(By Rich Bieglmeier) iStock has long been attracted to beaten down stocks that experience a cluster of insider buying, especially in proximity to near-term lows.
Vitesse Semiconductor Corp. (VTSS) is about half the price it was earlier in the year. I late March, the stock hit a high of $4.13. Today, as you can see above, the stock trades for less than $2.00.
On December 7, 2012, the company issued 10,000,000 shares in a secondary offering for $1.75. Vitesse intends to use the net proceeds from the offering for working capital and general corporate purposes. A portion of the net proceeds also may be used to repay or restructure indebtedness. Obviously, if the company prices its stock at $1.75, so will Wall Street. No free lunches for the regular folks, no way.
On 12/12/12, seven insiders and officers bought 98,651 shares of VTSS, mostly at a $1.75 per share as part of the over allotment that's standard with most offerings. Interestingly, most of the insiders participating in the recent buying spree haven't bought the stock in the last two-years; good idea as the share price fell from $6 to its recent low of $1.75.
Based on what we see on the semiconductor's chart, the stock could be headed back to its pre-offering price of $2.20ish. If it gets there, $2.65ish will be the real sticking point for the stock as there are multiple tops dating back to June 2012 at that price level. After $2.70, something above $3 comes into play.
It might take a while for $3+ to materialize, but it's possible if analysts are correct about next year's earnings and sales estimates. The street forecast 18 cents per share on sales of $141 million, up 15.7% from 2013's consensus of $122 million. If sale increase by 15.7%, we'd be comfortable with a forward P/E of 15.7, pricing VTSS at $2.82; 45.7% potential upside and slightly ahead of the consensus price target of $2.50. The industry trades with a trailing twelve month price-to-earnings (P/E) ratio of 19.12.
With a market cap of $50 million, shares are currently values at 45 cents for every dollar per share in revenue. Meanwhile, the average peer trades at $1.36 for every dollar per share in sales.
In addition to trading at a discount to its sector, Vitesse is marked down relative to its historical valuations. VTSS is valued at a five-year low on a price-to-book basis, and just a hair above its five year low based on price-to-cash.
Overall, iStock views most stocks that trade under $2 as options that don't expire, unless the company goes out of business. Based on Wall Street view of 2014, we don't think that's going to happen with Vitesse Semiconductor Corp. (VTSS). Long-term investors who don't mind waiting for a story to develop could be rewarded with above average returns; however, stocks trade under $2 for a reason(s), most of which aren't good.