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.

No comments:

Post a Comment