A Tale of Two Stocks: Similar Symbols, Different Trajectories

In this week’s installment of PCA, I cover two stocks with similar symbols: NV5 Corp. (NSDQ: NVEE) and NVE Corp. (NSDQ: NVEC).

But aside from similar names and symbols, the two companies and their respective shares could not be more different from one another.

For one, NV5 is poised to break out to a new high while NVE is tracing what can only be described as a worrisome price chart pattern. As I will describe below, the difference can be linked to the decisions management has made about each companies’ businesses and how investors are perceiving their respective futures.

The Dividend Trap: Setting NVEC Free

I am recommending the sale of specialty electronics and nanotechnology company NVEC. Specifically, NVEC specializes in spintronics, capitalizing in electron spin properties to compress data into smaller and easier to store and manage packages.

The stock was initially recommended by one of my predecessors in December 2018. While its technology and sector position are promising, the stock has become engulfed in what can only be described as a relentless selling wave.

Here is the problem. NVEC is a very small company, with a $245 million market cap. Its technology is imaginative, but does not seem to be capturing significant market share. Moreover, management does not seem to be pursuing any major growth strategies such as mergers or expanding capital expenditures to the point where the company starts to capture meaningful market share. Spintronics remains on the fringe.

This company is being perceived by investors as a dividend trap; a company whose dividend yield is artificially high to attract investors, to reward management, or both.

It just doesn’t add up. First, the company’s dividend yield is 7.9%. Most recently it paid out $1 to shareholders. Meanwhile, its revenues and sales dropped 4% and 11% respectively last quarter while the three-year earnings per share (EPS) growth rate is projected to be -5%, and the three-year sales growth rate is limping along at -4%.

The company is delivering on sales and earnings, while the balance sheet shows more cash on hand than liabilities. Yet the stock price continues to fall because even though the company is likely to remain in business for a while, it’s just not growing at the moment.

The market has concluded that future earnings won’t be enough to cover the dividend. Meanwhile, management acts as if nothing is happening.

But the happy talk isn’t selling and investors seem to be voting with their feet as this high dividend strategy, in lieu of trying to grow the business, does not seem to be a viable strategy.

Selling Likely to Continue

The stock is in a well-established down trend which does not show signs of slowing. Indeed, new lows keep coming and Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV) show persistent selling with lower highs and lower lows on a regular basis.

As a result, it’s time to let this one go.

NV5 Bullish Consolidation Ahead of Next Up Leg

Meanwhile, shares of engineering and industrial design consulting firm NV5 are near a breakout.

And why not? The company nearly doubled its margins, revenues, and earnings in 2021 on a yearly basis compared to 2020. Strangely enough, NV5 does not pay a dividend as it plows a reasonable portion of its capital into expanding and maintaining its business.

NV5 does just about everything required for a major construction project to get off the ground via its six divisions: Testing, Inspection & Consulting; Infrastructure; Utility Services; Environmental Health Sciences; Buildings & Program Management; and Geospatial Technology cover all bases of operations from design to certification and eventually operations.

Although the stock has been in the PCA portfolio since March 2018 and has achieved a nifty 142% return since then, the current price chart setup suggests that the stock could move significantly higher from here.

Good Habits Die Hard

This company continues to deliver the goods with solid growth credentials both organically and through acquisitions, such as the two recently reported in March 2022 which will strengthen its plumbing design, maintenance and environmental services divisions.

Moreover, with earnings due in early May, it’s good to know that NV5 has beaten earnings expectations for the past five quarters and is expected to deliver a nearly 11% earnings increase compared to last year to go along with a 17% increase in revenues.

Solid Price Chart

The price chart paints an excellent portrait of where the company’s fortunes are at the moment.

Specifically, the stock has delivered a major move to the upside following the last quarter’s earnings news. Now, it’s consolidating gains ahead of the May earnings report. But it’s doing so in a bullish fashion with rising ADI and a moderate decline in OBV.

Ideally, we like to see both of these indicators rise simultaneously. But in a consolidation pattern, a divergence of the two is not necessarily a major problem as long as the price holds up such as we’re seeing in NVEE.

The bottom line is that the stock seems to be consolidating ahead of earnings. And if earnings deliver a positive surprise, we should see another up leg in NVEE.

In the end, the difference between NVEC and NV5 is that NV5 takes care of its business and investors are responding favorably.

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