There is usually a great deal of risk when you're trolling for smaller companies. Yet a lot of that volatility is created because the entities just aren't being followed by the analytical masses. To a trained Hidden Gems gemologist that's also the scent of opportunity.
Consider a company by the name of LaCrosse Footwear
Why did the market get so excited about a company that had posted operating losses during each of the four previous years? Was a petty deal to deliver less than $5 million worth of boots to the country's armed forces over the next two quarters really that impressive?
See, this is exactly why I love these companies that fly under the radar. For starters, yes, for a company such as LaCrosse, with just $95.7 million in sales last year, the publicized military deal was significant. Yet after the first two quarters of 2004 came and went, with sales inching up by just 10% and earnings coming in at only $0.14 a share, investors figured that these boots were made for walking -- right out the door.
So the stock that treaded as high as $11 as a story stock could have been bought months later at yesterday's close of $6.99. Investors counted two quarters, ignored a company that was reversing a declining sales trend, and moved on. They probably couldn't have been troubled to consider that while the top line had suffered in the years prior to 2004, gross margins were now climbing for the fourth straight year. It was probably too much to ask to pull up the second quarter's 10-Q filing in which the company emphasized that this was a seasonal business with the first half of the year typically being its weakest.
So when the company shocked the market last night, earning $0.64 a share on a 15% spike in sales during its September quarter, investors learned that there are two sides to every story stock. How often can you say that a stock is trading at just 11 times trailing quarter earnings? Did I mention that the stock was trading yesterday at what was essentially its book value?
Sure, LaCrosse is no Nike
And I'm sure you're going to find folks who go overboard and miss the point again. They may turn right back around and buy into the stock figuring that if they multiply $0.64 by four to arrive at some ludicrous annualized earnings target, the stock should be trading at $30. Oh, please. That defies the very convention of the seasonality that they missed the first time around. The stock was a steal at $7, a bargain at $8, but buyer beware if it heads into the teens. The market's got suckers at both ends of the buy and sell lines. Now you know why I love companies like these.
Longtime Fool contributor Rick Munarriz is not a LaCrosse investor -- and not much of a lacrosse player if you get down to it. He does not own shares in any of the companies mentioned in this story.