Thursday, October 4, 2018

Stocks to Watch: AK Steel $AKS, Ubiquiti Networks $UBNT


1. AK Steel Holding ($AKS), $4.83.


Background: 
When Trump took office in 2016, one of the industries that seemed to will have the best growth was construction. In those days the confirmation of the execution of the border wall with Mexico favored several stocks and etf of the sector: construction companies, cement companies, machinery, Mexico. Several of them followed in my watchlist, even today: Lennar Corp LEN (one of the largest construction companies in the USA), Caterpillar CAT (the giant of machinery, the Big Cap that advanced the most in 2017) or IShares Mexico EWW (etf that follows the Mexican market). Among the construction materials, the steel stood out. remember it was one of the industries hardest hit after the recession of 2007. The rebound that had since November 2016 with the remembered 'Rally Trump' and its plan 'Rebuiding America', for 3 months, was spectacular, near a 100% rise.

Within the small capitalization companies on Wall Street, there is an attractive one in the steel sector: AK Steel Holding. I follow in my watchlist this company and its peer US Steel Corp X, because their prices tend to move in line. When there is marked divergence between both is when I pay special attention. (This is a nice way to follow a company: comparing it with a very close peer in its industry). This happened in May 2017: after a short technical correction, the price of US Steel continued to grow to 10-year highs until the end of that year, while AKS faltered. So, it stopped being attractive at the expense of its pair, but enter to my radar.

What happened this year, it is already known: in March, the first news of the tariffs that US would apply to imports of steel and aluminum was given. It was the beginning of the Trade War that continues until today. The company prices began to zigzag, sinking in August to $4.00, its 52-week lows.

Fundamentals: 
a) In favor: in the last months there are good news for AK Steel that make us think that the worst is over. The company had three successive upgrades in less than two weeks: Morgan Stanley, Merrill Lynch and Clarksons Platou, all with "buy" and targets between $ 5 and 6, justifying all of them in the rise in steel prices due to strong demand this 2018 and projected for 2019. If we add to this a repurchase of the shares by its own CEO Roger Newport, undoubtedly, these are good signs.

b) Against: the high debt of the company. Accumulated after many years of red numbers (that were in general for the entire steel industry) its debt is so huge for a small cap (AKS Market Cap $1,500M), and now also expanded with a recent and risky issuance of shares. In addition, a risky CapEx investment (capital expenditures) for $ 153M for improvements to its steel mills. While this shows the confidence of its directors in the future of the company, this high leverage will be, for some years, its main concern. 

Technicals:
As I always say, when the fundamental analysis is aligned with the technical, it's when you can have a good point to enter long. After reaching the "psychological" support of $4.00, the stock had an excellent September (almost 11% up). The stock went through the "value zone", the best time to invest according to the theory of Alexander Elder, between the exponential averages 13 and 26. In addition to this, appears a bull crossover in its MACD near the zero line. AKS still maintains a high short interest (26.3%) that makes it attractive in bouncing weeks.

Idea:
I believe AKS is a buy in the long term. The price of steel has already assimilated the Trade War and can begin to improve despite the latest news such as the probable increase in salaries in the sector. The best long entry point is when the price return to the value zone, which probably occur in the next few days as the market is in correction due to the aggressive increase of the 10-year bond TNX, in 7-year highs, that affects all Wall Street industrial sectors.

Support at $ 4 is powerful because its multiyear. AKS is 4 weeks rising and today the stock is testing the SMA200 (not show in his weekly chart).

2. Ubiquiti Networks ($UBNT), $91.87


Background:
One of my favorite stocks in the last 6 years since I 'discovered' it, is Ubiquiti Networks. I remember I bought stocks in 2012, a few months after its IPO, when trades at $ 28 and had a heavy pullback to $9 the following year and despite that I kept my shares, because I trusted the quality of their products and the skills of their CEO Robert Pera, ex-genius of Apple and today jealous guardian of the constant growth and profitability of his company. UBNT specializes in products and solutions for networks, internet, wifi and radio, based on high technology and affordable price, its infallible formula until today. Its technologies, such as UniFi or AirFiber, have international recognition and are capable of bringing the Internet and radio to almost anywhere in the world with great technical support behind them.

Ubiquiti is characterized by its volatile evolution since it go public. Despite accusations of falsification and class actions, in its early years (even it was considered "a fraud" by the popular short seller Citron Research in September 2017), it has the ability to overcome all these avatars until it arrived a week ago to its all time highs, and even make its first payment of regular dividends ($0.25 per share) in its last earning, replacing a aggressive stock repurchase plan that Pera had been carrying for a couple of years when its price was low. Both good signs that can mean next months of growth and a consolidation as a serious company, in case there were doubts.

Fundamentals:
Today Ubiquiti is already a Mid Cap ($6,800M), with good accounting numbers: cash flow and rising sales every year, low short-term debt, profit margin higher than its peers like Finisar Corp. FNSR or Palo Alto Network PANWFinally, its EPS earnings growth is superior to the industry. No problems here.


Technicals:
Despite the good fundamentals, from my own experience I suggest taking extreme care in trading this stock: their pullbacks are very extreme when they occur (for news such as the aforementioned or technical corrections). This due to its low float of 74M that exposes it to these abrupt movements. Therefore, it still has a high short interest of 32%. A careful use of tight stop loss and exit strategies should be mandatory in your trade.

Idea:
Ubiquiti is a company to invest (not trade) in the long term. This days has been correcting strongly since its all time high ($ 101.33), testing the lower band of Bohlinger and the SMA50. I suggest waiting to see how it faces both supports to think then about going long. If you are prudent with this stock you can expect many satisfactions.

Ubiquiti is still above the 3 main moving averages, and the Ichimoku Cloud. The correction from its highs is strong so its scope must be well evaluated before entering long.
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