Thursday, September 29, 2011

Dangerous territory

9/29/2011 EOD: $1.02
+0.00 (0.00%)

This market is really pretty treacherous, and totally unpredictable. CNIT is faring poorly, having underperformed all major indexes in the recent past, and approaching dangerous territory as the stock now border $1 per share. $1 is a psychological barrier for many small stocks like CNIT, and when breached, it can sometimes send the stock much lower very fast. Having said that, $1 can also serve as an area of strong resistance. Today we saw the stock briefly go to $0.98 and then return to $1.02, ending the day unchanged. Volume today was also quite high (~300k) which is a good sign that this area will serve as a strong area of resistance for CNIT.

Truthfully the direction of the market will ultimately determine whether CNIT rises from this level or shoots lower. If the market flip-flops for a while, or resumes a bullish trend, I feel *very* good about CNIT. If the market continues to sink, then CNIT may go lower with it.

Wednesday, September 21, 2011

Green speck among the Red

9/21/2011 EOD: $1.18
+0.01 (0.85%)

It's not really significant given the really small volume, but CNIT was one of the very few stocks to be in the green today :)

Tuesday, September 20, 2011

Evaluating CNIT's extension of the $5M stock repurchase program

9/20/2011 EOD: $1.17
-0.05 (-4.10%)

On Friday, 9/16/2011, CNIT announced in a press release that they were extending the $5M stock repurchase program they initiated on 9/27/2010 (see the press release from the original announcement from last year here). There's a lot to say about what this announcement might indicate and what it might do to the stock price, but before that let's take a quick look at CNIT over the last month using this hourly chart.

We can clearly see that the stock is consolidating in the $1.15-$1.30 range, and that there's pretty strong support and resistance at these respective levels. Volume has been very low, frequently staying below 100k shares traded per day. Market conditions have been tough, though the stock has under-performed the overall market which has, in fact, risen over the last month. The stock is trading significantly below its 200 DMA, which is now at $3.09 (note that in the chart about the yellow line is the 200 hour MA, not the 200 DMA), and  also much lower than its 50 DMA which stands at $1.70.

Fundamentals of a stock repurchase program
Ok, so what's in store for CNIT now that they've extended their stock repurchase program? When a company announces a stock repurchase program, it generally is an indicator that the company is confident in business outlook. Fundamentally, repurchasing stock does a couple of things for the company:

  • It reduces the number of shares outstanding, which in turn increases earnings per share
  • It increases the portion of total shares owned by insiders (all other things equal)
As mentioned above, stock repurchase programs are usually indicators of confidence and generally speaking investors like when companies repurchase their stock.

It's very important to note that, of course, stock repurchase programs are one of many things that affect a stock's price. You can't look at it in a silo and forget about all the other factors that may increase or decrease the stock price.

Cash on deck
In order to repurchase stock, the company must have cash. In its latest 10-Q, CNIT shows cash and cash equivalents of $9.6M, which is down from the $18.2M they declared at the end of their FY10 (March 2011 10-K). This decrease in cash came primarily from investment activities, particularly for software purchases and software development costs. This cash (all other things equal) enables them to repurchase the full $5M of stock in the plan.

Repurchase activity since 9/27/2010
As far as I can tell (mind you, I'm no accountant), CNIT has not yet repurchased any stock as part of the program they announced on 9/27/2010. Their balance sheet shows no change in treasury stock since their '09 10-K, so unless there's something fundamental I'm missing then they still have $5M of stock to repurchase. This can be viewed as a good and a bad sign. The positive way to look at it is that they can still purchase a whole $5M of stock, which represents nearly 10% of the current market cap based on the current stock price. The negative way to look at it is that if they didn't purchase any since the first announcement, there's no telling whether they will after the extension announcement they made last Friday.

Possible effect on stock price
As noted above, a stock repurchase program is generally viewed as a good thing for the stock price, as a decrease in shares outstanding and an increase in EPS, combined with a boost of confidence in the company, can push the stock higher.

After the initial 9/27/2010 announcement of the stock repurchase program, CNIT climbed slowly for a few days and then surged, rising 50% at its high compared to the opening price on the day of the announcement.

The S&P 500, in that period, rose only a couple of points, though it's important to note that in the fall of 2010 markets were very bullish, while now the general feeling is that we're in a pretty bearish period. Also, after the initial announcement made in 2010 CNIT had 14 out 15 straight sessions in the green, whereas after Friday's announcement CNIT has already been down two sessions in a row.

Generally speaking, I am still long CNIT, though currently I am holding onto a position rather than adding more. What concerns me most is the weakness in the overall market, as well as the weakness seen in popular China names such as SINA, SOHU, and RENN, as well as big sell-offs in most small China stocks. I retain a great amount of confidence in CNIT's business model and ability to execute, but am cautious in my entire portfolio, and am thus reflecting this caution in my investments in CNIT as well.

A couple of things would make me feel better, such as a break through $1.30 on good volume, or a continued consolidation in the $1.15-$1.30 price in a down market. Pending further information and price movements, I'll sit back and watch for a while before making a call on CNIT at this time based on this news.

Wednesday, September 14, 2011


09/14/11 EOD: $1.20
0.00 (0.00%)

Today's CNIT stock performance was very weak given the generally positive vibe in the markets. With very mild volume (~118k shares traded) and flat for the day, there isn't a whole lot to feel good about. What is true, though, is that if the stock continues at this range for a while, we could consider this flatlining to be a positive sign of consolidation and support in this area.

A variety of sources are quoting fundamental strengths for CNIT as well, such as the following:

  • China Analyst points out that with a net profit margin of 20.55% for the last 12 months, CNIT is one of the most profitable (in terms of margin) software stocks out there, sharing the space with big names like MSFT and ORCL.
  • Zacks reiterates that CNIT is potentially undervalued in terms of enterprise value to EBITDA, something that's been true in CNIT's case for at least the past year.

Sunday, September 11, 2011

Back for more CNIT

09/09/11 EOD: $1.18
-0.05 (4.07%)

It's been a while since I've commented on CNIT. In the last month I've been 10 days in Alaska, have gotten a new job (still within the same company), and have spent more time focusing on large cap stocks. That said, I still have an interest (and a stake...) in CNIT, so let's get back to thinking about this little guy.

Here's a look at the daily chart for the last few months:

The first thing we can see is that, after the initial plummet that happened after the last earnings announcement, there was a fairly substantial bounce (as predicted) with buyers coming in to take advantage of the new lows. That said, CNIT has slowly dwindled back to the same levels in the past few weeks. $1.20 seems like a fairly strong area of resistance, and we do see the curve flattening a little, but really there's no telling how much lower this could actually go. The main worry that I have is the fact that the economy is really in the dump right now, and as we all know when people are afraid and retreat from equities, the first things that get kicked out of the portfolio are the riskiest assets, of which small Chinese caps are a part. Note in particular that volume has been very low over the last 1-2 weeks, reflecting the very small number of buyers for this kind of stock when the general economy is feeling this much pressure.

Let's revisit some of the fundamentals on CNIT:

  • P/E ratio: 1.90. That's still extremely low and difficult to justify, even in spite of the very poor recent earnings announcement.
  • Income margin: >20%. This company is not just making money, it's showing off a very solid income margin to boot. It's sad that companies like this don't get rewarded more than all those start-ups that promise big but report losses over and over.
  • Insider Ownership: >40%. The insiders have a lot riding on the success of this stock.
  • EPS growth in past 5 years: 57.9%. Huge growth in the past 5 years, with some slowdown this year. The next earnings report will be huge in determining what happens next for the stock.