We are in the business of bold calls lately. It’s not our intention just the way our models have taken us. In today’s hot stock pick from a hot sector, we decided to turn things upside down and work from the bottom. Since our market leadership model produced a sell signal and our momentum model is just a breath away from joining it, we have identified a possible short.
National Instruments Corp. (NasdaqGS: NATI) engages in the manufacture and supply of measurement and automation products. It provides application software and hardware that combine with industry-standard computers, networks, and third party devices to create measurement, automation and embedded systems.
There are 3 main reasons we believe NATI could be headed for a near-term fall.
- Pricey Valuation
- Technical Analysis Sell Signal On The NATI Stock Chart
- Software Sector Chart With Technical Analysis Sell Signal
In an environment where money and rising sales are scarce, it’s important to focus on companies that are priced right. We don’t feel NATI is priced right. In our view, it’s too expensive. A forward PE of 25.32 is about 2 times higher than it should be considering the software company is only expected to grow revenues by 10.1%. We know that the bottom line is slated to grow more aggressively at nearly 90%, but we would be more convinced if the top and bottom line growth numbers were just a little closer. Ninety percent earnings growth on 10% revenue growth seems to be a stretch to us. We can see the bottom line numbers being revised down.
The overpricedness (is that a word, no we just made it up) of NATI is reflected in its PEG ratio of 2.93. That’s more than 2.5 times higher than the industry average PEG ratio of 1.08. NATI also trades at a 70% premium to its peers based on price to sales. Yet its growth rate and projected growth is in line with its peer group. Perfection in execution is baked into National Instruments’ cake and we can’t see se a perfect scenario.
As we mentioned in yesterday’s sector performance report, the software sector stock chart produced a sell signal. NATI has followed the leader and its stock chart also produced a sell signal, the negative MACD cross under above zero. Our technical analysis leads us to believe NATI stock price could test its 50 day moving average of $19.51. It closed yesterday at 21.25. A two point drop in NATI’s stock price would be a smooth 9.3% return. We can see this scenario playing out in the next few days to a week.
