Everybody likes a bargain. Investors really like a good cheap buy. A review of our four alternative energy industries revealed three stocks trading below industry average multiples of forecasted earnings. This is the second article in the series, thee first looked at Ormat (ORA:NYSE).
A couple of weeks ago shares of Kadant, Inc. (KAI: NYSE) registered an particularly bullish formation – at least from a technical standpoint. A ‘triple top breakout’ was formed in a point and figure chart, suggesting demand for the stock outpaces supply. Given the new momentum that has developed, the stock could reach as high as $52.00, representing 25% upside potential.
Kadant is trying to clean up the paper production industry with more efficient virgin pulp processing equipment and recycling solutions. The company also makes biodegradable absorbent granules from papermaking by-products for agriculture, lawn, ornamental and industrial uses. The company earned a 10.8% operating profit margin on $391.7 million in revenue in the most recently reported twelve months.
Analysts who follow Kadant expect the company to deliver as much as 20% earnings growth over the next five years. That is impressive and we would expect to have to pay as much as 20 times earnings to buy KAI. Yet the stock is trading at 18.4 times trailing earnings and 13.5 times earnings predicted for 2015. A current dividend yield of 1.4% makes the stock seems even more appealing.
The discussion today might be more or less academic. A technical indicator, the Commodity Channel Index that has served me so well, suggests the stock is overbought at the current price level – at least temporarily. A review of historical trading patterns suggests the stock has a fairly well developed line of price support at the $38 price level and another at $34. While it is not clear if fundamental performance would disappoint investors enough to send the stock down to the $34 price level, it does seem possible that the stock could retrace price to the $38 price level. Third quarter results send the stock soaring the day following the earnings announcement. Any period of weakness in the broader market could bring the stock back to lower orbit near $38 per share. For investors with a view to hold KAI for a period of time should find it worthwhile to wait and watch for a compelling entry point.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.