Volatility Offering Opportunity

In March of 2009, panic in the market led to an enormous number of value opportunities. Believers in market efficiency would be hard-pressed to justify some of the depressed valuations prevalent in the market at that time. Some companies have already posted tremendous gains in the four months that have passed. One such example is Spartan Motors (SPAR), designer and manufacturer of heavy-duty vehicle chassis.

The auto industry is clearly going through a tremendous slump, but investors went overboard in punishing the valuations of many of these stocks. Since hitting its low in March, the stock has already quadrupled. But how was an investor to know that SPAR was undervalued?

The company traded for just $75 million in March, but had cash of $14 million, receivables of $76 million, and inventory of $87 million, for a total of $177 million. Meanwhile, the company had total liabilites of just $90 million, for a difference of $87 million. In other words, the company could be purchased for its inventory, with its fixed assets, R&D, and customer relationships thrown in for free. For a company that has remained profitable throughout this downturn (including 2008 operating income of $69 million), this represented a tremendous bargain.

While most companies have recovered from their lows in March, many have not. Fifty-two week low lists continue to show investors which stocks are out of favour. Of course, not all out-of-favour stocks offer value, but the current environment still offers plenty of upside to those willing to make the effort to uncover the diamonds in the rough.

Disclosure: None