When was the last time you found a stock that is valued today at substantially less than the cash it owns? Read On.
I mentioned yesterday that market sentiment is pivotal to the share price of the microcap stock. People can fall in love with a stock that is too expensive for its progress and yet don’t blink an eye for its lofty valuation but when a stock is out of favour and has by and large been ditched by investors for possible failures in the past, they can become ridiculously priced.
Today I highlight one of these stocks that belongs to the latter camp. It is Yowie, that chocolate confectionary business with Yowie characters that caught the market’s interest following the success of Kinder Surprise. I had been involved in this company in 2015 – it doubled its price from 60c to $1.20 within the first half of 2015 when it was making entry into the US global retail chains. But as with most microcaps, it is never a straight line and you have to sell when the momentum fizzles out. And it did, as the business went through major hurdles.
Today YOW is trading at just a market cap of A$15m but has a cash balance of US$18.75m, an annual revenue of US17m although yet to be profitable, it has projected to be EBITDA positive this CY19. Yet YOW is trading at just 7c against a cash per share backing of 12c, hence a 42% discount to its cash. Incredible! And 2 years ago, when its annual revenues were just US9.6m or just higher than half of where it is now, its market cap was then at $104m and was trading at 49.5c!
While YOW is still a risky play as the competition is keen and margins are tight, the business did a lot of right things to restructure, reduce costs and better position its brand in the global marketplace.. it also has a strong presence in Woolworths now besides Target, 7 Eleven and a number of other major retail outlets in the US. On the balance of risk-reward however, the $15m market cap considerably undervalues its intrinsic value and its global market progress.
To me, YOW deserves a small position but because of low liquidity, it requires patience. YOW reflects a stock that should be sold when it was then trading at >$150m while lacking business progress and should be bought when it has started to tick most boxes, unloved, forgotten and trading at just 10% of its valuation when everyone were so excited. It demonstrates the merit of selling when it is overvalued for its progress and buying back when it starts to show value and improvement in its business. If I had held the stock from 2015, I would never ever recover from here.
The YOW valuation just shows the incredible disconnect in value in the universe of stocks – perhaps it reflects the lack of sophistication amongst retail investors in determining appropriate valuation of stocks.
