On fundamentals and technical

“With a common stock, few of us are rich enough to afford impulse buying.”
Philip Fisher

Two companies came to my attention last week after both posted solid earnings and revenue:

Rockwood Holdings, Inc. (ROC) is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes. ROC products consist primarily of inorganic chemicals and solutions and engineered materials. They are often customized to meet the complex needs of customers and to enhance the value of their end products by improving performance, providing essential product attributes, lowering costs and/or making them more environmentally friendly.
On Tuesday October 26, 2010, Rockwood Holdings, Inc. reported earnings per share from continuing operations of $0.52 for the third quarter of 2010 as compared to $0.14 for the same period in the prior year. Rockwood’s adjusted earnings per share from continuing operations increased to $0.55 in the third quarter of 2010 from $0.19 for the same period in the prior year. In addition, Rockwood reported Adjusted EBITDA of $169.1 million for the third quarter of 2010 as compared to $151.1 million for the same period in the prior year.

DIGI INTERNATIONAL INC. (DGII) operates as a device networking company that develops products and technologies to connect and manage local or remote electronic devices over a network, via the Internet or via satellite.
On Thursday October 28, 2010, Digi International Inc. reported revenue of $47.3 million for the fourth quarter of fiscal 2010 compared to $40.0 million in revenue for the fourth quarter of fiscal 2009, an increase of $7.3 million, or 18.1%. Revenue for the year-ended September 30, 2010 (fiscal 2010) was $182.5 million compared to $165.9 million for the year-ended September 30, 2009 (fiscal 2009), an increase of $16.6 million, or 10.0%.

The following table shows fundamental data for both companies and their related industry:

DGII P/E indicates an overvalued company vs its peers, however analyst estimates a forward P/E of 18 for the company, in line with the industry. DGII has very favorable price to cash flow compared with the sector and the industry. ROE for this year suffered because of revenue decrease primarily due to weakened economic conditions and changes in product mix. From 2005 to 2008 the company incremented sales in a 48% but from 2008 to 2009 sales decreased 10%. It can be expected that profit margin and ROE improve going forward along with the economy.
Low points: High P/E, low ROE, low profit margin.
High points: No debt, High cash flow generating.

With a 15 forward P/E, ROC looks undervalued. The company shows high ROE and a fair P/Book. The price to cash flow is very positive and the profit margin is in line with its peers
Low points: High debt, earnings growth estimate below industry.
High points: Good P/E, High ROE and lots of cash.

And for the fun part of this analysis we’ll go through the market, sectors and individual stocks.






The Nasdaq continues its ascent started in the first days of September.





Looking at the 10 days momentum chart I see a decelerating rate of ascent. Despite the fact that a positive reading means the uptrend is still in effect, I would like to see the momentum breaks above the downtrending line.


The index 10-30 days moving average histogram continues on positive territory with a pause recorded around mid October. As long as this oscillator continues with a positive reading the uptrend should stay.





The basic materials and technology sectors represented by the iShares Dow Jones US Basic Materials (IYM) and the Technology Select Sector SPDR (XLK) ETFs, continue going up in line with the general market, they are both at a four month high.




-------------------------------------------------------------------------------------------------

Rockwood managed to close above 36 last Friday and is now in a new four month high. The moving average oscillator stopped the descent that started around mid October and looks ready to begin going up again. A positive market next week should result in rapid gains for ROC.




-----------------------------------------------------------------------------------------------

DGII has yet to make a new four month high, the stock paused from 10/20 to 11/2 and then started going up possibly fueled by good earnings news. The 10-30 indicator looks neutral, a positive reading next week will indicate a good entry point.