Markets drifting during the holidays on light volume as expected. I continue to predict a poor opening to 2012 here, although rest of world(ROW) might start with a dead cat bounce after the bear market in 2011. A poor January would also set the table for a difficult 2012, which I also forecasst. If the market rallies straight through the first quarter, I would use that move to sell short.
But if the market acts as I expect, we should get another opportunity for a long side trade. For this I still like the MITEs, or materials, industrials, technology, and energy sectors. These stocks tend to be priced at the lower end of their ranges, and have some of the lowest valuations in the market. Small and mid cap stocks tend to be cheaper than the large caps in these sectors, and the cheapest tend to be unburdened with dividends. Currently, the cheapest stocks tend to be non dividend paying small/mid cyclical growth stocks in the MITE sectors. Being a deep value guy, I am there.
A new name that I would offer as a good long idea is Aegion. Formerly known as Insituform, the company is a play on our aging infrastructure transporting water, wastewater, materials, and energy via pipelines. They inspect, coat, treat, reline, and repair pipelines off all types of materials. Our pipeline system here is in need of hundreds of billions of repairs, and internationally energy and mining companies are developing new resource plays using Aegion pipeline technology as they expand their domestic products/services internationally.
Through an astute series of acquisitions Aegion management has transformed the old Insituform from a domestic, municipal market sewer repair business into a global energy and mining and structural rehabilitation business. Positioned for 20+% revenue growth and around 100% earnings per share growth in 2012, Aegion is a cheap stock with an excellent niche growth story. At $14, the stock trades for around 8x’s my profit estimate, 50% of sales, and around book value. The company generates a significant amount of free cash flow, and has a healthy balance sheet, despite major acquisition investments.
Aegion’s longer term return/margin targets suggest earnings power of close to $3.00. Management had a spotty record executing in 2011, so one must take those targets with a a grain of salt. However, that $3 per share profit target if achieved, would probably generate a double in the stock.
I am not ragingly bullish on the market. In fact, I am forecasting another trade to the low end of the range for shares. If we get there, I would consider adding more long exposure to my portfolio, and Aegion would be at the top of my list. For a trade into spring/summer. After that, we have to deal with the debt crisis in Europe.
Robert Marcin
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