Undervalued securities are akin to a clearance sale. Just like the sale at retail stores is aimed at clearing old stock, a stock market sale squeezes out impatient shareholders setting the stage for a rally for the ones who decide to stay invested. Surprisingly, this phenomenon could hold back shares of solid companies such as Rentech, Inc. (NASDAQ: RTK) and Arctic Cat Inc. (NASDAQ: ACAT).
At the first glance, Rentech may not look very attractive. The company has a high debt capital structure and continues to have loss making operations. In terms of valuations too, the stock's valuation of a forward earnings ratio of 45 does not offer any hope. However, it is not a story that is captured by valuation metrics. The company is a turnaround play that is experiencing tremendous top line growth.
The company reported a 43 percent jump in full year top line for 2013 while trimming its losses to just $1.5 million from $14 million a year ago. This growth continued in the first quarter as well and the acquisition of New England Wood Pellet, announced earlier this month, will further add to the growth momentum. The $34.5 million acquisition in cash is immediately accretive to Rentech's wood fiber processing business. A great deal of these developments is not reflected in valuation figures as yet, but bullish analyst views are a great vote of confidence to the company's growth strategy. Analysts at Imperial Capital have reiterated their 'outperform' rating on the stock, while Feltl upgraded its rating to 'strong buy'.
Shares of Arctic Cat lost 13 percent over the last month after the company lowered its full year earnings guidance. The company expects unfavorable Canadian currency exchange to reduce net sales by nearly 1.5 percent. On ground, the company is a rather solid player which registered a 28.4 percent growth in revenues for the quarter ended March 31, 2014. This is a critical piece of information as the March quarter is usually the weakest quarter for this manufacturer of snowmobiles and recreational off-highway vehicles.
Its losses also reduced to $1.5 million during the quarter from $5.1 million in the same period a year ago. The recent fall is on account of adverse currency movement which can play out as the company expects, but there could be some positive surprises. In any case, there isn't much scope of going wrong with buying shares of a profitable, dividend paying company at a forward earnings multiple of 10. The situation is just too good to be true for value investors and a recovery might take place sooner than later.