IHS (IHS) "Trading Transparency"

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

A few moments ago I sold my 140 shares of IHS (IHS) that I had puchased 10/1/07 with a cost basis of $58.53.   These shares were sold at $59.29 for a gain of $.76 or 1.3% since purchase. 

This sale doesn't really fit into my usual 'trading rules'.  But I always retain the right :) to arbitrarily 'pull the plug' on any of my holdings.  Perhaps it is because my portfolio is so small at 6 positions now--or I am just anxious to keep up with my Covestor results where I am just staying ahead of the S&P--but in any case, with the market basically moving higher and IHS acting rather weak the last few days, I decided to move on.

Since I am not really selling the stock on 'bad news', except my own perceived assessment of the stock's prospects, and this isn't really 'good news' either, I consider this more or less a lateral in football terms.

But before I get to what I decided to 'do' with the proceeds (I bought some shares of Graham (GHM)), let me share with you some of my thoughts on IHS and why I switched from being a holder of shares to a seller of shares and why now

IHS (IHS) IS RATED A SELL

First of all, as I write, the Dow is trading at 12,672.35 up 26.13 and the Nasdaq is at 2,527.93.  And IHS?  IHS is at $59.22, down $(1.79) or (2.93)% on the day.

Looking through the news on IHS, I came across a story from TheStreet.com which recently was published (5/23/08).  They remarked on several different stocks.  On IHS they had this to say:

"IHS (IHS - Cramer's Take - Stockpickr), which provides critical information, decision-support tools and related services to the energy, defense, aerospace, construction, electronics and automotive industries, has been downgraded to hold. Strengths such as robust revenue growth, a solid financial position and EPS improvement are weighed down by disappointing return on equity. For the first quarter, revenue increased 30% year over year to $198.8 million, and earnings per share rose to 34 cents from 32 cents. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 0.83 is weak. The company's gross profit margin is rather high at 55%. Its net profit margin of 11% compares favorably to the industry average. The company's current return on equity has slightly decreased from the same quarter one year prior and lags the industry average. Shares have risen 61% in the past year, beating the S&P 500. The gains have netted the stock a price-to-earnings ratio of 44.68, which places it at a premium to others in its industry. IHS had been rated buy since May 13."

The "quick ratio" is a bit different than the "current ratio" which we usually examine.  As it is defined:

"A measure of a company's liquidity and ability to meet its obligations. Quick ratio, often referred to as acid-test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities. Quick ratio is viewed as a sign of company's financial strength or weakness (higher number means stronger, lower number means weaker). For example, if current assets equal $15,000,000, current inventory equals $6,000,000, and current liabilities equal $3,000,000, then quick ratio amounts to: ($15,000,000 - $6,000,000)/$3,000,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets. In general, a quick ratioof 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry."

Even so, the current ratio, with a total of $406 million in total current assets compared to the current liabilities of $400.2 million, is also just above 1.0, suggesting some financial 'stress' as well imho.  These figures are from the Morningstar.com "5-Yr Restated" financials page which otherwise doesn't look too shabby.<script type="text/javascript"> function blockUI_cool(container) { var contain = jQuery(typeof(container) == 'undefined' ? 'body' : container ); var blockdiv = '

'; var mask = contain.prepend(blockdiv).children('.x-mask'); contain.addClass('x-masked'); jQuery('.x-masked').children('.x-mask').css({ height: ((window.innerHeight && window.scrollMaxY) ? (window.innerHeight + window.scrollMaxY) : ( (document.body.scrollHeight > document.body.offsetHeight) ? document.body.scrollHeight : document.body.offsetHeight )) }); } function ShowCite(term_name, site_name, term_path, full_date) { blockUI_cool(); var tpl = 'To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
'; tpl += '
American Psychological Association (APA):

'; tpl += '!word. !site. Retrieved !date, from !site website: !link
'; tpl += '
Chicago Manual Style (CMS):

'; tpl += '!word. !site. WebFinance, Inc. !link (accessed: !date).
'; tpl += '
Modern Language Association (MLA):

'; tpl += '"!word" !site. WebFinance, Inc. !date <!link>.
'; tpl += '
'; var message = tpl.replace(/!word/g, term_name); message = message.replace(/!site/g, site_name); message = message.replace(/!link/g, term_path); message = message.replace(/!date/g, full_date); var msg = jQuery('

').addClass('popupwindow').css({ position: 'absolute', left: parseInt(jQuery('body').width() / 2 - 300), width: 600, top: (window.pageYOffset ? window.pageYOffset : document.body.scrollTop) + 150, display:'none' }).html('

'+message+'

'+'

'); jQuery('.popupbtns', msg).append( jQuery('').click( function(){ msg.fadeIn('slow', function(){ msg.remove(); unblockUI(); }); } ) ); jQuery('body').append(msg); msg.fadeIn('slow'); }</script>  

Mark Hulbert recently wrote on Forbes.com about the utility of insider trading as an indicator.  He wasn't very impressed with the results:

"A recent academic study1 by professors Josef Lakonishok and Inmoo Lee provides an answer. The professors discovered that while stocks being bought by insiders proceed to modestly outperform the market, so do stocks sold by the insiders. Overall, therefore, there is not much of a performance differential between the stocks insiders are buying and the stocks they are selling."

In any case, IHS recently had a significant sale by a director which was reported on April 24, 2008, when it was noted that Director Steven A. Denning sold 744,501 shares of stock at $65.05.  In itself it may not be enough to change my mind, but as a piece of a puzzle, it may be worthwhile to consider.  This had followed a sale reported on April 2, 2008, as reported, of Co-President, Co-COO Jeffrey R. Tarr selling 4,573 shares of common stock at $65.84/share.  That particular sale was under what is called a 10b5-1 trading plan which is a plan that allows pre-arranged sales regardless of nonpublic information they may possess.  However, that sale also followed a sale April 1, 2008, by Executive Vice-President Daniel Yergin who dropped 10,00 of his shares between $66 to $69 apiece.

Going through the news we can see that Jeffrey D. Sisson sold 5,273 shares March 28, 2008, also through a pre-arranged 10b5-1 trading plan, John Oechsle, also through one of these same plans sold 3,000 shares March 28, 2008, CFO Michael Sullivan exercised options for 5,000 shares under the same plan and sold them on March 28, 2008, Yergin reported March 28, 2008,  selling another 18,403 shares, Senior Vice-President Stephen Green sold 6,600 shares as reported the same date under the same program, and IHS Co-COO Rohinton Mobed reported selling 10,980 shares of common stock in an announcement on March 28, 2008. 

It is really appropriate to exercise caution before concluding anything about these sales.  Many executives have stock options as really part of their employment package and sell stock regularly to fill their own financial planning requirements.  But all of these sales do give you pause, don't you think?

On a positive note, after the company's last quarterly report, they did indeed raise guidance on full-year sales to a growth of 21 to 23% from the prior guidance of growth of 18 to 20% year over year.

Ironically, the 1st quarter 2008 results announced on March 19, 2008, did beat expectations on both earnings and revenue.  So not all of the news is negative on this company.

Finally, looking at the price chart, I am not encouraged by the apparent ongoing technical weakness.  As presented by StockCharts.com with a 'point and figure' chart on IHS:

So today, with the stock weak while most other stocks climbed, I looked at the chart, thought about the financial questions raised, noted the insider selling activity (although most of that was fairly routine) and decided to 'move on'. 

Wish me luck.  I do think I need to do these types of relatively conservative 'laterals' from time to time. 

Thanks again for visiting!  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforsocks@lycos.com.

Yours in investing,

 

Bob

  Read the rest of original post »