New Positions Added

The market seems to have shifted to at least short-term bullish, so I decided to put a little cash to work on some names I believe will perform nicely for the longer term picture.

On Thursday afternoon, we picked up 100 shares of Cavium Networks Inc (CAVM) at $40.91. They are a hardware semiconductor company specializing in Cloud Computing. A small cap company relatively unknown, relative to the software names like CRM, FFIV, etc. They have several big clients including Alcatel, Aruba, Citrix, F5, IBM, Juniper, Motorola, Nokia, and Qualcomm. For more information on why Cloud Computing is definitely a place to be due to the world moving to a cloud storage system and the use of 3G/4G smartphones, see the Techinsdr piece here: “Important Trends in Tech- Cloud Computing.”

In terms of the fundamentals of CAVM, they are very strong for the most part. The one concern I have is their relatively low Free Cash Flow (FCF) Yield of 1.3%, however I can overlook that due to the fact that they are ramping their business up in order to take advantage of the coming trend in cloud computing. While many have heard about cloud computing, the industry is still in its infancy. If free cash is used strategically by management, then longer term this will bode well for the company. There has also been an entire market shift in spending their FCF. Company after company I have looked at all seem to have shrinking FCF as they spend now, hoping for a brighter future later. Maybe this shows that Company Executives are more bullish about the outlooks for the economy or maybe they are just tired of earning Zero percent in a money market. In terms of fundamentals though, the first thing I looked at blew me away: a ratio I came up with – that isn't anything complicated but allows a very conservative ratio that only a few companies can live up to – is Total Current Assets divided by Total Liabilities (TCA/TL). CAVM boasts a 2.8! Most companies cannot even get a ratio greater than 1, but their lean business model helps them achieve this mark. CAVM concentrates on their core competencies and does not run their own factories; they simply design the CPU chips and then outsource the rest. They post a Current Ratio of 3.6, financial leverage of 1.2 and an ROE of 19%, not to mention their profitability ratios year over year for Quarter 4, 2010 blow last years numbers away! Next 5 years growth estimates for Earnings are expected to be 19.8% and expected Sales growth of 48%. They have record revenue, net income, and cash flows from operations. All this tells me that I am investing with a margin of safety.

On a purely technical standpoint as shown by the chart below, I am bullish on CAVM. It recently broke its downtrend after the entire Technology sector suffered a minor pullback, but has regained an upward trend. While we didn't catch it off the break in downtrend (where I would prefer to have bought), I believe their fundamentals allow for enough of a margin of safety for longer term play here. The downtrend was also broke while stochastics were in near term oversold with solid volume on the initial break.

CAVM chart: (as of 3/25/2011)

Yesterday I picked up 90 shares of Pall Corp (PLL) at $56.17. PLL is one of the few stocks that held its uptrend even through this pullback, as you can see from the chart below. I am buying near the bottom of the trend and a slight close above my resistance line. PLL is a leading supplier of filtration, separation and purification technologies, principally made by the Company using its engineering capability and fluid management expertise, proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases. It operates in two industries: Life Science and Industrials. They have a fairly wide variety of sub segments generating revenue, which offers both a diversification of their business and a diversification to the portfolio. Next 5 years earnings growth estimates are expected to be 12%, along with a PEG of 1.7, solid y/y earnings growth estimates, along with rising consensus estimates for the next few quarters. They have an ROE of 21%, Debt/Equity of 0.6, Financial Leverage of 2.5, and a Current Ratio of 2.7. Their TCA/TL is not quite as strong as CAVM, but still comes in at a solid 1.0, still offering a margin of safety, even as PLL hits all time highs. Record cash flow from operations and free cash flow, with a FCF Yield of 3.7%. FCF is not as strong as I would like, but I am discounting because of the cap-ex spending all companies are experiencing. I am bullish on the story and their ability be in a strategic position to benefit from the structural shift in the economy we are experiencing.

On a technical perspective, PLL held up strong even in the recent market pullback, never breaking trend, but still hitting all time highs. While I don't normally like to buy stocks hitting all time highs, I believe their strong growth and story can continue to push them higher. We are buying near the bottom of their uptrend and solidly above all their moving averages.