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The best way to own a deep-value play lately has been to buy a value play -- and wait a week.
In the case of
, it actually took several months to complete that metamorphosis. But the bottom line is that this stock is a poster child for what is just not working on Wall Street right now.
This commercial printing firm -- and roll-up vehicle for Chairman Robert Burton -- was a raging value by most measures when I entered it back in May of this year. It remains so today. But arguing value in this market is a waste of pixels.
I picked up the shares when they were trading at just 0.3 times trailing sales and 2.6 times trailing earnings before interest, taxes, depreciation and amortization (EBITDA). It seemed like a bargain considering that tight cost controls were (and perhaps still are) squeezing out EBITDA increases of more than 15%. Revenue is also holding up reasonably well in this environment, eking out another 6% year-over-year gain last quarter.
It's no wonder insiders are betting heavily on their stock's ability to hold its ground. In the first four months of this year, seven executives and directors purchased nearly $4.3 million worth of their wilting shares at an average price of $13.33 a share.
Cenveo's stock actually did hold its ground well -- until September. This "value" stock lost a sickening 34% since the beginning of last month. I grudgingly took my lumps more than a week ago to help make good on my decision to raise the cash level on the "Recommended List" of my
newsletter up to 40%. I saved myself an added double-digit percentage loss by doing so.
But, lo and behold, into this abyss insiders have just pledged their faith again. Five of them just purchased shares of CVO worth more than $1.8 million at an average price of $7.49. Nonetheless, I stand by my decision to sell, and though I expect to be back in CVO again sometime in the future, that time is not now.
So how can I
be pounding the table to get back into this stock now that it is trading for just shy of 0.2 times trailing sales and 1.5 times trailing EBITDA? Because as ridiculous as Cenveo's discount appears, the increasingly dour outlook for the U.S. economy is forcing the realization that it could easily become even more ridiculous.
Falling to 0.15 times trailing sales or 1.2 times trailing EBITDA may seem a minor discount from here, but it would represent another 25% loss on this position. And I can't help but notice that even on the couple up days we've had over the past weeks, Cenveo still managed to lose a percent or two. The stock is simply way out of favor, and the rational safety net of a compelling valuation just does not seem enough to spur the demand for Cenveo that I originally expected.
This is not wholly irrational. I have already conceded that the sexy roll-up activity that generated spikes in Cenveo's stock as late as last year is not likely to resume anytime soon. It is also safe to assume that a slowing U.S. economy will cause headwinds to revenue growth in the coming year.
Even so, the low (and decreasing) valuation of these shares still seems overdone to me, and it is with consternation that I find myself shying away from this (still) seemingly attractive value play.
But I am. And I am because the economic problems evident now are obviously worse than they were even one month ago. That pushes back the likelihood of growth-spurring acquisitions even further than I had originally believed. The downturn could even make Burton finally miss his guided numbers -- something the conservative manager has not experienced.
Let's face it: The financial crisis we are in is unprecedented, and not at all over just because Congress is likely to pass that bloody bailout package.
" What used to be considered a "value" multiple appears to be declining as the pall over this market spreads. This is particularly true for shares of highly leveraged firms like Cenveo.
If Burton finally does miss numbers (or guides down full-year figures in the next conference call), it will not be a personal failing. Neither will be any increase in funding costs the next time he needs to refinance Cenveo's balance sheet.
While hindsight may show that my capitulation on Cenveo was horribly timed, my expectation of further economic declines and credit market disruptions makes non-action on this and other supposedly amazing value plays a logical call for all but those with at least a two-year
-- and no concern about potentially losing a quick 20%.
The declining definition of value, and the greater discount afforded leveraged firms, will absolutely end at some point. At that time, good old buy-and-hold investing will have its best chance in this generation of fast-money investors of making a comeback.
But I don't think that point is now.
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This article was written by Jonathan Moreland, whose newsletter, "TheStreet.com InsiderInsights," parses mounds of data on insider trades to find investable ideas.
At the time of publication, Moreland had no positions in the stocks mentioned, although holdings can change at any time.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;
to send him an email.