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Caught in a Momentum Squeeze
12/02/2009 4:31 pm EST
I hate it when this happens: A perfectly good growth stock gets adopted by momentum investors. It soars in the days before the company issues earnings on the hope that the good news already in the stock price will turn into great news in the quarterly report. When it doesn’t, the stock crashes as momentum investors move on.
Unfortunately, this could also scare growth investors into selling when they should be hanging on or even buying more. (For tips on coping with this twitch-inducing market, see my November 20 post.)
That’s exactly the story of Maxwell Technologies (Nasdaq: MXWL) in the last month or so. The stock rocketed from $15.85 on September 21 to $21.53 on October 19, and then, after disappointing quarterly earnings, sank back toward those September numbers. On Wednesday, December 2, the stock traded at $16.81.
Were the third quarter numbers so bad that they damaged the long-term growth story? They were disappointing in the short term, sure, but from a long-term perspective, I’d actually call them encouraging.
For the third quarter, the company showed a loss of 18 cents a share. But 11 cents of that resulted from the company marking to market warrants associated with its 2005 convertible debt offering.
Excluding those, the loss at seven cents per share was three cents per share worse than the consensus Wall Street forecast.
Disappointing, definitely, but if you own this stock for more than quarter-to-quarter results—which I recommend for small-company growth stocks—you should be encouraged by the company’s progress.
For example, Maxwell continued to penetrate new markets. The company is near completion for its first $13.5-million order of ultracapacitors for China’s diesel-hybrid bus market. Maxwell expects follow-on orders in 2011.
And in the critical auto market, Maxwell announced another win, with Continental AG picking the company’s ultracapacitors for use in automobile electrical systems starting in 2010. The company expects deliveries to begin in the fourth quarter of 2009 and to reach 10,000 to 20,000 units in 2010. The ultracapacitor content in Continental’s system will range from $50 to $200 a car; the company estimates the average content will be near $100.
Like most young growth companies with products that are still ramping up their volumes, Maxwell’s problem has been that it is still losing money on its ultracapacitor business. Here, too, Maxwell showed progress this quarter, as gross margins climbed to 38% from 36% in the second quarter as a result of the company’s moving some production capacity to China.
As of December 2, 2009, I’m keeping my target price at $25 a share by July 2010.
Full disclosure: I own shares of Maxwell Technologies in my personal portfolio.
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