At times, value investing can feel like trading. While value investors should always purchase with the expectation that a stock will be a long-term holding, some stocks can be so volatile that they go from offering a margin of safety to offering a reasonable price and back again within the span of a few weeks! And as Warren Buffett told us when we met with him last year, volatility (shunned as an undesired property by the mainstream finance industry) is the friend of the value investor.
For example, earlier this month we discussed how LCA Vision (LCAV) may have appreciated to a conservative estimate of its intrinsic value. But just three weeks following that article, its price had fallen by 40%, offering investors the opportunity to buy back in at depressed values!
There is no question that the near-term outlook for this company is poor: this is not a great time to be selling expensive, elective services to battered consumers, who are focused on paying down debt, saving money, and securing jobs. But this company has the ability to survive, with a strong net cash position and positive cash flow from operations through the first two quarters of this year.
And from a long-term business perspective, we have a company selling for $80 million that earned a combined operating income of $120 million in the three years that preceded this recession. While economic conditions are not likely to allow a return to those profit levels any time soon, the bleak near-term outlook is just the sort of stuff value investments are made from.
In a so-called "efficient market", it's hard to believe that stock prices can fluctuate so wildly. But as Joel Greenblatt notes in his book, stock prices do fluctuate enormously even within the same year. If investors can accurately determine that a company is trading for a discount to its intrinsic value, this volatility offers opportunities for excellent returns, sometimes within short periods of time.
Disclosure: Author has a long position in shares of LCAV