TPS Trade Alert – April 24, 2015
Recommendation:
Buy Goldfield (AMEX: GV) up to $1.85 per share.
Trade Rationale:
Investing in microcap stocks can be challenging for multiple reasons. After all, a company doesn’t tend to trade below $2 per share unless there are some major issues.
Sometimes it’s nothing more than the size of the company or limited growth prospects. Other times, something negative has happened, which has severely depressed the share price.
The key is to find those companies most likely to have true upside potential.
Of course, that’s easier said than done. That’s why you have to have a plan. There’s got to be some kind of thesis behind why you’d invest in such a small company.
One strategy I like to use is to find a microcap stock which has fallen recently due to a temporary problem. It could be poor quarterly results, or headwinds in the industry itself.
The most important thing is to determine if the issue is temporary. Accounting fraud is going to be very difficult to recover from, for instance. A very limited market for a product isn’t likely going to lead to much upside.
On the other hand, there are plenty of legitimate, short-term reasons why a company has a worse than expected quarter. If the stock sells off on this type of news, it could be a good buying opportunity.
I believe it’s this very scenario playing out right now with Goldfield (AMEX: GV).
GV provides electrical construction services to electric utilities and industrial companies in the US. The company is involved with construction and maintenance of electric utility facilities. And, it provides electrical contracting services, such as the installation of transmission lines and distribution systems.
One of things I really like about GV is its involvement in electrical infrastructure. Basically, the entire power grid in the US needs to be upgraded. As such, there should be plenty of lucrative work opportunities for GV for a considerable amount of time.
But that’s not all…
I mentioned earlier about finding companies which have sold off because of temporary negative news. GV fits the bill exactly.
You see, Goldfield had problems at two different utility companies in Texas during the fourth quarter. Basically, delays in material procurement and adverse weather conditions resulted in $5 million worth of losses on the projects.
Overall, annual income from operations dropped 90% year over year due to the delays. However, the problems have been addressed and the project is back on track.
That’s the very definition of a temporary scenario. The problems occurred, and they are over. It shouldn’t be an issue moving forward. Nevertheless, the stock price dropped significantly on the news.
Investors not only ignored the “temporary” part of the problem, but also didn’t pay attention to the good news. For instance, quarterly revenues (which weren’t impacted by the project delays) climbed 24% year over year.
What’s more, the company has $275 million in backlog. That’s 4x what it was in the prior year. And, it should provide consistent revenue moving forward.
GV also has just under $10 million in cash compared to $26 million in debt. That’s not bad for this particular industry, and current assets remain a reasonable 2.1x current liabilities.
Finally, given the share price drop this past month, GV is trading at just 0.4x sales and 1.4x book value. That’s extremely cheap for a company growing revenues and simply dealing with a temporary setback to income.
Let’s grab shares of GV while they’re trading at such reasonable prices.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
Company: Goldfield
Ticker: GV
Recent Price: $1.67
Buy up to Price: $1.85
Market Cap: $42.5 million
Avg. Daily Volume (3 month): 116,837 shares
Chart:
Category: TPS Trade Alert
