Monday, August 16, 2010

How To Get Investment Returns In A Down Market

On Tuesday of last week, market negativity was pushing most stocks down. Quietly, however, Addvantage Technologies (AEY) released results that pushed its share price up 10% during the day. This price move also resulted in a 60% return over the last 8 months, allowing investors the opportunity to profit from this mis-pricing of the security despite a flat overall market over the same time frame.

Eight months ago, Addvantage Technologies (AEY) traded at a 30+% discount to its book value. This is despite the fact that the company was profitable throughout the worst of the economic crisis.

For many companies, book value is not a meaningful guide to its worth. For example, the book value of manufacturing equipment may not correlate well with the actual value of that equipment, and so basing a company's value on its book value when it has a large proportion of such assets becomes problematic.

But for Addvantage, most of the company's assets are in the form of inventory, which it sells (and thus turns into cash) over two or three quarters. The company buys its inventory from manufacturers; it is not counted on to innovate with new products, nor does it have large fixed assets with uncertain values (as would a manufacturer). As such, its book value is very much a decent base from which to value the company, as its inventory is mostly sold with a profit over the course of a few months.

Now that shares of Addvantage have appreciated, its outlook as an investment opportunity is more uncertain. But shares of other companies in situations similar to those of Addvantage eight months ago are out there!

Disclosure: Author has a long position in shares of AEY

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