Long Idea: Acme United

Acme United (ACU) is a multi-national supplier of cutting and measuring products to a diverse group of users, from schools to offices to industrial companies. The company trades for just $30 million, but has earned more than $15 million in net income over the last four years and has a current P/E under 10.

Usually, a company trading at such a discount to its recent earnings is going through a downturn of either a cyclical or secular nature. Acme is no exception in this regard, as sales and income are down as a result of the recession. But there is no reason to believe Acme's lower earnings are anything more than cyclical; the company has managed to stay quite profitable, and generates such strong returns that its low P/E is surprising. Consider the company's return on equity over the last several years:

Even in a down year, the company has still earned an ROE above 11%! Despite the fact that the long-term earnings picture for this company looks excellent, the stock dropped 15% after the last quarterly earnings report, as the numbers came in below expectations. As we've discussed before, Wall Street's focus on the short-term allows long-term investors opportunities to profit.

Management also appears to believe in the long-term future of the company, as it has spent almost $3.5 million buying back stock in the last few quarters, during a time when most companies have shut down their buyback programs due to a lack of confidence. Management collectively owns almost 25% of the company, so their interests are mostly aligned with those of shareholders.

When companies with high returns go on sale due to cyclical issues, long-term investors are offered the chance to profit. Acme appears to offer just such an opportunity.

Disclosure: None