Seize the Profits

 | Aug 20, 2014 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

wag

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rst

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cvs

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wmt

For many people, being perceived as an opportunist typically carried with it a bad connotation. But in investing, seizing an opportunity is the name of the game. Being greedy is indeed a favorable trait among investors in the sense that profiting from turmoil provides a huge edge in the marketplace.

That's why when Walgreen (WAG) recently dismissed CFO Wade Miquelon amid a billion-dollar forecasting error in its Medicare-related business, shares dropped nearly 15%. That blunder may have created an opportunity to own WAG shares at a decent entry point. Shares now trade around $62, down from a 52-week high near $77. Walgreen and CVS Caremark (CVS) essentially own the corner drugstore market. The prolific locations of these businesses make them very convenient and accessible to Americans who want to avoid the hassle of a big-box retail pharmacy. One can be in and out of a Walgreen quicker than it would take to find a parking spot at Wal-Mart (WMT).

Rosetta Stone (RST) is another interesting name that has been shunned by Mr. Market. Shares now trade below $9 per share, valuing the company at less than $200 million. It has no debt and more than $2 per share in cash on its balance sheet. But the opportunity has nothing to do with being a statistically cheap security.

Rosetta is the known name in the language-learning-technology market. No other platform is as successful as Rosetta Stone. The value of speaking or understanding multiple languages is a key asset to many businesses and governments today. RST technology offers the best platform to do that.

The market seems to be focused on the consumer side of Rosetta Stone's business, but the hidden gem is in its enterprise and education (E&E) business, which is growing very rapidly. RST is undergoing a transformation to realign the business toward the E&E market, which is growing and profitable. Alone, E&E generated nearly $4 million in earnings before interest, taxes, depreciation and amortization during the second quarter. For 2014, RST is guiding adjusted EBITDA of between $18 million and $22 million against an enterprise value of $145 million. Full years 2015 and 2016 could see significant expansion in EBITDA as the E&E segment accelerates.

When you find turmoil or uncertainty coupled with a business that can grow over time, the potential outcome can be very favorable. Market history is littered with examples of it.

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