“Water $$: A valve maker with a better idea” Navellier

by Travis Johnson, Stock Gumshoe | July 8, 2008 3:45 pm

I think a few readers and some folks in the forum have already called attention to this teaser ad, one in a recent avalanche of teaser ads from Louis Navellier[1]’s various newsletter services — I don’t know about you, but I’m getting a little bit sick of the guy.

On the other hand, during times like this he can be an interesting guy to follow — he generally picks such rapidly growing stocks that you really get a lot of boom and bust picks when the market goes through dramatic changes.

And his picks probably change so fast that I imagine even the copywriters who throw his ads together must have a bit of trouble keeping up — I just recently heard from another reader, for example, that Navellier just sold a stock that he was, only weeks ago, breathlessly predicting would double in a matter of weeks. That was Fuel Systems Solutions — on June 22 he guaranteed that it would double, from $32 to $64, by July 7 … yes, July 7 of this year, which was yesterday.

On July 7, it closed at $28.37. For the math-challenged, yes, that is less than $32. And a lot less than $64. And I don’t subscribe so I can’t tell you for sure what Navellier is saying about it now, but I can tell you that at least one reader passed along word that Navellier recommended his readers sell the stock recently. Suspiciously close to being a pump and dump[2] kind of maneuver, though I don’t think that’s what was intended by Navellier or his publisher — I’d say it was just a bad investing idea, and Navellier cuts losers fairly quickly. (Pump and dump, for those who don’t know, is when stock touters try to push up a stock’s price while they’re selling the shares — not something any established or reputable publisher would try to do.)

But anyway, as I said, Navellier can be fun to watch both when growth bubbles are inflating and when they’re deflating, with his focus on fundamental growth metrics that often cause stocks to get bit up to very high valuations.

So let’s have a look, shall we?

This is the meat of the ad that I’ve seen a few times in the last week or two, and which has been passed along to me by many readers:

The ad is all about the coming water[3] shortage, and the crisis in water supply around the world. The stock he is touting is a company that makes water equipment …

“It’s a VALVE MAKER. A valve maker with a better idea. This is a small Texas outfit with a big idea: approach the job of moving fluids, any fluids, differently.

“The result is a breakthrough that delivers a double-digit increase in efficiency, while reducing maintenance to almost zero. It’s an approach that is producing the first real advances in valves in a hundred years.

“Applied to our water shortage, it’s a giant step towards a solution. Applied to our oil[4] shortage, ditto.

“Applied to hydroelectric power and the steam produced by a nuclear reactor, ditto, ditto.

“Earnings were just released: last year’s 59 cents per share are this year’s $1.52. That’s a triple.

“Two thirds of this company’s business comes from Asia[5], where efficient irrigation is the difference between life and death.

“Buy the valve company that’s solving the Third Shortage. It could be our next Hansen. As Ben Franklin noted: When the well’s dry, we know the value of water.”

So … in case you’ve not guessed this one, the company is …

Flowserve (FLS)[6]

This one is probably not a big surprise small-cap company according to most of you — it has been talked about with breathless glee on CNBC (particularly as a favorite of Karen Finerman, the token value investor on Fast Money), at least since it was down in the $70-80 range last year. It peaked at around $140 after their last earnings blowout, which was in late April, and has since trended down with the rest of the market, to a price today of about $123 at the close.

FLS has had a huge year, and they have posted amazing earnings growth over the last several quarters — which, undoubtedly, is what made them float to the top of Navellier’s databases. They are a valve and flow control company, though it would be a stretch to call them small (market cap is up to $7 billion now, which most people would consider to be a textook example of a midcap company). They are based in Texas, and the growth last quarter was “near a triple” if you want to round up — the earnings were up 159%, from .59 to 1.53 (we’ll assume that the penny’s worth of error by the copywriter was intended to throw the Gumshoe off the scent … ha!)

What impresses me about Flowserve?

Well, it’s certainly a hot industry — both for water and for oil, since their valves and pumps are also used in the oil patch. And they have been riding it nicely, with consistently growing earnings — they have beaten earnings estimates over and over, and as of their last quarterly report they were managing a nice trifecta: increasing earnings, growing order books, and improving margins.

So, not much to complain about there.

What makes me nervous?

Well, they trade at a significant premium to the market and their broad sector, which is scary for many folks these days — but to be fair, Flowserve has traded at a very high trailing PE for many, many years and I doubt many investors would complain (the price was under $20 five years ago). The stock is trading as if the company will continue to be a strong grower, though not necessarily at the same heady rate we’ve seen in the last couple quarters. Morningstar[7] puts their PEG ration (price/earnings/growth rate) at 1.4, which is perfectly reasonable but arguably not a screaming bargain.

And the shares were just recently upgraded by BMO Capital, which helped bring a small recovery from the pre-holiday selloff last week. Here’s a good article from Kiplinger’s about Flowserve[8] with some quotes from BMO’s analyst, in case you’d like to have a bit more perspective on that.

So … my sense is that if you think the buildout of water and energy infrastructure will continue apace, Flowserve is probably nicely situated for that … they certainly have a strong niche in those industries, and they have clearly been doing something right over the past four years. If there’s a slowdown in those hot areas, though, it wouldn’t be surprising to see FLS growth tail off — and I expect that any slowdown in growth would bring their valuation down a little bit. I know that Navellier was recommending this one to his readers as recently as May[9] (it was about the same price then that it is now), beyond this teaser ad that has been circulating for a month or so, but don’t know where it stands on his official recommendations list today.

I’d guess that you’re going to think either that this is a growth story that’s breaking down after a huge run and should be avoided, or that the latest dip is just a momentary lapse of market logic that has placed a great growth story on sale. I don’t have a lot of conviction either way on this stock, so you could probably talk me into believing either one depending on which way the wind is blowing.

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