The short term investing stock picks blog

On March 18 I posted a User Request analysis on California Pizza Kitchen.  I basically panned the stock due to a threat from increasing agricultural prices, decrease in consumer discretionary spending because of housing and gas, and a history of the company being unable to grow effectively.  Many of you derided me as we watch the stock climb over 17%, completely, ruining my 1-month prediction of a small loss. 

Today, however, we see the stock coming much more inline with my expectations.  The stock is down around 9% from my original post now.  The CEO stated today that cheese costs are hurting their balance sheets and guided lower for the second half of 2007.

This wasn’t a user request, but I am categorizing it as such.  Just one I wanted to share with you all, especially those of you who read this blog for fun but really stick with longer term investments.  For the record, I think this is a play for short and long term.

So, I’ve taken to reading annual reports on the toilet.  Yes, I know, perhaps that’s a little crass for you — but its true.  I just got a rather large shipment in (I still like the hard copies) and have been pawing through them to find some hidden gems - or at least gems I do not know.

Yesterday it was Kaman Corporation (NASDAQ: KAMN).  I took the 2006 report apart and what I read impressed me.  The company runs in three segments: Aerospace, Industrial distribution, and Music.  It’s Aerospace division, in the company’s own words, "was on the outside looking in," prior to 2005.  At this point management stepped in and took a real strategic approach to this segment, potential contracts, and costs.  The results have been remarkable.  This division has gone from stagnate to growing at a clip of around 13.5% per year since 2004.  The company stand to benefit heavily from the success of Boeing with subcontracts for its 777 and 787.  The growth is not limited to North America, either.  Kaman also has a multi-year contract with Shenyang Aircraft in China.  I believe this will eventually be Kaman’s largest division.  The only laggard in this division is a pesky contract with Australia which is already operating at a loss, with more helicopters to fill in that 11 unit order.

Its two other main divisions, Industrial distribution and Music are less impressive to me.  I’m going to just toss out Music.  If you care, Kaman is the largest independent distributor of musical instruments and accessories.  The brand is very solid, but the industry sucks.  Kaman could get a pretty penny for this segment, which makes up 18% of revenues.  Until they do this, it will continue to drag on margins and growth rates. 

As for Industrial distribution, this is still a work in progress.  This division’s growth slowed in 2005 and remained the steady in 2006.  I have faith that the management team is diligently implementing systems that are improving margins and will offer scalable opportunities.  The reality is that its growth is tied directly to the economic strength of this country, in ways that the Aerospace division is not.  Side note: if you like SSYS after my post on it, this stock will expose you to similar risks, for better or worse, you decide.

Ok, so stuck in my fantasy Annual Report world within the confines of my bathroom, I had no clue until this morning that Kaman was reporting today.  After some more due diligence, I promised myself that I would share this with you all if the company reported something I liked after the bell.

Here’s the news: Aerospace growth is strong and will remain so, Industrial distribution may be in for a flat year, and music is down (surprise, surprise).  However, we should see strong growth, maybe even 10% from industrial distribution, as the company announced two new National contracts coming online.

The truth is that I love the management at Kaman and I love Boeing in 2007.  As long as this remains constant, I love the stock.

Disclaimer: I have no current or past position in Kaman Corporation.  User Request post stocks are selected from a handful of questions that come to my inbox based on what peaks my own interest.  All recommendations, commentaries and information provided by FivePercentStocks.com, should be researched before making any investment decisions. I am not a professional analyst and do not expect people to make investment decisions based on my postings.  Investing in the stock market involves risk and you are the sole bearer of that risk.

Five Percent Stocks Analysis
Stock: Stratasys, Inc.
Symbol: (NASDAQ: SSYS)
Current Price: $47.73 (04/27/07 close)
Business profile: Stratasys, Inc. develops, manufactures, distributes and markets a family of rapid prototyping (RP) systems and devices. The Company offers a family of three-dimensional (3D) printers and high-performance systems that enable engineers and designers to create physical models, tooling and prototypes out of plastic and other materials directly from a computer-aided design (CAD) workstation.

My new position recommendations:
Short term: HOLD/WAIT for consolidation or upward movement after last week’s breakout
Long: OVERWEIGHT
Short sell: NOT RECOMMENDED

My price targets:
Short term (1-2 mos): $49.70 (4.1%) (depending on when it comes over $29.85)
Long term (1 yr): $59.10 (23.8%)

Professional analysts:
Rating: OVERWEIGHT
Target: $46.13 (-2.2% - recent break-out has not been noted by any of the analysts)
Last: No recent change. 

As an aside, William Blair’s Small Cap Growth fund (WBSNX) sold over 50k shares before earnings in April, no idea if this was their entire position or if they missed the earnings bounce completely.  Their website shows a position of 543k shares at the end of February.  The fund is managed by Karl Brewer and Colin Williams.

My industry outlook:
Machinery: Neutral

Rationale: Short term, I’m still waiting to see if we can consolidate above the nascent support at $47.53, but am not that hopeful.  I would wait until this consolidates either around $47.50 or elsewhere before buying.  The other option, would to be to buy on strength, either a gap up, or a strong 1% gain.  I believe this one will take a breather, perhaps with the market as a whole, before moving higher.  Our Fibonacci analysis and Stochastic analysis are both bearish.  In addition, the candlestick analysis is looking bearish as well.  That said, Equivolume charts shows light accumulation on Friday.

What does Stratasys, Inc. do?  According to Wikipedia: "Stratasys, Inc. is a company headquartered in Eden Prairie, MN that manufactures and sells both rapid prototyping machines and materials. Stratasys FDM systems use fused deposition modeling technology to produce parts out of industrial-grade thermoplastic materials such as ABS, ABSi, polyphenylsulfone (PPSF) and polycarbonate (PC)."¹  Stratasys’  CEO Scott Crump invented FDM which is the best selling rapid prototype platform.  Customers include BMW, Diebold, Hyandai, Parker Hannifin, Logitech, and Medtronic.  The recent break-out of the stock was a direct result of stellar first quarter earnings.  Q1 GAAP EPS of $0.30 (non-GAAP EPS was $0.32) vs. consensus of $0.27. Revenues were $27.3 million vs. $23.91 million consensus.  Great results for the company’s weakest quarter. 

Looking long, I am most excited about the company’s paid parts division located on its RedEye RPM website.  According to the website, "Powered and launched by Stratasys, a leader in RP innovation, RedEye RPM is the world’s largest rapid prototype and parts building service. You can use RedEye RPM to quickly serve as an extension of your in-house capability or as a preferred partner for outsourced prototype and manufactured parts.
With access that’s as close and convenient as your computer desktop, you can build from 3D CAD files using a range of high-performance engineering materials for precise, durable, functional parts as well as ultra-smooth surface finish, fine-feature detail parts."  The company recently announced that it had doubled its capacity in this division and recent independent white papers from independent consultants TA Grimm should help send sales through the roof. 

As mentioned, I believe the paid parts division will continue to be the strongest growth division for Stratasys and even grow faster then the last quarter.  Nevertheless, I also believe that sales of 3D printers will also beat expectations this year.  Many of the sectors that Stratasys sells to will be increasing R&D spending this year - not the least of which is the expected growth in defense and aerospace R&D. 

As I was reading the recent press releases from the company, I noticed something really appealing.  It recently announced a new build option for its software that will improve the speed of its FDM machine by 40%.  The upgrade is available to customers, free of charge.  Talk about a significant improvement and a strong customer relations builder. 

The only potential FDM competitor to Stratasys is a realm is a small but growing open source movement around a device called the RepRap.  The potential for alternative technologies to emerge that debase Stratasys’ competitive advantage is real.  Other risk factors include a continued decline of the US economy, which would especially hurt the paid parts segment, which is most dependent on North America.

1- http://en.wikipedia.org/wiki/Stratasys

Disclaimer: I have no current or past position in Stratasys, Inc.  User Request post stocks are selected from a handful of questions that come to my inbox based on what peaks my own interest.  All recommendations, commentaries and information provided by FivePercentStocks.com, should be researched before making any investment decisions. I am not a professional analyst and do not expect people to make investment decisions based on my postings.  Investing in the stock market involves risk and you are the sole bearer of that risk.