Monitoring a Marketer

 | Oct 08, 2013 | 5:00 PM EDT
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As a value investor, I am wired to look closer at stocks that are trading at all-time or new yearly lows. After all, price paid ultimately determines whatever future return an investor can expect to attain. You make money in stocks during the buying process; you don't realize it until the sale is completed.

Despite my attraction to beaten-down prices, the maxim "you get what you pay for" also rings true in the stock market. The market is not dumb and sometimes low prices will forever remain low prices. On the other hand, the most incredible investment opportunities occur when a company or the market in general is experiencing a period of maximum pessimism. Remember Apple (AAPL) when it was trading for less than $10? How about when Wells Fargo (WFC) was trading at $9 and Whole Foods (WFI) for less than $5?

Blyth (BTH) is small-cap consumer goods company that sells health products, candles, and decorative household products. The company is not a retailer or wholesaler but a direct-to-consumer marketer. Think of businesses such as Avon (AVP), The Pampered Chef, Mary Kay Cosmetics, and you get the idea behind Blyth.

The shares are currently trading around $12.50, down from a two-year high of $45. Business has slowed for Blyth. The shares tumbled after the company announced that second-quarter revenues tanked, losing 32%, and the company lost $0.08 during the quarter. Blyth is responding by restructuring it business by focusing on a direct-selling approach. The company is investing heavily in technology and enhancing its distribution system.

In the short run, the restructuring will lead to greater costs, but Blyth has a strong enough balance sheet to support this action -- and then some. The company sits on $150 million in cash and around $130 million in short-term and long-term debt. Yet even at the current juncture, the company is generating around $30 million a year in free cash flow. At a 12x free cash flow multiple, the company is worth $360 million against $200 million today. Again, free cash flow will likely be materially weaker in 2013 as a result of the restructuring efforts, but Blyth offers significant upside recovery potential not only because of the future cash flows but also the limited availability of shares.

Insiders control more than 42% of the common stock. Another 25% or so of the shares are held among several investors and institutions. Of what remains in the public float, more than 50% has been sold short. Blyth is set up for the mother of all short squeezes.

More so, an investor by the name of John Rochon, who is the chairman and CEO of CVSL (CVSL), recently confirmed on a conference call that he has been buying up shares of Blyth in the open market. If you look him up, he has had success with investments that include Mary Kay and Avon. From the looks of things, Rochon doesn't seem finished with building a stake.

This is a company worth keeping an eye on. It's a decent business that is currently undergoing a turnaround at the peak of maximum pessimism. Future cash flow growth along with shorts trying to cover more than 50% of the public float creates a recovery potential that could far exceed 200%.

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