Current Ideas/Analysis.
QAD Inc.
Screen: Moving Avg Crossover, Low DEbt To Capital, Rising Relative Strength
Ticker: QADA. Market Cap: $869.6 Million. Volume: 51,350. Short Volume: 253,850. Short Volume Ratio: 5.55
QAD Inc (QADA) $44.26
Fundamental Look:
· Headquartered in Santa Barbara, CA, but with direct operations across 24 countries, QADA provides cloud based enterprise software solutions to global manufacturing companies
· In short QADA provides cloud based software solutions to assist firms in the management of their respective supply chains, reducing costs and increasing efficiencies in the process.
· Primary verticals/sectors targeted by QADA are: Automotive, Life Sciences, Consumer Products, Food and Beverage, Technology, and Industrial Products
· The company reports its fiscal year 2021 2Q results this upcoming Aug 26th 2020.
· Shares of QADA are down 13.10% year to date and sit 18.85% below their 52 week high of $54.54.
· Fundamentally, the last 12 months of revenue for QADA are down 1.2% when compared to their prior 12 month fiscal performance. Sequentially, the most recent quarter was off 5.7% from the prior quarter, not entirely surprising given the Covid-19 related impact to global manufacturing as a whole.
· Looking forward (specifically to this week’s earnings report), I would expect QADA’s revenues to be relatively in line/flat with the prior quarter’s. I note comments in their past conference call, where the company neglected to give guidance on total revenue. They did however indicate expectations of $31 million in subscription revenue, and maintenance revenue of $26 million (foregoing guidance for “license”, and “professional service” revenue).
· Given that management also implied that subscription and maintenance revenue will account for a similar percentage as the prior quarter, I would expect that 2Q total revenue will land between $72 million and $76 million when they report.
· QADA’s balance sheet doesn’t give me any major concerns, as its debt to capital ratio sits at 27%. If I were to raise an eyebrow, it would be at the decline in the firm’s interest coverage (EBITDA/Interest) from 22.1x to 5.8x, quarter over quarter. However, I feel confident that the firm is generating enough capital to cover its interest obligations.
Additionally, QAD has generated more in operating cash flow than its spends in investing cash flows
Technical Look:
· From a technical vantage point, QADA shares aren’t screaming buy to me at the moment, but there are a few developments that I think are worth monitoring. (*as a general rule of thumb, I’m reluctant to take a position in a name directly ahead of its earnings report).
· I note that the 10 period Exponential Moving Average (EMA) crossed the 100 day on August 18th, with prices increasing 3% since that time period
· Additionally, this has come in conjunction with increased momentum, when looking at the 14 period RSI indicator.
· Volume at price shows a “mode of value” so to speak around the $40 per share mark. In short, we’ve seen a lot of trading activity at and around that price point.
· I applied an anchored volume weighted average price indicator at 5/27/20, 3/18/20, and 11/29/19, respectively, which coincides with the prior 3 earnings releases for QADA.
· In doing so, I detect levels of potential support at $40.61, $42, and $44.18 per share respectively.
· Of concern to me however, is QADA’s current proximity to the upper end of its Bollinger Bands.
· Additionally, the lack of volume in the last several trading days implies a lack of conviction on either side of the trade, which I would attribute to a reluctance to get long (or short) directly ahead of earnings.
· At this point, I’ll be paying attention to the behavior in this name following the Aug 26th earnings release. There’s a 25% gap between current levels and its 52 week high of $54.54, which I view as the current opportunity in this name.
· Were I to get long, following earnings, I would be looking to apply a stop loss at 1.3x-1.5x the current ATR of 1.56
Medtronic PLC
Screen: Moving Avg Crossover, Low DEbt To Capital, Rising Relative Strength
Ticker: MDT. Market Cap: $135.86 Billion. Volume: 2,925,700. Short Volume: 345,418. Short Volume Ratio: 11.18
Medtronic PLC (MDT) $100.71
Fundamental Look:
· Located in Dubland, Ireland, founded in 1949. Provider of medical services, technology, and solutions to hospitals, physicians, and clinicians, globally.
· Shares of MDT are down 11.2% year to date and sits 17.5% below its 52 week high of $122.15.
· From a fundamental vantage point, the last 12 months of revenue are down 5.3% in comparison to full year end 2019. On a sequential basis, the most recent quarter showed a 23% decline from the prior quarter, which in normal circumstances would certainly be outside of my comfort zone.
· In looking to comments from the most recent quarterly call, the decline in sequential revenue was largely attributed to Covid related factors, namely the reduction in elective medical procedures, as healthcare systems directed the bulk of their attention to Covid-19 related procedures.
· MDT’s total debt to capital ratio sits at 33% is within my comfort zone (which in general is sub 50% for long ideas). They’ve also spent within operating cash flows in each of the last 4 years, which gives me additional comfort specific to their debt levels remaining in check. The same holds true as it relates to MDT potentially diluting shareholders.
· MDT will be reporting their 1Q21 results around August 25th 2020.
Technical Look:
· From a technical perspective MDT’s 10 day Exponential Moving Average crossed above the 100 day EMA on 8/6/20 with prices increasing 4.1% since that time.
· This most recent push higher is accompanied by increased momentum (using the 14 period RSI as means of measurement). Trading volume (using a 20 period time frame) has actually been average, with the most recent candles (both in price movement and trading volume) indicating uncertainty, in my view.
· Applying an anchored volume weighted average price indicator, and anchoring from the 3 most recent earnings releases shows potential support points at $94.63, $95.62 per share. In candor however, it also shows a possible point of resistance at $102.27, which in my view fits with the recent uncertainty and narrow trading range of recent candles.
· For background, I like to make use of AVWAP to give insight into the average entry price of all long positions from a given/specific point in time. In this particular instance, you have investors who established positions as of 5/21/20 and 2/18/20 with average entry prices below current levels (and conceivably likely to maintain their long positions).
· By the same token, those who established positions as of 11/19/19, are showing an average price point of $102.27, which is above current levels. Those investors could very well be inclined to exit their current positions once “made whole”.
· Given the aforementioned resistance, my entry point would be near the $103 mark. From a risk management perspective, I would be looking to exit my position at 98.37, should my thesis prove incorrect, amounting to a 4.5% max loss threshold and equivalent to 1.89x the current Average True Range (ATR) of 2.45
Disclaimer: The information provided on this site is opinion, intended for informational purposes only, and does not constitute investment advice.