The Best and Worst
Stocks of 1997
Winner -- Reliability Inc.
The Company's Biz. Reliability bites -- and burns. The company makes burn-in equipment to test the performance of computer memory chips. While the company also makes power sources and provides services, DRAM and RAM testing machines make up half of the company sales.
With facilities in North Carolina, Costa Rica, Singapore, and its home base of Houston, Texas, the company sells its machinery and services to the biggest players in the industry. In fact, Intel, IBM, Mitsubishi, and Texas Instruments make up 80% of the company's revenue base.
The Story. Back in March, Parsons Corp. wanted to dump its 30% stake in Reliability. The options for Reliability were simple -- the share price had been depressed, so letting Parsons sell the sizable stake in the open market would have been a disaster. Meanwhile, the company was cash rich and capital appreciation poor, so Reliability bought back the stake at a split-adjusted price of $3 1/4.
You're probably chuckling already. With 30% fewer shares outstanding after the Parsons stake was acquired and retired, the earnings skyrocketed. With less stock outstanding to divide net income into, EPS was a rocket.
Yet Reliability's outperformance cannot be credited to one bold act of insider confidence. For each of the first three quarters this year, sales and earnings have soared and the order backlog has never been less than $12 million. Then again, the company knows about pent-up demand -- investors have been buying up the shares all year.
How Could You Have Found This Winner. The Parsons divestiture could have been interpreted two different ways. The bearish scenario was that Parsons knew that the stock had peaked and wanted out. The bullish scenario was that Reliability knew that the stock had bottomed and wanted leverage. In the fickle and cyclical world of DRAM chips, which Reliability was chained to, the truth is probably that both companies had their uncertainties.
But Reliability rose above them. The large backlogs at the end of every quarter should have inspired confidence for each upcoming quarter. For the first nine months of fiscal 1997 earnings per share have more than doubled to $0.85 from $0.39 a share. That is obviously more than simply the work of retiring the Parsons shares. The company was rolling and the share price was rocking.
The Future. Despite being one of the best performing stocks this year, Reliability is well off its highs. As the company announced record third quarter earnings it also revealed that the fourth quarter will be "challenging," and while the final results should be above expectations, they will probably fall short sequentially.
So, while earnings estimates rose to $1.20 per share for 1997 and $1.30 per share for 1998, investors apparently figured it was a good time take some profits. Parsons revisited? Or savvy investors following the old axiom that bulls make money, bears make money, but pigs get slaughtered? Sometimes, Reliability bites.
-Rick Aristotle Munarriz
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