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Red flags to watch for when investing: cumbersome financial reports that relegate unusual activity to the footnotes. (iStockphoto)
Red flags to watch for when investing: cumbersome financial reports that relegate unusual activity to the footnotes. (iStockphoto)

No shortage of red flags for this manufacturer’s stock Add to ...

Hi Lou,

Can you give me some direction on Hammond Power Solutions?

Have been watching for a period of time and am thinking the time to buy is approaching.

Thanks,

Glenn

Hey Glenn,

Thanks for the assignment.

This will be the first time that I investigate the risks and opportunities associated with Hammond Power Solutions Inc. The company designs and manufactures transformers for a variety of industries including mining, oil and gas, steel, water treatment, wind power, and manufacturing. HPS.A operates in Canada, the United States, Mexico, Italy, and India.

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The stock has a market capitalization of $83.78-million with average daily volume of 8,748 shares. Both of these factors increase the risk associated with HPS.A because of competition from bigger players and with respect to liquidity. The dividend yield is currently 2.78 per cent.

A study of the charts will help determine if now is a good time to buy.

The three-year chart offers a number of patterns that are worth highlighting. The first is the downtrend that started in early April of 2013 and the aggressive gap down that followed later in the month on release of first-quarter 2013 financial results. By June a death cross surfaced indicating that investors could expect more selling pressure to arise.

There was another gap down in July on the release of second-quarter 2013 financial results. Management cited weakness in the mining sector leading to reduced revenue. There have been some trading opportunities but the dominant trend has been down.

The six-month chart illustrates the downtrend that is the major influence on the stock providing resistance on every attempt to move higher. The MACD and the RSI both signalled a buy at the December lows but with the thin trading volume over the last 30 days there would have been liquidity issues to deal with.

Given the results of the research conducted on your behalf I would be very cautious with this stock. Thin volume, an extremely small market capitalization, an established downtrend, a death cross, and sales weakness in the mining sector don’t add up to a buy.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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