Summary
- Forrester Research is trading near a 10-year low valuation, after management forecast a somewhat disappointing 2023.
- A unique and rare chart pattern of declining price with nicely rising buying momentum is now reality.
- I have a target price range of $45 to $60 in 12 months. I rate Forrester Research, Inc. shares a Buy and Outperform selection.
I am writing a companion idea to my article posted here this weekend , regarding work on a new quant-sorting formula for finding turnaround prospects. The idea is a strong Accumulation/Distribution Line indicator and low Average Directional Index score can increase the odds of a short-term to intermediate-term bounce in price.
A stock that reached a buy point in the formula over a week ago, and has quickly reversed its selloff, is Forrester Research, Inc. ( FORR ). The operating business revolves around independent business research and consulting. According to the website, the company is a global independent research and advisory firm, using technology, marketing, customer experience, product, and sales functions to help business customers accelerate growth.
Forrester has itself grown through periodic acquisitions of small research firms, folding them into its larger portfolio of assets. It's possible another addition will be made in 2023-24, especially if a recession opens up new opportunities on the cheap.
10-Year Low Valuation
Besides my intrigue with the chart reversal pattern explained in the next section of this article, Forrester actually is quite inexpensive vs. the last decade of trading history.
Price to trailing earnings, sales, cash flow, and book value ratios were positioned near 10-year lows between late 2022 and early 2023. A decade-long graph of basic fundamental ratio analysis is drawn below.
When we include Forrester's high cash level ($118 million at the end of December) vs. minor long-term liabilities ($104 million), enterprise value stats are even cheaper! Essentially, enterprise value multiples on EBITDA (earnings before interest, taxes, depreciation and amortization) and sales have been stuck at a 10-year low since October.
EV to forward stripped-down cash generation (EBITDA) is pictured below vs. major peers in the research and advisory field. Readers will notice Forrester is the winning choice if you are looking for a bargain valuation. The sort group includes Thomson Reuters ( TRI ), Equifax ( EFX ), Booz Allen Hamilton ( BAH ), Moody's ( MCO ), Dun & Bradstreet ( DNB ), Franklin Covey ( FC ), CBIZ ( CBZ ), CRA International ( CRAI ), RELX PLC ( RELX ), and TransUnion ( TRU ).
The only operating data point I would like management to improve is profit margins. Granted, operating and final margins on sales have been under 10% in the last decade. However, low margins are usually valued at lower multiples vs. peers on Wall Street. The company conservatively holds more cash than debt and leases in total, so management would have to become leaner on the expense side of the equation or get to a point where price increases for its services outpace inflation. If I were running the firm, such would be my focus in 2023-24.
Technical Chart Reversal?
The temporary share price drop on the Q4 earnings release on February 9th and 10th, on somewhat disappointing results, caused the buy signal in my new formula design. The green arrow below points to the sharp price decline not confirmed by the Accumulation/Distribution Line. In fact, the ADL has risen dramatically, measured from the earnings release.
In January, the stock reached a tight equilibrium between buyers and sellers, represented by the ultra-low 21-day Average Directional Index reading circled in red. It appears the mid-February dump was aggressively purchased.
Lastly, On Balance Volume has been performing in a spectacular fashion over the course of the last year and a half (marked with an orange arrow), despite a price drop from $61 in November 2021. It's a little puzzling to me how so much buying daily has translated into a steep -40% quote slide. The regular advancing pattern in OBV is usually supportive of rising price.
Other indicators not pictured are also pointing to higher price in the near future. Overall, there have been several important positive/bullish divergences in my momentum indicators, arguing the February price decline is not sustainable. The rare find of a declining price in the face of strong momentum buying has caught my attention. My thinking is price will eventually turn, perhaps into a multi-month or multi-year advance.
Final Thoughts
The most interesting part of the investment setup for Forrester is its valuation has been cut nearly in half over the last 14 months. I figure a 10-year average valuation on the stats presented in this article would bring a 50% to 80% share price increase, assuming estimates of company growth are hit into 2024. In my opinion (researching and investing in stocks for 36 years), this stable business-result organization should not be priced at discounts to previous historical outcomes and the S&P 500 index in general.
I have placed a 12-month target price zone of $45 to $60 on shares (+25% to +65% for a total return), depending on the severity of a likely recession on results. What are the downside risks? In a deep recession and/or stock market crash scenario, I am modeling -20% to -30% price risk a year from now.
Either way, recession or not, I do expect Forrester Research to "outperform" the S&P 500 index over the next year or two. The entire U.S. equity market valuation remains very high historically vs. revenue statistics or total capitalization to GDP output in the economy. I rate Forrester Research, Inc. shares a Buy , especially on mild weakness in the coming weeks back to $33-$34.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
For further details see:
The Bottom Fishing Club: Noteworthy Forrester Research Reversal