When I first bought Charles & Colvard (CTHR, Financial), it sold moissanite gemstones, a man-made diamond substitute. The stock traded at a substantial discount to the value of its current assets. In a worst case scenario, it should have been liquidated and we would have received something in the neighborhood of our initial purchase price.
Today, Charles & Colvard markets directly to consumers and its finished jewelry items are available on Amazon, eBay, Jet and in nearly all Helzberg Diamonds brick-and-mortar stores. In addition, they can be bought on the Charles & Colvard.com website, which is branded, beautiful and primarily targets the millennial audience.
The company is rapidly approaching break-even. Amazingly, it has a sound balance sheet with net cash and at the current price available for a discount to book value. Book value consists of cash, receivables and inventory.
Catalyst
Recently, traffic to charlesandcolvar.com has really been surging. For an e-commerce site that’s a key piece of information. From Local SEO:
"Two out of every three people make a decision based on their search, while one in three made a purchase."
The future of Charles & Colvard
The first and the fourt quarters are traditionally strong quarters for Charles & Colvard. Year over year, the company is improving. Margins have improved much, primarily because the company is mostly selling Forever One (its top line product), and its inventory now consists primarily of Forever One with a higher turnover rate.
We can expect margins to continue to trend in the direction of Forever One margins (the widest margins). If website traffic outpaced growth of the company’s own website, that would be a very important margin driver.
However, the most important thing is general revenue growth. One reason the market may not appreciate the strides Charles & Colvard is making here is due to a huge one-time inventory sale of lower grade inventory.
If you adjust for that one-time sale, results have been remarkable considering the company pivoted away from a push-marketing model to distributors to a pull-marketing model, creating demand at the consumer level.
This being a tetonic shift in approach, it is almost a miracle Charles & Colvard navigated the transition so well. Insiders have been buying all through the turnaround:
Given the recent traffic surge to the company's highest margin portal, nationwide brick-and-mortar distribution and solid balance sheet, this looks like a terrific opportunity to acquire a low-risk (of permanent impairment of capital) GARP play.
Disclosure: Author is long CTHR.
