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Thursday, December 09, 2004

MarketWatch Inc. (MKTW) Analysis

…I was recently asked about MKTW – a stock that made our weekly screens on 11/21/04 at $18.05. Here is how I analyzed the stock for the screens.

MKTW is currently forming a:
Flat Base:
A basing stock that has weekly closes within a few percentage points of each other on below average volume. A flat base must last at least 7 weeks in duration. Our research shows better success with flat bases lasting 12 weeks or longer. The pivot point will come on huge volume as the stock breaks out of the tight flat base range.

The recent action of MKTW is amazing to watch. It has made a few daily screens and one weekly screen recently. If it breaks out on large volume, it’s an instant buy within 3-5% of the pivot. The real question is: Is it a buy right now?

Let’s look at the numbers:

Income past 3 years:
2001: -76 mil
2002: -9 mil
2003: +2 mil

Looks good but I see a red flag

Revenue past 3 years:
2001: 45 mil
2002: 44 mil
2003: 47 mil

Profits have soared but sales are stagnant. Revenues have not moved much at all, the company has slashed operating expenses to allow a profit to be made. In my experience, companies that slash expenses can only maintain stock growth for a short period of time. At some point they must increase sales which in turn will increase earnings. Earnings power is the underlying factor in stock movement.

Earnings are supposed to jump 186% in FY 2005 and that has moved the stock recently. If MKTW can make or beat the numbers analysts are predicting, the stock will breakout and will be a buy.

We are looking for FY 2004 earnings to be $0.15
Analysts are predicting FY 2005 to be $0.43.
The market is always working 6 months ahead. If the stock keeps moving, this means earnings will continue to go higher as will the stock.

Some other less important numbers:
ROE – 3.76% (low – should be over 15%)
Float is high (23.7 million compared to 25.9 million outstanding shares)
Insiders own 8.51% (very low – not a critical factor)
Fwd PEG ratio – over 2 (very high)

In conclusion, MKTW made my screens based on future expectations and chart setup. I also ran a screen based on EPS rating and relative strength on IBD. It passed all of these tests so I included the stock based on the final chart analysis (my personal feeling based on what I see).

I am yet to find a stock that is perfect or passes every screen out there. In this case, I see the future anticipated growth and realize that stocks move on expectations and recent strength (i.e.- Relative strength versus the S&P 500). MKTW shows up solidly in both categories. When I do a full analysis, I must provide all numbers that I research including the important gross profit and revenue numbers. If things work out as expected, revenues should jump drastically in FY 2005. I was just pointing out the negatives I see. Overall the stock is positioned better than most in this group.

Remember, stocks move approximately 6 months ahead of actual numbers. MKTW has moved based on analyst estimates and company targets. If and when those numbers are met or exceeded, the stock will justify the prior movement.

Look for the current base to play out for another couple of weeks. A breakout at that point would be positive for the current flat base. Also, the stock carries some good company (sister stocks), that also weighs into my screening process.


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