Like many high-growth stocks, Volcom (NASDAQ:VLCM) has been volatile, wiping out at any hint of slowing growth. Its latest face-plant gives investors an opportunity to buy shares of a great company at a bargain price.
If you recall, when it reported its most recent quarterly results, Volcom may have increased sales and earnings by more than 40%, but the company's guidance spooked investors and its stock plunged. In the last month, it's down more than 40%.
A major customer, Pacific Sunwear (NASDAQ:PSUN), created potential difficulties for the company last year (nothing new there). Volcom was also affected by the "challenging" 2006 snow season and lower sales of its new footwear business. And of course, anybody who invests in retail stocks is already a little bit paranoid about how consumer spending will shake out.
Hit the half pipe
Holding stocks like Volcom and Zumiez (NASDAQ:ZUMZ) frequently brings the thrill of victory and the agony of defeat; both have suffered recently as investors reacted to tidings. A glance at Volcom's one-year chart tells quite a story.
Although the irony of a publicly traded company making such a big thing of its "youth against establishment" brand isn't lost on me, Volcom seems to lend plenty of authenticity to its brand mission. It shows understanding for the competitive nature of sports as well as the distinctive essence of the subculture itself (Volcom also produces music and films).
At a Wall Street conference this summer, CFO Doug Collier spoke about the many kids who are serious enough about the Volcom Stone to create murals in its honor, not to mention get Volcom Stone tattoos. Talk about feeling at one with a brand.
Although Zumiez, Pacific Sunwear, and Abercrombie & Fitch's (NYSE:ANF) Hollister all cater to skateboarders, surfers, and other board sports enthusiasts, the way Volcom delves into the soul of the subculture looks like a competitive advantage to me.
Cheap thrills
Given Volcom's recent wipeout, the stock actually looks reasonable for investors interested in growth and value. There are times when temporary stumbles can give bargain-seeking investors the best opportunities for dirt cheap dream stocks. Volcom is trading at 15 times 2008 earnings, even though it still believes 20% growth that year is achievable. It's also got a PEG ratio of just 0.6 at the moment, which signals a stock that's priced at bargain levels -- analysts expect it to grow 24% for the next five years.
We mustn't forget its strong balance sheet, either. Volcom now has more than $3 per share in cash and a small amount of debt. In addition, when it comes to managing its business, it shows impressive metrics. For example, its return on assets is 19%, its return on capital is 22.2%, and its return on equity is 23.4%. Compare that to the apparel, accessories, and luxury goods segment, which averages ROA of 7.3%, ROC of 10.3%, and ROE of 15.6%.
Of course, to continue its high growth, Volcom must rely on its brand being a real, solid trend and not a fad. For those who believe it's got staying power, its current valuation looks downright appealing for long-term investors who'd like to get a growth stock at a bargain.
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