Thursday, January 26, 2012

AME: Broad specialists

Ametek Inc. (AME) makes electronic instruments and electro-mechanical devices.

That bloodless description hides the company's overwhelming number of  business divisions that serve specialized markets: Aerospace and defense, chemicals, floor care, measurement and calibration, power systems -- the list goes on and on.

AME appears to hold that middle stretch between upstream raw material manufacturers, such as a plain-vanilla chemical company, and downstream finished product makers. AME makes specialized things that enable the downstream companies to make finished goods from the materials of the upstream companies.

So is a company with a broad range of specialties. As I looked at their list of divisions and business units, my first thought was, "What a managerial challenge this company must pose."

But the suits at company headquarters in Berwyn, Pennsylvania -- just south of Valley Forge, where Gen. George Washington and his army spent a difficult winter -- seem to be doing quite well, thank you very much.

Their stock chart and financials point toward that conclusion, as do the big-money managers, whose institutions own 84% of the stock.

AME was one of 21 stocks added today to Zacks top buy list. Today's runners-up are VCBI in 2nd place, POOL in 3rd and PLCM in 4th.

The careful reader will say, "Wait, didn't I see AME mentioned in Private Trader a few days back?" And that is true: It was a runner up in my chart rankings when it was previously added to the Zacks list.

The Zacks rankings rely heavily on analyst opinion, which is volatile even in the best of times. So I've found that it's not unusual to see Zacks add a stock to its best buy list, drop it a few days later, and then add it again a few days after that.

This is one reason why I tend to be a short term trader.

I chose AME from the new additions because it had the most bullish chart. My essay "10,000 Charts" describes how I go about making my selections.

The most recent price rise began Oct. 4, 2011 at $30.87 and has continued, with three corrections, to today's high of $47.75 (so far). The recession low was $16.36 in March 2009, and that rise was interrupted by a major correction during the summer of 2011.

Implied volatility stands at 38%, at the low end of the range that has held since early December 2011. Low implied volatility implies trader complacence, which translates into a willingness to open bull positions. So the price and the implied volatility are in line.

I liked the chart because the most recent rise brought the price into blue-sky territory, above any previous trading. And the breakout, above the high of $47 set in April 2011, is recent -- it happened today.

So if the breakout is indeed what it appears to be, any bull position will be getting on the train as it leaves the station. If the breakout fizzles, which happens a lot with stocks -- well, that's what stop/losses are for.

Also, the rise of the last 10 days has been marked by slightly higher volume -- always a good validator that a rise has some enthusiasm behind it.

AME's return on equity is 20% -- approaching growth stock territory -- but the debt, at 0.54 times equity -- is a bit overly aggressive for my taste. However, borrowing costs are at historical lows. So as long as the money is put to productive use, that debt level isn't a deal-killer for me as a trader.

The price is expensive -- it takes $2.58 in stock to gain control of $1 in sales -- and that is an indicator of buying enthusiasm for AME.

As an aside, there are two ways of looking at the price/sales ratio.

A value investor will look for a low ratio, assuming that stock price will rise to equal sales which, in turn, will also be rising, at least if the value investor has chosen wisely. So the value investor, standing sedately on the station platform, quietly folds his or her umbrella and calmly steps on board, trusting that the train will leave the station sometime in the future.

A growth investor will look for a higher price/sales ratio, treating it as an indicator that the train has already left the station and it's time to madly ride his or her horse alongside the train and leap on the roof in order to not be left behind.

The stock is a bit low in liquidity, with average volume of 874,000 shares, and that is reflected in AME's weak options selection. There are only 10 strike prices in the February options, and open interest is in the low double digits with pathetic bid/ask spreads: 0.30/4.90 for the at-the-money February call option.

So any bull position, under my rules, would need to be in shares.

Earnings were announced this morning before the opening -- 63 cents per share vs. 61 cents expected -- so the next earnings will be sometime in April, as will the next ex-dividend date for the quarterly payout, now yielding 0.51%.

Decision for my account: I'm passing on AME because of the poor options selection. If I buy shares alone, then I lack leverage.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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