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Exited HLYS For 11.92% Gain - Margin Of Safety Is No Longer Enough

|Includes: Heelys, Inc. (HLYS)

I closed out my HLYS position in the Value Stock Guide portfolio for a 11.92% gain, net of commissions. The stock was held for a little over 4 months.

More details about the transaction is on the site.

The purchase thesis for HLYS was its net-net valuation. Even while the business is struggling, the company's balance sheet is strong. The stock price has struggled but the market valuation was/is below the cash on hand. With no debt, the liquidation value of the company exceeded its market value when the stock was purchased.

Even today, the stock may still be considered undervalued. However, the margin of safety is much lower. As the stock approached my target sell price, it made sense to exit the position and redeploy the capital in other opportunities.

If you are still considering HLYS for its valuation, realize that the cash burn rate is quite high and the management has struggled to figure out a way of growing or stabilizing its business. Various safety issues around its wheeled footwear has not helped. While the management has blamed everything in sight, including the tsunami in Japan, the fact remains that the company has not been able to figure out a way out of its business decline.

Still, every stock is a buy at a low enough price, and HLYS was a buy when I purchased it. There is still a possibility that the company may be bought out for its cash, but with each passing day the possibility becomes less so. With the cash balance now eroding, it no longer fits my margin of safety requirement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Prior holding