Back from vacation and adding to Aehr Test Systems

I am back from vacation and will be providing a few updates over the weekend of what I have done lately in my portfolio.

I will start with Aehr Test Systems.

I am reluctant to add to any position given the market.  My investment portfolio cash position is up to 65%, and is even higher (83%) in my RRSP account.  Nevertheless I did add to my position in Aehr Test Systems.

I’ve been waiting on a retracement in Aehr for some time.  I think that under $3 is a good opportunity to buy the stock.  On July 19^th the company announced earnings.  Their fourth quarter revenue, at $6.7 million, beat their own $6 million guidance.  Their current backlog is $17.8 million (including the $1.3 million WaferPak order announced on August 9^th), which is almost equal to full year revenue from the previous year ($19 million).  On their fiscal fourth quarter conference call the company said they expect to “exceed” 50% revenue growth in the next fiscal year.

Listening closely to the conference call, it is clear that the upside bound on revenue could be much higher.  There are a number of high volume applications for their test systems that Aehr is being integrated into and where purchase orders are anticipated.  I think its possible that we see a press release event where a large (maybe $10 million plus?) order is announced.  This would send the stock up significantly.

But of course I’m a little worried about the recent weakness in the stock.  Catching a falling knife is never advised and that is what I have done here.  But there have been so many instances of small caps nosediving only to recover the last couple of months that I suspect this is just another one of those.  I think back to a number of stocks that I have owned, Novabay Pharmaceuticals for instance, which had precipitous drops that were followed by recoveries.  There was some insider selling after the move to $4, so perhaps some investors have taken that as a cue to sell.  The stock is so illiquid that it only takes one large, dedicated seller to send the stock down.

One the negative side they sell semi-conductor equipment, which is a lumpy and cyclical business.  Interestingly, on  the last conference call management said that they are still too small to be caught up in the cycles.

We are not necessarily dealing with macro semiconductor cycles here yet. As we are primarily designed in on key new programs with our customers with new products and new applications in many cases, and so it’s very specific to those customers

I note that the other equipment manufacturer I follow, Ichor Holdings, had a dip back at the beginning of August but has stabilized of late.

After the move down the stock trades at a market capitalization of $55 million.  After the recent capital raise there is $18 million of cash on the balance sheet and no debt.  Assuming 50% revenue growth in fiscal 2018, the stock trades at about 1.3x revenue.

That’s too low in my opinion.