As we approach the end of the year’s first quarter, 2014 is still just getting its footing. But that hasn’t been too long for Small-Cap Star Shenandoah Telecommunications Company (SHEN) to make gains of nearly 40 percent.
Strong 2014 So Far for SHEN
Shenandoah is a diversified telecommunications holding company, working through subisdiaries in Virginia, West Virginia, central Pennsylvania, and western Maryland. And while regional telecommunications is hardly the sort of sexy tech play that gets investors jumping out of bed in the morning, it’s not hard to see why this particular one is taking off in 2014.
If you plug SHEN into Equities.com’s EVA reports, you’ll see the picture of a company with growing revenues and profits since 2010. For four straight years, Shenandoah’s turned in year-over-year revenue growth for a cumulative 58.5 percent increase over that period. The company’s also exceled at keeping more of that revenue, as net income rose 25.48 percent in 2012 and a whopping 81.53 percent in 2013.
And the company’s stock chart also indicates some of what may be driving some of the growth in share price this year. From the start of November to early February, the stock repeatedly tested a support level of about $23 a share, bouncing off that level on multiple occasions. Since the final time it touched that level, the stock crossed its 20-day and 50-day SMAs from below and has remained above those levels ever since.
The strong fundamentals, combined with the confidence in a firm support level at $23 a share, likely helped drive this recent buying spree that has pushed up shares this year.
DuPont Report Paints Clearer Picture
The picture gets a little more clear if you apply the DuPont Method for analysis to the stock. Looking at the numbers in the EVA Report, it’s clear that Shenandoah is lagging behind its competitors in terms of return on equity (ROE), a key factor that normally wouldn’t bode well for potential growth. Shenandoah’s 0.1263 lags well behind the industry average of 0.3519.
However, the purpose of the DuPont Report is to look deeper at ROE and get a better answer to the question of why, and that paints a rosier picture for Shenandoah. The company is faring much better than the industry average in terms of net income, one of the most important factors in ROE. Net income, unsurprisingly, is a clear positive and leading competitors is also a plus.
Asset turnover and equity multiplier, though, are different from net income in that a wide positive margin between a company and its competitors isn’t necessarily a positive. In these cases, the closer to the industry average, the better. And for both of these figures, Shenandoah isn’t up to snuff, falling well below the industry average. This, more than anything else, explains the way the ROE is lagging behind competitors.
However, there’s a silver lining in this for Shenandoah investors. While falling behind the industry average for its equity multiplier isn’t a positive, indicating that Shenandoah could potentially do more to leverage its assets, it also means the company has significantly less debt than the rest of the industry typically carries. And, while it’s less than ideal, it’s certainly better to have too little debt than too much.
A look at the current trends could also be viewed as a positive for Shenandoah. Net margin, asset turnover, and ROE are all increasing year-over-year, a sign that even sunnier days may still be on the horizon for the company.
There are certainly warning signs as well, like the fact that the stock’s 14-day RSI has been trading above 70, territory that can typically be a sign a stock is overbought, for the entire month of March, but, for the most part, it’s clear why Shenandoah is among the best-performing Small-Cap Stars so far this year.