While the cash for clunkers program did provide consumers with a temporary incentive to open their wallets, consumer spending is expected to remain tepid over the next few months. Consumer confidence is low, unemployment continues to rise, and consumers are increasingly using their incomes to pay down debt.
As a result, the market has punished many stocks that sell leisurely consumer goods. But conditions like these tend not to persist for long. In the meantime, investors are offered the opportunity to buy such companies for what appear to be tremendous discounts to their intrinsic values.
Consider Adams Golf (ADGF), designer and distributor of golf clubs. The company has lost money in three of the last four quarters, as customer inventory reductions and reduced consumer demand has caused revenue to drop significantly. But is the company in such dire straights as to warrant its current market valuation? You be the judge.
ADGF trades for just $19 million, but has current assets of $50 million versus liabilities of $14 million, which includes just $5 million of debt. Due to Mr. Market's obsession with current earnings, ADGF offers investors a chance to purchase a cash flow positive (referring to second quarter cash flow from operations) going concern at a discount to its liquid assets.
It could be a while before consumer spending returns to levels where Adams Golf can once again generate net income of several million dollars per year. But with the stock price at this level, investors don't need that to take place in order to make money. As the company aligns its cost structure to the lower level of demand, it will likely return to profitability in the near future, rewarding investors who focus on the long term and who cover their downside risk by purchasing liquid assets with a healthy margin of safety.
Disclosure: Author has a long position in shares of ADGF