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Alex Morris
Alex Morris

Callaway Plummets: Stick with Cash & Quality

March 15, 2011 | About:

Tuesday was yet another tough day for stocks, with the DJIA and S&P 500 both off a bit more than 1% at the time of writing. While the board is covered in red, there is one particular stock that jumps off the page at me: Callaway Golf ( ELY). On the day, ELY is down nearly 9%, without any SEC filings or news to note. However, a quick look at the 10-K for this year might partially explain the decline.

In fiscal year 2010, Callaway Golf had $967.7 million in sales, a 2% increase YOY. However, of that total, $164.8 million (17%) is attributed to Japan, the second biggest region by sales for the company. On top of that, Japan has been the one bright spot in Callaway’s portfolio since 2008, simply by maintaining sales in a tough economic environment. The other big regions, the United States and Europe, have seen sales decline by 15.5% and 32%, respectively.

The odd thing here is that the stock was flat yesterday (up 0.26%), when the picture was just as dire for anything that relates to the future of ELY in Japan. While today’s decline couldn’t have been predicted, an astute investor might have caught this anomaly and acted on the inefficiency (apparently I’m not that person, because I didn’t even think of it at the time). Regardless, the overall picture for Callaway Golf continues to darken; continued struggles in the United States and Europe have caused sales to plummet, and has led to stiff competition in a fight for any of the equipment purchases being made (which are few and far between). The earthquake/tsunami in Japan only adds to their worries, and brings up the possibility of a third disappointing year at ELY since the start of the economic crisis.

As a long term investor with a primary focus on avoiding a permanent loss of capital, I would be in two places today: 1) quality stocks with a strong balance sheet (names like JNJ, MSFT, PEP, PG, etc), and 2) cash (in order to load up on the first option in the event of continued declines). As noted by Robert Schiller in a CNBC interview on Monday, the last big earthquake in Japan (Kobe, 1995) led to a “huge worldwide stock market drop” the following week. Buy companies that you are happy to own regardless of short term drops in the market, and load up on those same names if Mr. Market gets pessimistic.

About the author:

Alex Morris
I am a recent graduate from the University of Florida; I received a finance degree as well as a real estate minor during my time at UF. I will be sitting for Level 1 of the CFA Exam in December 2011, as well as for my series 65 exam. I am a value investor, plain and simple.

Rating: 3.8/5 (10 votes)


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