Thursday, October 04, 2012

IHS Offers Possible Short Opportunity

Disclosure: I have no position in IHS. I may initial a short position within the next 72 hours.

I'm typically not one for shorting stock and must admit I have limited experience doing it, but I couldn't help but notice the opportunity that IHS Inc, a market research company, is providing. After undergoing a huge price correction from around $115 per share to about $91 per share in September, I still think there is room further downside.

First let's consider the 12 month trailing P/E ratio. As of market close today, the P/E ratio was 47 and change. Typically, when I see 12 month trailing P/E ratios over 25 alarm bells start going off in my head, so I decided to pull high and low P/E ratio since the company became incorperated in 2005.

As you can see from the chart, the company has only overcome the 47 threshold once in it's 6 year history. It is also the highest the company has been since the 2008-2009 housing bubble collapsed.

The second thing I looked at was insider activity. Since July, insiders have sold more than 1.2M shares while only purchasing 50K. While this differential clearly shows insiders think the company is overvalued, I think what is more important is that insiders didn't jump back in at the mid-90 share price. To me this suggests they might be expecting some further downside.

The last thing I looked at was the book value per share which was $23.79. At the current price of 96.29, your getting approximately $0.24 for every dollar you invest. With such low earnings (relative to price), it is hard to overcome the 4:1 price to book value.

Tuesday, October 02, 2012

Investment Portfolio: Week of 10/1/2012

No changes in my investment portfolio this week. Currently my investment portfolio contains five equities: Discover Financial Services (DFS), Intel Corp (INTC), Medtronic, Inc (MDT), Microsoft (MSFT), and Wells Fargo & Co (WFC).

Depending how Intel does this week, I might exit a small position I had in U.S. Silica Holdings (SLCA) and bring Intel's weight in the investment portfolio to approximately 22%. 

Last Thursday Discover Financial Services released Q3 results. I'm planning to evaluate the stock this weekend and confirm the investment theory is still sound. Mr. Market decided the news was enough to jump the price of the stock 7% when the news broke on Thursday, so I'm expecting the underlying fundamentals to still look good. Look for my analysis early next week.