Acorn International: Surprising Short-Term Growth

Even though I have studied the market's history, followed many companies for years, and back-tested companies' historical values against their historical stock prices, I am still amazed at how quickly prices can change in the market. Even though I have seen it occur countless times in the past, material price changes occur so frequently and with such speed such that they can still shock me. Consider Acorn International (ATV), an infomercial marketer.

Less than one month ago, we discussed ATV as a potential value investment. It traded for less than its cash on hand, and did not have a controlling shareholder, meaning shareholders could force a payout if need be. Indeed, discussion in the latest quarterly conference call suggested shareholders were becoming impatient and were getting closer to demanding the cash be paid out. But even if management decided to keep the cash within the company, investors still appeared to be buying a business at a substantial discount, as the company has been close to breaking even despite the recession.

The stock hovered around $4 per share for most of the last month. Then, last Thursday, Roth Capital Partners initiated coverage, and estimated the stock's value at $8 per share. Over the course of the next few days, the stock rose by over 50%, and spent parts of yesterday above $6 per share. At that price, the stock no longer traded at a discount to its net current assets, and no longer traded at a substantial discount to a conservatively estimated intrinsic value, offering investors the opportunity to lock in tremendous gains in a very short period.

Sometimes, it can take years or months for a stock to return to its intrinsic value. Other times, like in this case, it can occur over the course of just a few days. In either case, the lesson is the same. Buy businesses trading at discounts to their conservatively estimated intrinsic values, and you protect your downside risk and increase your upside potential, no matter what the period of time involved.

Disclosure: None

Comments

[tc1:]

Thank you for this, Saj. I waited to buy a bunch of shares of ATV around $3.90 - $3.99 on a major dip after it had been trading in the mid-$4 range in July-Aug. ATV then plunged further into the low $3 range.

Yes, the speed with which it zoomed back up has been quite remarkable, not unusual with these Chinese emerging stocks this summer-fall.

And yes, i sold most of my shares (tried to sell all my shares) at the $6.05 level, not trusting the "spike"-like action of the stockprice.

It's always so helpful to lock in those big sudden gains and then see if one can re-buy later at a lower price.

Oct 06 02:05 PM

[wirelesstec...:]

"....At that price, the stock no longer traded at a discount to its net current assets, and no longer traded at a substantial discount to a conservatively estimated intrinsic value..."

What you said is not correct from the valuation point of view. ATV is not trading at negative enterprise value anymore. It is trading substantial discount to its current assets. The business valuation of ATV should worth much more than that. If you are only using enterprise value to evaluate under value and over value, there are only two stocks under this constraint in whole US market. I scanned whole US market stocks with market value above $100M. ACTS and ADPT are only two stocks which trade under zero enterprise value now. ACTS has about $33M negative value and ADPT has about $2M. ATV is still under value since the enterprise valuation is only $40M.

In 2008, ATV has a bad year. It lost $.7 per share in 2008. The company has turned around in 2009. ATV will have a profit of $.5 per share this year. ATV has more than $4 cash and no debt. The book value is more than $8. ATV's cash position will be $5 per share by the end of 2009. ATV at current price still looks very cheap. The fair value should be at least $8.5.

The short term and intermediate technical indicators have turned bullish on ATV. Here is the link:

www.stockta.com/cgi-bi...

From the chart, you should hold and enjoy for the ride, not to sell. I see the stock will reach $8 before the end of 2009. Good luck with your trading.

Oct 07 12:46 AM