We do not intend to initiate a position in our portfolio, but we do see potential for significant appreciation in QTM. We think that any position in this stock should be halved leading up to the their fiscal 2011 release in late march. Although the potential for the company to beat lowered estimates exists, there is a good chance that it won't be dramatic, and the stock could take it's time getting back to $4.00. Still, we feel that the turn around is moving more quickly than most think, and a forward P/E of 10 indicates a lack of support for a turn around at all. For these reasons, we believe that a small position could be added to over the next six months, and an aggressive profit target and stop loss is in order. What are the Risks? The tape market could take a turn for the worse faster than the company is able to grow its disk sales. So far this has not been apparent and sequential growth has even been realized, but the possibility is certainly there. The companies ability to gain market share on the disk side is also in question, given their slightly late start, even if sales there are growing. It will also be important to watch the number of shares outstanding, which has so far been in check. The increase of convertible subordinated notes to around $130 million, however, will certainly dilute the stock over time if they are converted to equity. At what rate this will occur remains in question, the notes are set to expire in 2015. Bottom Line Buy $2.75 Sell $6.00 - $10.00 Stop Loss (Trailing) 25% Time horizon: 6-12 months Position Size: Small - Medium |
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February 14, 2011 PSW Staff |
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