Abaci's Common Sense Investing

Time for a review of the underdogs, a.k.a. industrials, as the latest results have come out. Against common perceptions or wisdom the results were all outstanding, a fine achievement and it looks like the depreciating USD is really helping exporters.

Check out http://abaci-investing.blogspot.com/2007/01/every-dog-has-its-day-my-industrial.html for the basic story of each selection which remains sound today.

1st a summary of the basic parameters.

894 - sales up 12%, EPS up 15%, 9x p/e, 2.1% yield
927 - sales up 54%, EPS up 84%, 8.5x p/e, 4.3% yield
1120 - sales up 38%, EPS up 72%, 7.5x p/e, 3.3% yield
408 - sales up 18%, EPS up 31%, 12x p/e, 3.5% yield
1001 - sales up 6%, EPS up 209%, 8x p/e, 3.1% yield

Average - sales up 26%, EPS up 82%, 9x p/e, 3.3% yield

Since it's only been 6 months I don't have much to supplement. 408 appears more expensive but justifiable so given its 5-year growth record. And it definitely has re-rating potential as management and owners are restructuring the board and improving corporate governance to please the institutions. 894 and 927 will continue to benefit from the growth in consumer electronics and communications market, plus both are enlarging their capacities. 1120 will enjoy the rising EURO and fashion appetite. 1001 has just turned around and will need time to prove the value in its JV with Ryerson. In short I'm still positive on all five of them. Remember Peter Lynch's rule of 5 and these are meant to be purchased in a basket.

Next let's look at the market performance.

894 - $2.03, $2.54, up 25%
927 - $1.8, $3.67, up 104%
1120 - $$2.58, $3.28, up 27%
408 - $3.82, $5.7, up 40%
1001 - $0.98, $1.5, up 53%

Average - up 50%

50% in 6 months is outstanding and it's actually my annual target for small caps, though one could've done even better if just sticking to my other picks like Chalco, China Cosco, or even Tomson. But this is the cost for diversification and I already forewarned these were dogs. Comparing the price movement with the profit growth, I don't think the dogs are let out of the doghouse yet. That's why I think this sector continues to be a safe place, on relative terms, in today's market.

During this evaluation process I've looked at other potential dogs, as I know readers are always only interested in the 'next' pick, as if past picks were like retired hall-of-famer athletes on wheelchairs now. For which I can say after studying a dozen other dogs, I still can't find any that can really outshine the 'fab 5'. One exception is Meadville (3313) but beware it's the only flop of all my picks in the past! Though I still have good hope of the PCB market and its 3G potential. The other interesting bet is RMIH (1997) but since it's a new IPO and the price has already run away before this post, I'd not recommend it this time.

DISCLOSURE: I hold the 'fab 5' and 1997, no 3313 at time of writing.