While the current market volatility can be unnerving, there is a potential silver lining in value land, as potential bargains are being revealed. I still believe the volatility will persist, and it may not be the time to go on a buying spree, but it is time to at least hone your watch list.
Mine continues to grow as the market punishes the smaller names, to a greater extent than the broad market. Case in point, the Russell 2000 Index and Russell Microcap Index are down 20.2% and 21.8%, respectively, since Dec. 1, putting them both in bear market territory.
The damage is much worse in many individual names that have picked the worst time to put up disappointing quarterly numbers, or are otherwise viewed as a "dog with fleas." It's nice when you can identify one of these, which besides appearing cheap, may also have a potential catalyst.
One of those names, Rofin-Sinar Technologies (RSTI), recently appeared on my Double Net screen, which identifies stocks trading at between one and two times net current asset value. This laser-solutions company is certainly not a household name, but that comes with the territory.
The stock has been trounced the past three months, down 34%. While the company is profitable, and enjoys high-single-digit profit margins, revenues have gone nowhere the past several years. Last week, the stock was hammered upon the release of first-quarter earnings. While earnings met expectations, revenue was disappointing, and the shares dropped more than 10%.
Despite the troubled revenue picture, the balance sheet remains solid. The company ended the first quarter with $177 million, or $6.25 per share, in cash and short-term investments, and just $23 million in debt. On the long-term asset side of the balance sheet, the company owns six manufacturing facilities, comprising 450,000 square feet.
The shares currently trade very close to book value, 13.5 times trailing earnings, and 11 times 2017 consensus estimates.
The potential catalyst (and I emphasize the word potential), is that there's been some activist investor activity that may help right the ship. SilverArrow Capital, which currently owns 9.4% of the company, is not happy with performance, and is pushing for change. Specifically, the activist has cited concerns about corporate governance, subpar gross margins, lack of transparency in reporting, declining revenue, and inflated spending on research and development.
Last month, SilverArrow nominated three candidates for Rofin-Sinar's board of directors, and submitted five stockholder proposals focused on improving corporate governance. What we have here, is the makings of proxy contest.
Time will tell if Silver Arrow will be successful in its efforts, but sometimes turning up the heat in these situations can yield change, and ultimately improve both a company and the stock price.