Wednesday, October 26, 2011

The Rise Of Parlux

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


MuniDude said...

This stock definitely required an iron stomach. I held on by focusing on the fundamentals and trying to distance myself from the day to day moves as much as possible. Calculating a conservative liquidation value also helped to quantify the likely downside so you weren't only focused on large moves in the stock.

Vitor Hugo said...

What about Perfumania's due diligence occurring right now? Deadline is this Friday..

You dont want to factor that in on your analysis?


Geoff Rocca said...

What attracted me to this stock was its status as a net-net; cash, receivables, and inventory minus total debt was larger than the market cap. At the current price, this is no longer the case, so I agree with you that the easy money has already been made.

Anonymous said...

The stock has been at similar levels many times this year. The fundamentals have not deteriorated, and if anything there is a catalyst for higher value realization in the near term. Why sell now vs. 6 months ago?

Saj Karsan said...

Hi Anon and Hugo,

To me, as much as a catalyst represents opportunity, it represents risk as well. Considering what's available (in terms of other companies), I have no interest in taking this risk.

As I said in the article though, this stock may still be undervalued, so I don't necessarily disagree with your decision to keep it.

Anonymous said...

I kept it. In fact, it was 20% of my portfolio.

I'm going to be a pretty happy camper come Monday, I believe.

Saj Karsan said...

Congrats, Anon! I guess it'll be close to 40% of your portfolio now