Investors have a tendency to look at stock charts after a stock has significantly increased in value and think the could have made that big return if they had just known about the opportunity at the time. In reality it doesn’t work that way. Most stocks that are near their lows or out of favor are “cheap for a reason”. Here is an example of one, Body Central (BODY), a former high flying growth stock that is now trading at one-third its peak valuation and more importantly less than enterprise to sales ratio of 40% and cash equal to 30% of the market cap. Similar stocks have been acquired at 2X the current multiple.
When stocks are out of favor and priced inexpensively, investors tend to focus on the reasons they are out of favor. When they are in favor and priced fully, investors tend to focus on the reasons they are priced that way. In truth, most of the time those reasons are always present, it is just that investors tend to focus on just the negative when stocks are declining and focus on just the positve when they are increasig.
Here is our take on the reasons BODY is cheap and some thoughts on what the reasons could be when it isn’t cheap any more….
I have spent almost my entire career in the investment industry, over 27 years of it anyway, as an analyst focused almost entirely on “value” stocks. Most aspiring value investors are intellectually attracted to the investment style because it makes sense intuitively. Buy enough “safe” cheap stocks and thanks to mean reversion or shareholder activism or just plain time, your results should outperform the market. Investors see successful investment results ex-post and believe in “hindsight” they too could have made that investment. However, I believe that, “if you could have you would have.” What most investors fail to understand is that the value stocks that have done well where most likely “cheap for a reason” at the time the potential gains were the greatest and there was no clear reason or “catalyst” to buy the stock at that time. As others have said, “valuation can be its own catalyst.” What follows is an analysis of Body Central (BODY), a stock that is “cheap for a reason” and has no “visible catalyst.” Anyone that is still reading this article after that last sentence, thank you for your support!