SIMO or SYRG [Nov 2012]

This month I'm taking a little more time than usual to pick a good stock to analyse. At first I couldn't find one, then I found more than one. Anyway, I think the decision process can also be important if you have any sort of time limit to dedicate to your investments.

This time I'm torn between two small caps from completely distinct universes. 

Silicon Motion Technology Corp. is a Taiwan tech player mostly focused on the mobile industry. It designs, develops and markets high-performance, low-power semiconductor solutions for the multimedia consumer electronics market. It supplies Samsung! This could be relevant. It trades under the ticker SIMO as an American Depositary Receipt (ADR). For more info on ADR's visit:  http://en.wikipedia.org/wiki/American_depositary_receipt

Synergy Resources Corporation (SYRG) was founded in 2007 and is an oil and gas operator in Colorado. The Company is focused on the acquisition, development, exploitation, exploration and production of oil and natural gas properties located in the Wattenberg field in the D-J Basin in northeast Colorado. Recent data confirms the company operates 146 wells, held approximately 222k gross acres and 188k net acres under lease. Its estimated net proved oil and gas reserves included 5.1 million barrels of oil and condensate, and 33.4 billion cubic feet of natural gas.

Both companies are trading at cheap levels compared to current and future (estimated) earnings - PER and next 12 month PER (or Forward PER), both have recorded high revenue growth in the last year and both are performing very well in recent quarters and both have very low levels of debt in their balance-sheets.

SIMO seems a lot more undervalued but SYRG is definitely poised for growth according to analysts estimates. About analyst coverage both have a BUY consensus recommendation constituted by 6 (SYRG) and 7 (SIMO) analysts. All of the analysts have a BUY or OVERWEIGHT recommendation and the upside potential to the lowest price target over 35% in both cases.

So far I've just pointed out some reasons to why I think these companies are worth investigating, but now comes the time to choose one. These are just some questions I think it's important to ask when looking at these two possible investments:

  1. Why are they so cheap? Are they a "value trap"?
  2. What's the momentum of the stock price? Why?
  3. What's the institutional investors' position?

Why are they so cheap? Are they a "value trap"?

SIMO had a huge run in 2011 after sales increased almost 60%, company returned to profitability after two years of negative income, and every quarter the company issued guidance above expectations. In 2012, SIMO also issued guidance above expectations for the 1st quarter and even though results were even better then estimated, for some reason shares went down quite a bit (>15%). I believe this was because it was the first time the company reported a decrease in sales (~5% Q-o-Q). After that guidance disapointed for the second quarter and stock price sunk until now. Basically, I think the company is performing well but for some reason is issuing very weak revenue guidance. Just with this pre-analysis I wouldn't say its a value trap, but it's important to look at the industry as well.

SYRG was recently founded and has just started to be profitable. Neverthless the company is recording TRIPLE DIGIT growth in revenues since 2009. I think the company is not THAT cheap considering it's current earnings, but the fact that it has just started to be profitable with the fact that it is a small cap can let investors more cautious. Another thing that can play against this investment is that it is a "growth" play, and growth is something rare these days so investors can be questioning the company's ability to keep growing at the same pace. 

What's the momentum of the stock price? Why?

SIMO presents a downward trend. It peaked in the beginning of the year and since then it retraced back almost 50%. In July there was a positive small reaction after the company issued Q3 guidance above expectations, but it didn't take long before testing new lows. I believe this negative momentum is associated with the fact that the company is in a very volatile industry based on global growth, which is threatened and especially due to the recent below-expectations results.

SYRG presents a very different price history. In September stock price rose almost 50% peaked in early October and since then retraced back around 15%. I believe the september move wasn't associated with any particular new information, instead was more of a technical reaction after some months in consolidation and a new coverage by a brokerage firm (Overweight).

What's the institutional investors' position?

This question is actually related to the last one. In fact institutional investors can determine to some extent the momentum of the stock price. In the last 6 months, institutional investors have reduced their exposure to SIMO in almost 8%, while increasing 30% of their investment in SYRG. Even if the reduction wasn't significant, I believe the institutional investors are clearly "buying" SYRG's story. 

Conclusion:

SIMO is a lot cheaper, it is performing extremely well in recent quarters and is a great play on Samsung Mobile, but it has been surprising investors with low guidance, institutional investors have been exiting and the trend is pointing lower.

SYRG isn't that cheap, but it's performing very well with great revenue growth, price target increased recently presenting a very nice upside potential, institutional investors are buying massively and stock price just dipped a little after a huge run. This could be the time to buy.

Right now, I'll go along with SYRG as I believe it will take more time for SIMO to recover. 

Tópico: ???? [Nov 2012]

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