It is an open secret that markets act as a voting machine in the short-term and tend to overreact to bad news, thus creating buying opportunities in the process. Not all instances of falling share prices are worth buying into, but fundamentally solid stocks such as Adept Technology Inc. (NASDAQ: ADEP) and Aeropostale Inc. (NYSE: ARO) are good examples to make the most of this irrational market behavior.
Adept Technology makes and sells industrial and mobile robots for semiconductor, warehouse, logistics, food and small parts flexible manufacturing markets worldwide. In March, the stock was on its 52-week high level, but has lost over 50 percent within a matter of a month. Meanwhile, the company's third quarter results also did not help in stopping the slide.
Adept Technology's quarterly revenues grew a healthy 38.5 percent to $15.1 million. At 45.7 percent, the company's third quarter gross margin was up 300 basis points from the same period last year. The company actually managed to turn in a small profit of $265,000 compared to a loss of $1.7 million in the third quarter of previous financial year. The improvement was not just limited to the latest quarter. In fact, the company negated a loss of $10 million during the nine months.
None of this warrants a massive correction seen in the stock. On the contrary, the company business is stabilizing and the management is trying to accelerate sales growth further. Although a forward price earnings ratio of 42 does not inspire confidence, Adept Technology is a turnaround play and the multiples can fall into place pretty quickly if the company continues to deliver.
Last year was pretty bad for retail players and it was no different for Aeropostale which lost nearly 79 percent of its value. This specialty retailer of casual apparel and accessories has swung to losses as sales continue to decline. In the latest quarter ended March 3, 2014, the company's top line dipped nearly 13 percent to $395.9 million; however, net loss increased to $76.8 million.
To be fair with the company management, it is not sitting idle. The company has undertaken a comprehensive cost reduction program as part of its ongoing turnaround plan. The company already has a store closure program underway, but plans to eliminate 100 corporate positions too. The company has decided to close 125 mall-based P.S. from Aeropostale stores by the end of 2014. All these strategic moves are expected to generate $30-$35 million in annualized pre-tax savings. Analysts believe the genuine steps could turnaround the company which has a lot of novelty value left in its brands. That's no guarantee of success but it helps that Topeka Capital Markets, Telsey Advisory Group, and Mizuho have 'hold' or 'neutral' rating on the stock.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.