When most companies report poor results or show pessimism in their outlooks, their stocks will trade down for some period. However, there is a group of stocks that is likely to trade up (and sometimes significantly up) even when the news concerning it is bad. These are the deepest of the deep value stocks, whose prices are so low that they will often show stock returns even in the face of deteriorating operations. Acorn International (ATV) is an example of such a stock.
Five months ago, Acorn was discussed on this site as a potential value play, and it had remained on the Stock Ideas page ever since. It has traded down below $3.30 per share twice in the last five months, giving it a huge discount to its net current assets. Recently, however, the company has spent time near $5, offering investors the opportunity to sell at a price much closer to its net current assets.
Of course, the prices of certain stocks rise while others falls, but how is the investor supposed to know which ones are going to come out with the great results? Fortunately, the investor doesn't have to. Since the original article about Acorn five months ago, the company has come out with nothing but bad news:
- Quarterly results were lower than expected
- Expectations for the year were lowered
- More recently, the company's chairman and CEO resigned, suggesting the company may not be progressing well towards its current targets
Despite this, the stock has recently traded some 40% higher than the lows described above. This stock serves as an excellent lesson about the importance of paying a low price for an investment. If you buy a company when it's cheap (relative to its assets and/or earnings), you don't need strong performance to achieve superior results. When strong performance does occur, however, the results can be extraordinary.