What happened
Shares of protective equipment maker Alpha Pro Tech (APT -0.81%) fell a hefty 11.5% in the first half hour of trading on Aug 4. They made back some of those losses by 11 a.m. EDT but were still down by around 9%. The news that moved the market was earnings, but when you see the actual results, there's a disconnect. At least, until you look at a slightly bigger picture.
So what
Demand for Alpha Pro Tech's personal protective equipment skyrocketed year over year in the second quarter, with sales in the division jumping just over 280%. That was driven by the massive increase in demand for face masks and face shields that resulted from the spread of COVID-19. But even the company's building product division had a decent quarter, with sales up roughly 11%. All in, Alpha Pro Tech's top line increased 123% or so. Earnings, meanwhile, came in at $0.46 per share in the quarter, an increase of 475% compared with the same period in 2019. The company's cash balance increased to nearly $25 million from $6.5 million at the start of the year. That, coupled with a debt-free balance sheet, led management to give up a credit line that it hadn't tapped in a number of years. Basically, Alpha Pro Tech is a financially strong company that's hitting on all cylinders today.
Image source: Getty Images.
So why did investors dump the stock? The answer is much bigger than a single day, noting that the stock is up roughly 550% so far in 2020, even when you include today's drop. That's a massive run, with investors clearly viewing Alpha Pro Tech as a way to trade the healthcare supply-demand situation that's being driven by COVID-19. Expectations are obviously very high. After such a large price advance, meanwhile, it's hardly surprising to think that investors would want to book some profits. That's true, even though the company continues to have a sizable backlog of orders and plans to further increase its safety-product production capacity.
Now what
At this point, after such a huge year-to-date gain, most long-term investors are probably best off staying on the sidelines here. A lot of good news has been priced into the stock. And it might not be such a bad idea to take some off the table, either, if you have been lucky enough to own the shares. The need for safety equipment is likely to be higher than it has been historically, but a positive change in the battle against COVID-19 (such as a successful and widely available vaccine) could change investor sentiment here and send the shares sharply lower. That's the trouble with story stocks: When the story changes, things can get ugly, fast.