93 20.5 29.38 46.9 24.88 Centigram CGRM(O) 3/93 19.63 16.88 Grossmans GROS(O) 3/93 3.88 -6.44 * HEI Inc. HEII(O) 3/93 9.88 -22.77 * 7.63 NewImage NIIS(O) 3/93 19.25 -12.3* 16.88 CML Group CML(N) 4/93 38.5 39.38 34.88 Decorator DII(A) 4/93 11.56 -14* 9.94 Andrea Radio AND(A) 4/93 37.88 48.5 28 41.25 Global Indus. GLBL(O) 4/93 18.38 21.25 15.6 16.13 Reflectone RFTN(O) 4/93 11.63 11.75 10.38 Huffman HUKF(O) 4/93 8.38 9.5 6.88 Champion Pts CREB(O) 5/93 4.75 4.13 Chrysler C (N) 5/93 44.13 39.63 Defiance DEFI(O) 5/93 5.25 4.13 Patrick Ind. PATK (O) 5/93 17.63 15.63 PlumCreek PCL (N) 5/93 52.13 47.63 Teppco TPP (N) 5/93 26.88 24.13 * Sold out at stop-loss. Recommendations for the Month We have six new recommendations for this month:Champion Parts, Chrysler Corp, Defiance, Inc., Patrick Industries, Plum Creek Timber, L.P., TEPPCO Partners, L.P. Name of the Company: Champion Parts Symbol: CREB Exchange: NASDAQ Phone: (708) 573-6600 Address: 2525 22nd St., Oak Brook, IL 60521 52 wk. Hi LO: 6-1/4, 2-7/8 Recent Price: 4-3/4 Recommended Price: 4-3/4 Stop-Loss: 4-1/8 Description: Champion Parts, Inc. is a major replacement parts remanufacturer in the automotive, truck and farm equipment aftermarket. The company remanufactures, tests, and distributes over four million parts each year throughout U.S. and Canada. The product line includes carburetors, water pumps, clutches, starters, disc brake calipers, motors, engines, and so on for all makes and models of domestic automobiles and trucks and many makes and models of farm and industrial equipment. Echlin, Inc (NYSE ECH) owns 16% of CREB stock, purchased in 1987 at $9 per share. Echlin is the largest supplier for Champion Parts. Please note that this stock rises almost straight up and in the past has fallen straight down but slowly. Make sure you closely follow the stock and update your stop-loss. Reasons: The company has about 3.6 million shares outstanding and management owns about 16% of the stock. As mentioned above, Echlin, Inc. owns about 16% too. The company's long term debt is about 27.6 million (as of January 1993) compared with its revenues of 112 million. Earnings for the quarter ending March 31, 1993: 3 mos to Mar 1993 3 mos to Mar 1992 Sales 25.9M 23.7M Income .654 M .208 M EPS 0.18 0.06 Avg . Shares 3.65M 3.65M Name of the Company: Chrysler Symbol: C Exchange: NYSE Phone:(313) 956-5741 Address: 12000 Chrysler Drive, Highland Park, MI 48288 52 wk. Hi Lo:44,17-5/8 Recent Price:41-1/4 Stop-Buy: 44-1/8 Stop-Loss: 39-5/8 Description: The third largest automaker in the U.S. Reasons: Chrysler returned to profitability in 1992 despite startup costs for its new line of cars. In Feb. 1993 Chrysler sold 52 M shares at $38.75 each. Half of the proceeds (about 2 billion) were to be used to reduce pension $3.8 billion liability. Institutional interest is about 22% Chrysler cars and trucks are doing extremely well and per share earnings are expected to surge ahead in 1993. The company's earnings for the quarter ending Mar 31, 1993 are as follows: 3 mos to Mar 1993 3 mos to Mar 1992 Sales 10.9B 8.19B Income 530M -256 M EPS 1.57 -0.62 Avg . Shares 325M 292M Name of the Company: Defiance, Inc. Symbol: DEFI Exchange: NASDAQ Phone:(216) 861-6300 Address: 1111 Chester Ave., Suite 750, Cleveland, OH 44114-3516 52 wk. Hi Lo: 5-1/8, 1-5/8 Recent Price: 5 Stop-Buy: 5-1/4 Stop-Loss: 4-1/8 Description: Defiance is an integrated supplier of products and services to the U.S. transportation industry. The manufacturing operations of Defiance are comprised of two principal companies: Defiance Precision Products and Vaungarde, Inc. Defiance Precision Products manufactures cam follower rollers and other precision components. Vaungarder is a manufacturer and painter of plastic parts for the transportation industry, including bumpers, spoilers, facias and other exterior body components. Other subsidiaries provide engineering services for the auto industry, perform tool and die design, and produce metal and plastic prototypes for fenders, hoods, doors, and chassis. Reasons: This industry group, auto parts - original equipment, tracked by Investor's Business Daily has gained 14% since Jan. 1993. It has had 7 consecutive quarters of improved earnings with the last 3 quarters netting .04, .08 and .20 cents per share. Long-term debt is 8.7M (as of Dec 1992). Its earnings for quarter ended March 93: 3 mos to Mar 1993 3 mos to Mar 1992 Sales 20.6 M 16.2 M Income 1.27 M .104 M EPS .20 .02 Avg . Shares 6.1 M 6.1 M Name of the Company: Patrick Industries Symbol: PATK Exchange: NASDAQ (NMS) Phone: (219)-294-7511 Address: 1800 S. 14th St. P.O. Box 638, Elkhart, IN 46515 52 wk. Hi Lo: 17-1/2, 5-3/4 Recent Price: 16-1/4 Stop-Buy: 17-5/8 Stop-Loss: 15-5/8 Description: Patrick Industries makes and distributes building products and materials, primarily for the manufactured housing and recreational vehicle industries. Manufactured products include aluminum and wood products. They make vinyl and paper wall panels, wood beams and so on. Reasons: The company has a long-term debt of 16.6 M and its annual sales for 1992 were 184.3 M. It has a book value of 13.07 In 1992 it had record earnings of 94 cents per share (versus a loss in 1991). Earnings for quarter ended March 93: 3 mos to Mar 1993 3 mos toMar 1992 Sales 54.9 M 39.7 M Income 984K 160K EPS .67 .11 Avg . Shares 1.4 M 1.4M Name of the Company: Plum Creek Timber, L.P. Symbol: PCL Exchange: NYSE Phone: (206) 467-3600 Address: 999 Third Ave., Suite 2300, Seattle, WA 98104 52 wk. Hi Lo: 52, 34-3/8 Recent Price: 51-3/4 Stop-Buy: 52-1/8 Stop-Loss: 47-5/8 Description: Plum Creek's business is to acquire and operate timber and wood related operations. It is a limited partnership. They own and operate six lumber mills, two plywood plants and a fiberboard plant. These facilities produce lumber, plywood, and fiberboard for a variety of markets and applications. Reasons: Earnings for 1992 surged to $4.02 per unit as compared with $1.10 per unit in 1991. Lumber prices are rising rapidly. This should result in further growth of earnings. This is very likely because this company has had increasing earnings even before the lumber shortage started. Its earnings for quarter ended March 1993: 3 mos to Mar 1993 3mos to Mar 1992 Sales 116.4 M 99.2 M Income 25.6K 9.11K EPS 1.62 .58 Avg . Shares 13.5 M 13.5M Name of the Company: TEPPCO Partners, L.P. Symbol: TPP Exchange:NYSE Phone: (713) 759-3636 Address: 2929 Allen Parkway, P.O. Box 2521, Houston TX 77252-2521 52 wk. Hi Lo: 26-3/4, 19-3/4 Recent Price: 25-1/4 Stop-Buy: 26-7/8 Stop-Loss:24-7/8 Description: This company provides a pipeline system (4200 miles) for transportation of gasoline and various kinds of fuels. In addition it owns and operates storage facilities for refined petroleum products and liquefied petroleum gases. Reasons: Oil and gas products and pipelines industry group tracked by Investors Business Daily has gained 16% since Jan. 1993. Earnings risen in 4 of last 5 quarters. Earnings for quarter ending March 93: 3 mos to Mar 1993 3 mos to Mar 1992 Sales 48.8 M 41.2 M Income 13.5 M 7 M EPS .92 .49 Avg . Shares 14.5 M 14.5M Basics of Stocks CHAPTER 6: Strategies for Buying Stocks In the previous chapter we stated the parameters that are useful for expressing stock picking strategies. Stock picking strategies can be broadly classified into three categories: Fundamental Analysis Technical Analysis Technical and Fundamental Analysis (or, as Nicolas Darvas calls it, Techno- Fundamental Analysis) In this chapter we will briefly look at examples of strategies for each of these approaches. FUNDAMENTAL ANALYSTS In the fundamental analysis approach to stock selection the focus of attention is on the fundamental parameters. The fundamentals relate only to the company and may be to some static features of the price but not to price variation or volume. Some fundamental parameters are the following: industry group, products/services, earnings, shares, per share figures (especially the latest annual earnings per share and the ubiquitous PE ratio), long-term debt, acquisitions/expansion, patents, book value, legal proceedings and so on. A pure fundamentalist avoids looking at the price action (how has the stock been performing recently) except perhaps that he may look at the PE ratio to determine wheter the stock is "overvalued" or "undervalued". There are published average PE ratios for industry groups. A fundamentalist compares the current PE ratio of a company with the average PE for the industry group. For example suppose the PE ratio of a company is 10 and the average PE for the industry group of the company is 15, the fundamentalist figures that the company is undervalued. If, on the other hand, the PE ratio for the company is 20, he might dump the stock or short it as he considers it to be "overvalued". The fundamentalist usually looks for the following characteristics of the parameters. The list is only meant to be suggestive and not exhaustive. Moreover, depending upon his fancy, a fundamentalist might choose a subset of these parameters ignoring the rest or even include some other parameters that we have not considered here (such as currency rates for international companies). He may also weigh the parameters attaching to some parameters greater importance than to the others. Parameter: Positive Characteristic Earnings: Growing Long-Term-Debt: Falling or Low or Non-existent Legal Proceedings: None or the company has major lawsuits against some other company which it is likely to win bringing in large amounts of cash. Book Value: High (greater than the stock price, for example) Assets: Increasing Liabilities:Decreasing Cash on hand: High or Increasing Cash Flow: Meets company's day to day requirements Insider Buying: High Company repurchase of shares: High PE ratio: Low Products: New products released or to be released and there seems to a great demand for the products to be released. Season: Buys before the peak season. Buys before the stock starts rising from its cyclical low or just after. TECHNICAL ANALYSTS This second category of stock buyers are inveterate statisticians and graph or chart addicts. A pure technician only looks at the market. He only studies the price and volume behavior of stocks and nothing else. If the market behavior of the stock is good, nothing else matters to him and if it is bad, nothing can change his mind to buy the stock. He might analyze an infinite number of features of the price-volume behavior of stocks. He is like a scientist who analyzes the DNA structure. He will examine the data painstakingly, tabulate the data, compare features (such as the 30-day moving average of price, the 60-day moving average of price), plot the variation of one feature against the other and can get completely incomprehensible! A few of the really simple features or signs that a technical analyst might look for are the following (here we are referring to the usual chart of price change versus time although an expert technical analyst is not bounded by such tradition): Sudden break-out after base building (i.e., either insignificant fluctuation in price for a long time or price fluctuation in a fixed price range) accompanied by increased volume. Standard deviation of the stock is low indicating that the stock is not very volatile 30-day moving average of the stock price crosses the 60-day moving average indicating a sharp rise in the short-term. Formations in the graphs such as the cup, cup with handle, saucer, head and shoulders, double cup (or "w"), and so on. Rate of change or the slope of the curve or the first derivative. Tops and bottoms or the analysis of the second derivative. And so on and so forth. This can go on ad infinitum. Ad nauseum. TECHNO-FUNDAMENTALISTS Techno-fundamentalists are the people "inbetween". They take ingredients they like from both fundamental and technical approaches to come up with their own concoction. The technical and the fundamental analysts believe that the techno-fundamentalist is confused; he is like the cat on a wall not knowing which side to jump. This meshes pretty well with the picture that the techno- fundamentalists have too. They feel that they are like cats on the wall with technical analysts on one side and the fundamental analysts on the other. Neither the technical analyst nor the fundamental analyst is able to see the whole world. But the techno-fundamentalist feels he can due to his vantage position. A popular techno-fundamental strategy is the CANSLIM strategy aggressively marketed by William O'Neal of the Investors Business Daily. The CANSLIM is actually misleading. The CANSLIM only refers to the fundamental characteristics of a stock and not its technical characteristics thus telling only half of the strategy that the CANSLIM strategy really advocates. Each letter in the word CANSLIM refers to a characteristic of the stock. The C refers to the current earnings, A refers to annual earnings growth (how have the earnings been growing over the past few years), N stands for new products or services, S for number of shares outstanding, L for leaders or laggards (is the company a leader in its industry group or is it merely a follower of a leader), I for institutional holdings and M for the market direction (bull or bear). The CANSLIM strategy only tells us how to perform a preliminary screening of stocks. In addition it advocates a technical analysis to prune further and choose the stocks to buy. The technical analysis is based on EPS strength (how have the company's earnings been rising when compared with all the other companies), on relative strength (how has the company's stock price been behaving as compared with all the other companies stock prices), and on the analysis of price volume behavior. The CANSLIM strategy recommends buying a stock that has the CANSLIM features, has high EPS strength and relative strength, and is just breaking upwards out of an established base. Disclaimer All information provided in PRAGATI is for the sole use of subscribers and is based upon PRAGATI's interpretation of public information believed to be reliable. All opinions expressed herein as to the relative values of securities discussed are based on historical valuation norms - no guarantee of specific performance is expressed or implied. 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