Friday, July 16, 2010

Computer Modelling Group Ltd 2

I first bought this stock (TSX-CMG,) in November 2008 and bought some more in March of 2009. My total return to date on this stock is 30% per year. This is a small cap stock that is growing fast and is also a dividend paying stock. This stock will, of course, be more risky that most dividend paying stock, so be careful. Only buy this stock if you can afford to take the risk of owning a small cap stock.

When I look at the Insider trading report, I see lots of Insider Selling to the tune of $6.7M. Most reports I have been looking at lately show lots of insider selling and I find this discouraging. However, we are in a recession and you never know why people sell. In this case, all the selling seems to be in shares (compared to lots of other company insider selling which seemed to be in stock options). There is extremely minor insider buying (totally some $9,000). The Insider selling is about 2% of the market value of this stock.

The way that the management has shown confidence in this stock is that they have increased the dividend, and paid a special dividend this year. However, one thing I do not like is that it would appear that they used almost all their cash flow for this year to pay the dividend this year. On the other hand, they did have enough cash to pay this dividend, so from this point of view; the dividend paid is not a problem.

When I look at the 5 year low P/E ratio, I get one of 10.4 and when I look at the 5 year high P/E ratio, I get one of 17.6. Based on earnings estimates for 2011 financial year, I get a current P/E of 19. Note that the earnings estimate for 2011 has been lowered as the estimate for 2010 was $.91 and it came in at $.80. Also, I get a Graham Price of $5.95. With the current stock price being at $17.53, it is off the Graham Price by 195%. This is not quite a bad as the high price for 2010 of $17.50, which was off the 2010 Graham price by 215%. However, it is almost there.

When I look at the dividend yield, I get a 5 year average of 3.9% and a 5 year high of 5.3%. The current yield is just 4.1%. It is better than average, so this is good. The last thing to look at is the Price/Book Value Ratio. The 10 year average is 4.38. The current ratio at 10.27 is over twice that. I must say that this ratio has been rising steadily over the last 10 years. If you look at the stock price chart, you will see that since June of 2008, this stock has been rising and it has done much better than the market as a whole.

There are not many analysts following this stock, however, most recommendations are Strong Buy and Buy. However, I did find one Hold recommendation. Since there are more Buy recommendations than Strong Buy recommendations, the consensus would be a Buy. (See my site for information on analyst ratings.)

What analysts like about this company is the lack of debt and the great dividends. (Liquidity and A/L ratios are 2.44 and 2.56, which are very high). This company has most of the market for heavy oil software. However, this is a tech company, and sometimes, things change rapidly with tech companies.

Personally, I might want to buy some more of this stock in the future, but I think that the current stock price is a little high. The other side of this is that this is a growth company, and it may be sometime time (or never) when it gets to a more reasonable relative price. A P/E of 19 is not especially high for a growth company. I am certainly happy with my investment and I will hold on to it.

It is a computer software technology and consulting firm engaged in the development and sale of software. They have 250 Clients in 45 countries. Their reservoir simulation software assists petroleum companies to extract an increased amount of oil and gas from their reservoirs. Its web site is here Computer Modelling. See my spreadsheet at cmg.htm

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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