Don’t Buy This Stock Right Now…

| April 1, 2010 | 0 Comments

I’m writing today’s column with a heavy heart.  I don’t usually get sentimental about individual stocks.  But, this one is different.

This stock was an early recommendation in my advisory service Penny Stock Breakouts.  And, it turned out to be one of the best performers we’ve had.

Many of my subscribers made more than 5 times their money on this one stock.  And, they did so in less than a year.  I’m usually not one to brag, but that’s a super return.

I just recently told my subscribers to sell the shares.  And, I have to admit, I had a tough time cutting the stock from the portfolio.  I still really like the company.

Ok, enough with the sappy nostalgia.

The reason I’m writing about this stock today is to warn you from buying it right now.  At first glance, it might seem like a good opportunity.  But the truth is, the fundamentals have really broken down.

I think the shares are poised for a sharp decline over the next 12 months.  (And, this decline will provide an excellent buying opportunity!)

So, what stock am I talking about?

It’s none other than Hi Tech Pharmacal (NASDAQ: HITK).

HITK makes prescription drugs, over-the-counter medications, and nutritional products.  They currently offer over 100 different products to nearly 100 different customers.  Their main customers are leading drug wholesalers McKesson, Amerisource Bergen, and Cardinal Health.

When I first discovered HITK in February 2009, they were just beginning a major growth spurt.  They had recently launched two new generic drugs.  And, I believed these drugs would drive strong revenue and earnings growth for the next several quarters.

It looked like a great opportunity for my subscribers.

Best of all, the stock price had plunged in the market meltdown of late 2008 and early 2009.  The shares were down from over $12 to nearly $5.

HITK looked very cheap indeed.

But, would the numbers confirm it?

In February 2009, the company’s fundamentals were improving rapidly and the growth outlook was very strong.  HITK was expected to grow earnings at 25% a year for the next five years.

Nevertheless, the shares were trading at just 12x earnings.

With a bit of simple math, you see HITK had a low PEG ratio of 0.50.  In other words, the shares were trading at a 50% discount to the company’s long term growth rate.

As you know, I love stocks with a strong growth outlook and a low PEG ratio.  HITK clearly fit the bill.

But, that wasn’t all.

The company also had a strong balance sheet.

They were sitting on nearly $13 million in cash.  And, they had virtually no debt.  I was satisfied they were in a strong position to weather the economic downturn.

The clincher for me was the company’s guidance for the current quarter (ending January 2009).  Management was forecasting revenue to double.  And, they were expecting earnings to soar 283%.

I knew that if the company posted gains like those, investors couldn’t ignore the stock for long.

I recommended HITK to Penny Stock Breakouts subscribers in March 2009.  The shares were trading at just $5.17.  Even though the market was skittish, I believed this was a great entry point.

HITK reported quarterly earnings shortly thereafter.  The numbers came in a little shy of guidance, but they were still very strong.  The stock didn’t jump on the news, but we didn’t have to wait very long.

As you know, the market bottomed in mid-March 2009.  This was great for us.  Investors took one look at HITK’s phenomenal growth story and began piling into the stock.

The shares were off to the races.

HITK continued posting huge revenue and earnings gains quarter after quarter.  And, the shares kept moving higher and higher throughout the year.  As you can see, they finally topped out at nearly $30 a share in January 2010.

That gave my subscribers a phenomenal gain of 478% in just 11 months!

We continued holding the shares throughout this remarkable move.  The company’s fundamental picture hadn’t changed so there was no reason to sell.

I finally had to pull the trigger on HITK last month.

The fundamental outlook for the next twelve months has weakened significantly.  The company’s projected five year earnings growth rate has dropped from 25% to 10%.  And more importantly, the company’s earnings are expected to decline in fiscal year 2011.

Given this dim outlook, I firmly believe HITK is dead money for a while.

With that said, I think HITK still offers terrific long-term growth potential.  The company has a whopping 15 products awaiting FDA approval.  And, these products are targeting brand name and generic drug sales of over $600 million.

What’s more, HITK has another 20 products in development.  These products are targeting brand name drug sales of over $2 billion!

As these products gain FDA approval, HITK will once again go through a period of super revenue and earnings growth.  But for now, I’d avoid HITK.  You should have an opportunity this year to pick up the shares at much lower prices.

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Category: Penny Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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