Small, Profitable and Growing — But Watch the Bumps

Noting a personal buy today for the Friday File

By Travis Johnson, Stock Gumshoe, March 2, 2012

I’m sorry to say that things are still very much up in the air for my family right now, so our publishing schedule has been a bit inconsistent, but I do want to take a few minutes to tell you about a stock that I just bought today — this is obviously not a recommendation, I just share ideas, but it is a stock that we’ve talked about before that has seen a substantial dip in price this year.

I just bought shares of CVD Equipment Corp (CVV).

Now, I’m not Louis Navellier — so I’m not going to tell you that this is a $16 stock headed to $30 like he did late last year … but that’s probably good, because so far it’s been a $16 stock headed to $11, and I’d much rather pay $11 for the stock. Despite the fact that it sometimes works spectacularly well, I have a very hard time buying momentum stocks that are going up and up and up without any specific connection to news. Momentum stocks almost always show great growth in earnings and revenue that drive their shares higher, but it’s investor love for the rising share price that causes the valuation to get more and more stretched (as with a higher PE ratio, for instance), and you have to have tremendous confidence in their immediate growth prospects to continue paying a higher and higher multiple for the shares.

I was not convinced enough in CVV’s immediate growth prospects to plunk down my cash for the stock when it had doubled to $16 or $17 a few months ago, despite great growth in their sales backlog and a good “story” and a series of profitable and growing quarters … and though I liked some aspects of the stock when Navellier again was out in force pegging this as one of his favorite small growers of the year back in January and driving the shares higher again. But now that those profitable quarters are still there, the backlog and orders are still growing, and the share price has dropped to give them a trailing PE of 19, I’m in. The stock is tiny and there is only one analyst covering them, an analyst who has consistently underestimated their earnings in recent quarters, so I wouldn’t put much stock in the forward PE of 13 … but the company is ...

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