It's been quite a while since I've penned an article with investment ideas -- for good reason. Investment ideas are a function of market behavior and performance. The higher a market climbs, the smaller the pool becomes of worthwhile ideas.
That being said, there are interesting names out there, today. Most of them tend to be on the smaller side, because small does not attract Wall Street attention. These ideas are not market darlings, today. Actually, they are rather hated by the market.
There's little value in optimism in the stock market. Money flows into optimistic situations and out of pessimistic ones, which leads me to conclude that the likelihood of finding bargains in widely favored stocks is incredibly low.
On the other hand, pessimism causes investors to abandon assets irrespective of underlying value. The need (or desire) to get out of a losing position almost always exceeds the value creation for those who are patient. Famed investor Benjamin Graham described this mentality when he observed that the market is a voting machine in the short term, but a weighing machine in the long term.
Micro-cap LeapFrog Enterprises (LF) came to my attention last week when Jim Rogers' Ariel Investments disclosed a position. Anyone with young children is probably aware of LeapFrog and their educational toys. A year ago, LeapFrog was trading for close to $7 a share. Today the shares trade for around $0.90, or a market cap of $65 million. The balance sheet is impeccable: zero debt and nearly $90 million in cash. Tangible book value is around $2.75 per share.
The income state is the issue, obviously. LeapFrog lost $27 million during the three months to June 30 2015. Clearly, losses of this magnitude are not sustainable and explain why the stock is trading for less than cash on the balance sheet.
As you might imagine, the key to LeapFrog is a business transformation, which is precisely what CEO John Barbour is working on. So the bet here is on management -- as it often is. However, what I like is that LeapFrog is a high-quality brand that is known to all parents who have young children (and many who don't). My wife bought my one-year-old son, Noah, a LeapFrog toy and he absolutely loves it. More importantly, I can tell it's a quality product.
In this instance, I would say that management has the wind at their backs given the quality balance sheet, exceptional brand recognition, and customer loyalty. The work now is to position LeapFrog to excel once again in the highly competitive toy market.
Just as raising a child requires commitment and unwavering patience, those same qualifications will serve investors well in selecting LeapFrog. The payoff won't be as rewarding as watching your children grow, but making some money is not a bad second prize.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider LF to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.