NEW STOCK PICK
March 30, 2016 Expert Penny stock picks OTC
As investors in public companies, we’re keenly aware of profit margins and how difficult they can be to maintain while trying to get an edge over competition. The last seven years or so have been especially tough, considering the Great Recession, the collapse in the oil prices and ongoing weakness in global economies that have companies tightening their purse strings in every way possible to maintain margins.
One way companies contain expenses is through supply chain optimization, which includes maximizing efficiencies (and thus minimizing costs) with respect to manufacturing, logistics and distribution. In the last decade, technology has vastly improved supply chain optimization and it underscores our second portfolio addition for March in Quest Solution, Inc. (OTCQB:QUES).
Headquartered in Eugene, Oregon with offices in the U.S. and Canada, Quest is a specialty systems integrator with its primary focus on field and supply chain mobility that was founded in 1994. The company’s portfolio of enterprise mobility solutions cover automatic identification (AIDC), mobile cloud analytics, radio frequency identification (RFID) and proprietary mobility software. In addition, the company also manufactures and distributes consumables (i.e. labels, tags, ribbons.) and barcoding printers. Quest is rated in the top 1% of global solution providers and has a list of Fortune 500 companies amongst in more than 7,000 clients in an array of sectors, such as retail, manufacturing, transportation, health care and energy. Through its turnkey mobile offerings, Quest can save its clients money through supply chain efficiency and by limiting the number of vendors its clients require.
The company is focused in large and growing industries. According to VDC Research, the mobile professional services industry is expected to grow more than 40% from 2013 to 2017 ($7.0 billion to $10.0 billion). The expansion is supported by the global workforce becoming more mobile, increased complexity requiring customized solutions and handheld devices simultaneously becoming more powerful and affordable. The global printed label market, which is a sweet spot for Quest, is forecast to grow from around $34 billion in 2015 to about $42 billion in 2019.
Quest is quite a bit different than most others on trading on the OTC exchange. The company has been active with acquisitions (three since the start of 2014), records significant revenues compared to its OTC peers and has preferred relationships and partnerships with industry leaders like Zebra, Motorola, Honeywell and Apple.
The below image illustrates some of the sectors Quest caters to, as well as some of its customers.
stock picks OTC
Just over a year ago, Quest acquired Bar Code Specialties, Inc., creating one of the largest selling groups in the nation for Zebra/Motorola and Honeywell mobile computing devices. In October, Quest acquired ViascanQdata, a $25 million solution provider with most sales in Canada (remainder on East Coast of U.S.), substantially increasing its presence north of the U.S. border, nearly doubling its employee count, providing cost-saving synergies and giving Quest more purchasing power. More purchasing power equates to better margins for Quest. With the merger, former ViascanQdata CEO Gilles Gaudreault assumed the role of top executive of Quest.
With the buyout, Quest also brought under its umbrella ViascanQdata’s recently built media manufacturing facility in Ajax, Ontario, Canada, which increased its media production and labeling capacities. All tallied, the combined company now has three factories, four warehouses and 150 employees.
Being listed on OTC Markets as “OTCQB” means that Quest is fully reporting. It also means that a regulatory filing is due tomorrow covering the fourth quarter and full year 2015 for Quest. We are optimistic that the company is going to come through with their preliminary results and deliver another solid quarter. In the third quarter, the company reported net revenue of $16.7 million, up by 84% from $9.1 million in the year prior quarter. Gross profit margin increased 78 basis points from 18.3% to 19.08%. Quest was profitable with net income of $697,356, or 2 cents per share, compared to net income of $62,786, or nil per share, in Q3 2014.
In a preliminary report of revenue, Quest said that revenues for the year were in the range of $63.0 million – $63.5 million, in line with previous guidance. The company also booked about $8 million in deferred revenue during 2015, revenue that will be recognized in the coming years. No guidance was provided with respect to profits. We expect some bumps with the integration of ViascanQdata during the quarter and that stronger margins will start to show through because of synergistic savings during 2016. The year seemingly has gotten of to a good start with a new order in excess of $1 million completed for an existing pharmaceutical company for a mobile inventory tracking solution and a new partnership with Apex Supply Chain Technologies opening the door for Quest to offer traditional supply chains a new cloud-based platform, called “smart locker,” for mobile device management.
Technically speaking, the relatively low volume trading nature of shares of QUES can lead to some relatively large intraday moves. The chart is in a multi-year downtrend since hitting 72 cents two years ago. However, trading has been moving sideways for about two months, basically bouncing back and forth between 18 cents and 24 cents. We’re trying to catch QUES on the bottom side of the channel with the bias that the technicals will catch up to the fundamentals and push the stock price through the first resistance at 24 cents. Above that, we see some more resistance around 27 cents that is more of a band of resistance that goes up to about 30 cents. We call it a band because the 200 week moving average (MA) is the start of it and there is static resistance along with the 50 week MA (currently at $0.32), which is trending down and will lend to the resistance at 30 cents. Above that, there is some sporadic resistance, but it is pretty smooth sailing until about 42 cents, which is where we will take profits of 115.4%. Normally, we try not to set our targets too high, but a move to 42 cents means that Quest only reaches a market valuation of about $16 million, which we believe is completely possible in the next 6-9 months if the company keeps posting profits equal to or better than it did last quarter.
QUES stock pick
To the south side, things are a little sketchier because QUES is not far from a multi-year low. As mentioned, we see the first support at 18 cents and we’d certainly like to see that hold on any drop. We see some more below that at 15 cents and, while it may be tempting to keep a stop-loss of only 23%, the volatile nature of QUES that seems disconnected from fundamentals will cause us to have some more patience. To that end, we are widening our stop-loss point to a bottom support at 12 cents, which implies a risk factor of 38.5%.
A quick look at some other popular indicators lend some to the idea that the bottom may be in for QUES. The Moving Average Convergence/Divergence is, understandably, in negative territory, but the histogram bars at zero tell us that a bullish cross is trying to happen with the MACD breaking up through the signal line. This is interpreted as the downside risk fading some and at least a temporary shift in trend in favor of the bulls. The Average Directional Index is tilting down slightly now, suggesting that the downward direction is losing some of its steam. The Accumulation/Distribution (A/D) line is surprisingly strong, uptrending over the past two years while the stock price declines, suggesting that the stock is falling on low volume trades. The Full Stochastics and the Relative Strength Index (RSI) are two popular momentum indicators and both are in the exact same position as to trending in a box beneath their centerline. In order to tell that the bulls are taking over momentum, both indicators need to break north of 50.
Quite simply, we view Quest Solution as one of those companies that is a bit of an anomaly in the OTC space. If the company can hold the course and remain profitable, even if it is only at 1 cent per share compared to 2 cents per share in the latest quarter, that would equate to a P/E ratio of less than 5:1 at current levels. The acquisitions in the past two years, especially the addition of ViascanQdata, has Quest in a position to meet this type of minimal growth and profits. The business model includes repeatable revenue streams and the client list certainly validates the value of Quest products and services. As it stands, the company just seems to be underappreciated by Wall Street, but adding a few solid quarters of profits and rising revenues should get their attention and we want to be ahead of the crowd.
Quest Solution Inc. (OTCQB:QUES) Buy at $0.195 on March 29, 2016. Support at $0.18, $0.15, $0.12. Resistance at $0.24, $0.27, $0.30, $0.43. Trade length 6-9 months.
No comments:
Post a Comment