When the market goes down, correlations seem to increase, pushing the prices of even good businesses down. While this provides opportunities to the value investor, it also tests his patience; even companies that are doing well can get hammered in the market! Bucking this trend of late has been Parlux, which recently saw several thousand shares trade within striking distance of its net current asset value. As such, Parlux is the latest stock to join this site's Value In Action page, providing some lessons in the process:
1) Focus on price vs value, don't worry about catalysts
Parlux traded as low as $0.60/share in 2009 and $1.70 in 2010, which was a massive discount to its net current assets. Some outstanding warrant provisions made it unlikely that a buyout would occur, thus removing a potential catalyst. But had investors waited until those provisions expired (this is still a few months away), they would have missed most of the big move: the stock has recently traded near $4.00!
2) Be courageous in the face of a falling market
The best times to buy this stock were not when everyone was optimistic. At some points, the stock appeared to be in free fall. But it is the investors who bought when everyone else was selling that made the biggest killing. It may seem counter-intuitive, but the low-risk investor is usually he who buys when everyone else is selling!
3) Management matters
Even though this company always had decent brands, it didn't always have a CEO that could keep expenses in line with revenues. Previous management appeared to be looking for home-runs, spending marketing dollars in the hope/expectation that revenues would respond. Since the return of Fred Purches, however, management has been much more disciplined, conserving assets rather than spending them. This has resulted in a dramatically improved bottom-line despite lower sales.
Parlux was one of the longest serving members of this site's Stock Ideas page. As such, it has been discussed a few times since it made its debut here in August of 2009. While the company may still be undervalued, the safest returns have now been made. Considering the current availability of a great number of other stocks that are currently in a similar position to what Parlux faced in 2009, the gains taken out of this investment may incur better returns elsewhere.
Disclosure: No position