Amrep Corp. (AXR) Profile

In this post I highlight AXR (Amrep Corporation). AXR has been on the Rebel Traders watch list for many weeks. It is a play on a trend reversal along with a high short interest.

Amrep began in 1961 and began trading on the NYSE in 1972. The primary business of Amrep is magazine subscription services, and real estate development (Fp80 comment: The two business operations of Amrep could not be further apart, processing magazine subscriptions AND real estate development is not a successful business model in my view). Amrep has their headquarters in Princeton, NJ (25 miles from RebelTrader HQ). Picture shown is of the building they occupy from the real estate owner in Princeton.

Amrep started getting attention in June 2006 as shown by the increase in share trading volume and in the span of 8 months went from $35 (special dividend adjusted) to almost $150 per share. The share structure as provided by Thomson Financial data provider is:

shares outstanding = 6.65 million
shares in float = 1.73 million

As you can see based on the share float it does not take much buying activity in order to get a substantial price movement in the shares. What had taken place was the share price got way ahead of the true share value (based on fundamentals, market cap, and growth rate). In other words people were willing to pay up for the stock even though the business suggested it was not worth that much. In July and October of 2006 Amrep reported EPS numbers that were way ahead of analysts expectations, and that brought buyers to the table thinking the company was way under priced. Always remember that investors and traders will pay what they 'feel' the stock is worth. Hype goes a long way to the investor. Greed & Fear drive the real price movements

But in January 2007 Amrep released quarterly earnings and they went from an EPS of 2.42 (October 2006) to 1.04 ( 132% drop ). Reality had set in. Now all of a sudden investors were holding onto a stock that was in no way worth the value they paid for it in their views. The massive sell off began late January 2007 and has been a straight drop ever since.

The share price of Amrep is nearing a more realistic value now based on the actual earnings of the company. More importantly is that the share price a level investors "feel" it is worth? Where the price will stop falling can only be answered by technical analysis. At the present time on a weekly chart there are weak signs that it may have bottomed. But I caution that those signs are weak. (see the weekly chart shown below). What we need is to see more evidence of a reversal in the works before we can consider this a swing trade (mostly to capitalize on the short interest covering). We do this buy using the charts to establish criteria to test those conditions.

First we have long term support areas. Currently the share price is close to one support area with a stronger one below it. Is this the support area that is going to hold and be the base for the start of a trend reversal? We can't say. That is why we next set conditions which must be met to confirm to us that the bottom may have been established. We then look at a closer view of the stock chart to show the trend line and a baseline level we want to see the share price trade at to give us confidence that buyers are working up the price (daily chart shown below).

Is Amrep worth $46.91 a share (July 6th closing price)? Is it worth even lower than that and we will drop to the next support region around $34? A company with a current P/E ratio of 6 may sound good and may sound like a bargain but P/E ratios don't necessarily indicate that the share price is undervalued or even a good investment. A stock always trades at the price the investors perceive the value to be. And this is why I rely on the technical analysis of the tape (charts) to tell me what investors are willing to pay for a stock. Go back to Amazon a few months ago. They had a P/E of over 100 leading into their earnings release in April. Many analysts were saying that the price of Amazon was overvalued already and that any further upward price gains would be difficult. Well they were all wrong and even with the way overvalue condition investors bought up Amazon shares like they were printed on money themselves.. If one were to use P/E as a guide for determining growth potential or the lack thereof the chances for successful investments/trades will be lower. In swing trading I never use a P/E ratio. I look to the chart to tell me what the investor is willing to pay. And when there is a consensus that it is time to start buying upwards, then I join in for the ride and then hop off before the ride ends. Don't want to get stuck at the end of the line in a roundabout and then head back down.