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.