"Inferior
attitude fosters inferior performance."
-- Christina Nikolov
Mishandling
by
Christina Nikolov, Founder ChartWatchCentral
Stock/Ticker: Handleman Company (HDL)
Date: February 10, 2003
Opinion: Bearish
Current Price: $11.95
Target Price: $9.02
Commentary:
Handleman Company (HDL) enjoyed a 77% rally between October 11, 2002 and January 16, 2003. Then over the past three weeks HDL pulled back to the December 30th low, forming what now appears to be the neckline of a head and shoulders top. (chart #1)It wasn't a coincidence that the shares peaked just above $13 in mid-January. As the chart depicts, that reversal was a direct result of overhead resistance related to the 18 month downtrend line. (chart #2)
While we expect HDL to eventually undercut the neckline of the formation mentioned above, don't be surprised if there is some strength in the short-term. If HDL continues to drift higher in the coming days, we suggest shorting the shares as they approach $12.50. (chart #1)
One thing that stands out at this juncture, is the absurdly low valuation. Currently, HDL touts a p/e multiple of 9.3 times April 2002 per-share earnings of $1.29. And using full-year projections of $1.62 and $1.80 for April 2003 and 2004, the p/e drops to 7.4 and 6.6 respectively. While these figures sound low, it's important to remember that they're calculated using earnings projections which could easily be based on false hopes.
We mention this because sales for the second quarter of this year were $348.9 million, down 2% from $355.2 million for the second quarter of last year. In addition, the consolidated gross margin rate for the second quarter was 23.8%, compared to 24.3% for the second quarter of last year. Declining revenues and margins don't add up to earnings growth of 25%. Even if HDL surprises us and comes in with per-share earnings of $1.62 in April, we don't believe it's sustainable.
Chart(s):
1) Handleman Company (HDL) Four Month Daily Chart
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Click the Chart for an Enlarged View
2) Handleman Company (HDL) Twenty Four Month Daily Chart
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Click the Chart for an Enlarged View
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