Liking The Looks Of A Special Situation At Data I/O
I’m very excited to be joining Forbes.com as a blogger, and look forward to bringing you some great investment ideas. In my many years of working in the investing field as an analyst, editor, and interviewer, I’ve met hundreds of investment advisors—fundamental analysts with long-term outlooks, sector specialists, market mavens, and technical analysts whose primary focus is strictly price momentum.
My specialty is fundamental analysis, with a technical bent. That means that I mostly like to buy companies that are fundamentally strong—businesses with a track record of growing revenues and earnings, reasonable debt, good cash flow, loyal insiders, a decent—but not too much institutional following, and very importantly—some sort of catalyst that is pushing their shares higher.
You see, I’ve found that even the best-run company—one that is batting a thousand on all the fundamentals—can be a dog of a stock if there isn’t some catalyst ready to propel its shares to the next level.
That catalyst can be many things: A stock buyout, a special dividend, a spin-off, a new product launch, an impending turnaround, or even a new management team. Or the catalyst may be something indirectly related to the company, such as an uptick in the general economy, technology breakthroughs in the company’s industry, or just the right time in the cycle to buy into its sector.
In the past couple of years, these special situations have paid off big for shareholders. For example, recent M&A activity propelled shares of HJ Heinz up 20%; Virgin Media, 24%; and Elan, 11%. Shareholders of Kraft, Huntington Ingalls, and Lumos, saw returns of 316%, 70%, and 69%, respectively, as a result of spin-offs. Issuing special dividends sent shares of CVR up 40%; US Cellular, 10%, and Inteliquent , up 104%.
Lastly, we don’t want to forget turnarounds like Ford, whose shares have risen 826%; Hewlett-Packard, 117%, and Wendy’s, 88%.
What the catalyst actually is, isn’t so critical—the key is determining if the event is important enough to compel investors to sit up and take notice, and send the shares soaring. It’s easy to look at these situations in hindsight, isn’t it? The more difficult challenge is—how does an investor discover these momentous events before they happen?
Fortunately, there are some hints of coming catalysts that careful analysis will often uncover, including:
- Boost in trading volume
- Rise in institutional ownership
- Increase in insider buying
- New trend in analyst ratings
- Company/Sector/Industry Growth
- Market Share Leadership
- Large and growing cash position
- A need for a cash infusion
- Change in company focus
- Shuffling of management
My specialty is searching for those kinds of catalysts—events that taken individually, may be overlooked. But combine a few of those, and they often provide a sneak preview of an event that can greatly increase a stock’s market price.
In this blog, I intend to alert you to just those types of opportunities, and I also plan to run up caution flags, when I see nonsensical evaluations, companies taking advantage of their shareholders, or businesses who seem to be falling off the track.
I just ran a screen for companies that appear to be on the verge of an important catalyst, and I discovered about five businesses that look like they have “all the right stuff” to propel their shares to the next level. I’ll be talking about them in the pages of my newly-launched newsletter, NancyZ’s Buried Treasures, but I’m happy to share one of these treasures with you today.
Data I/O (NASDAQ: DAIO) makes and sells software to the programmable semiconductor markets, specifically in high-growth areas such as flash and microcontrollers. Their customer base includes a wide range of companies in the auto, wireless, consumer, and industrial markets. They cover a broad base of household name companies like Delphi, Panasonic, Siemans, Honeywell, Carrier, Google, and Microsoft.
Opportunities seem virtually endless, since just about every single electronic product today contains one or more programmable semiconductor devices that are critical to its operation. Moreover, the global electronic equipment market is estimated to triple from this year to next—a fine time to be moving up in this niche.
But as you know, the only thing you can count on in the electronics market is change, and if you can’t keep up with that change, you might as well hang up your boots.
DAIO hit a few bumps in that change road a couple of years back and missed out on a couple of crucial industry trends but it looks to me like they’ve managed to climb their way back to the top, setting a turnaround in motion.
They’ve gone after some big-name customers in tremendously-growing markets. As of second quarter, 29% of their customers were in the automotive industry, which is growing at a 20% annual rate. There, the company provides products for most of the car, including wipers, ignition, tire pressure, and steering components.
The wireless market makes up 25% of DAIO’s revenues, and it’s expected to rise by more than 30% this year. You’ll find the companies programmable devices in a host of wireless electronics, including smart phones, tablets, and gaming devices.
The rest of DAIO’s revenues break down like this: consumer, 16%; industrial, 15%; and programming centers, 15%.
The build-up of customers and industry diversification is paying off for the company, and sends a signal to me that DAIO may be worth a second look. And looking into the company’s finances provides even more interest.
For the second quarter ended June 30, 2013, DAIO posted sales of .3 million, up 11% from first quarter of 2013. And while the company is still incurring net losses (4,000), or (.08) per share, a couple more announcements produced a spark: 1) Orders for the second quarter rose 30%, to .7 million, from second quarter of 2012, and were up sequentially, by 41%, from the first quarter of 2013; and 2) The loss in the second quarter includes a restructuring charge of 2,000. The company says it is restructuring “to reduce operating costs, address excess space costs, and provide the capacity to hire critical resources.”
Operating income before the restructuring charge was ,000, so it looks like DAIO is striving toward being in the black again.
Just in case, I did my due diligence and looked over two of its key competitors.
Agilent Technologies (NYSE:A) provides bio-analytical and electronic measurement solutions and services to the life sciences, chemical analysis, diagnostics and genomics, communications, and electronics industries worldwide. Teradyne (NYSE:TER) provides automatic test equipment worldwide, for the Semiconductor and Wireless segments.
Both companies look OK. They’ve been beating analysts’ estimates, but their near-term trend doesn’t look as rosy as DAIO’s. I didn’t see any catalyst with either that would make me think the potential for their shares to rise is as good as DAIO’s.
The shares of DAIO are somewhat speculative, so please make sure you consider your own investment goals and portfolio diversification prior to jumping in. And it’s better to be conservative in your purchases and your targets. I’ll give it a .50 near-term target—up 124% from its current trading level of .45. I’d also recommend you setting a 30% trailing stop-loss on the shares.
Thanks for reading. I look forward to bringing you some great ideas, and hope you’ll visit my blog often.
Nancy Zambell owns no shares in any of these companies.