Wednesday, May 26, 2010

What's Old Is New Again

Stock price volatility benefits the value investor. Stocks that are especially volatile can provide investors with entry points that provide a margin of safety, and exit prices that reward the investor for "putting up with" the volatility. One stock exhibiting such tendencies is Acorn International (ATV), a distributor and marketer of hundreds of products through infomercials, catalogs and other channels.

Long-time readers of this site may recognize this company already. Last year, the company traded at a substantial discount to its net current assets. When business conditions stabilized, the stock price drove right through its net current asset value, and shareholders were further rewarded as the company paid out a portion of its cash reserves in a special dividend. The stock proceeded to trade at a range that made it difficult to tell if the company was under- or over-valued, allowing for an exit point for value investors.

Last week, however, as the company's first quarter results came in below expectations, the stock once again plunged to a level far below its net current asset value, to lows not seen since November of 2008. But while the company trades for under $100 million, it holds current assets of $194 million ($120 million of which is cash) against liabilities of just $35 million.

Often, a company trading at this kind of discount to its current assets is losing money hand over fist. But Acorn expects to pull in net income of over $12 million this year, even after a first quarter result that was below expectations. As the company has now worked through much of its older inventory, it can now focus on selling items with better margins and returns. With so many products to choose from, the company has an inherent advantage (compared to a one-product company, for example) in being able to choose to promote the most successful products.

As an added bonus to investors, most of the cash the company holds is held in Chinese yuan, which may appreciate relative to the US dollar in the near future, as many are reporting. But while the short-term is inherently difficult to predict, over the long-term the Chinese yuan should definitely appreciate relative to the US dollar due to the high productivity gains Chinese workers are expected to experience relative to their US counterparts (due to the low starting point of the Chinese worker).

This stock is not for the faint of heart. Its price can fluctuate severely on a day-to-day, week-to-week or month-to-month period. As such, the mainstream finance industry would tag this stock as risky and leave it at that. But for value investors, price volatility is not the same as risk. To the value investor, the value of this company does not change nearly as dramatically as the company's price, offering opportunities to buy when the company trades at a discount.

Disclosure: Author has a long position in shares of ATV

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.


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