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