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Saj Karsan
Saj Karsan
Articles (5983) 

Key Tronic: A high P/E ratio Stock That Was Still Extremely Undervalued

January 28, 2010 | About:

Key Tronic (NASDAQ:KTCC) is a company that has come up a few times on this site, and has been a member of the Stock Ideas page for quite a while. A few months ago, it traded at a discount to its net current assets despite being a profitable company. Two months ago, it was discussed as a stock that could only go up, due to the fact that downside risks were minimal compared to upside potential.

Yesterday, investors hit pay dirt, as the stock showed a 20+% increase over the previous day's close following the company's quarterly results. This brings the stock's return to almost 400% over the last year. In a relatively short period of time, the stock went from a Ben Graham net-net to trading at a premium to its book value, meriting placement on the Value In Action page.

Could investors have foreseen the fact that the company would beat earnings estimates by 5 cents per share, which would subsequently blast the share price to a level not seen since mid-2007? Possibly, but that's not how value investors make money. When the share price would rise and under what circumstances was not really known. What was apparent here is that the market was not properly valuing the company.

First, investors were offered the opportunity to purchase the company's inventory and accounts receivable at a discount, with the rest of the company's assets thrown in for free. But this was not a company bleeding cash, either. The company had been profitable for 22 consecutive quarters! Furthermore, future earnings were not subject to US taxes, as discussed here. Finally, the company had a flexible cost structure, allowing it to scale down expenses should revenues decline.

Learning about value investments of the past can help the investor uncover what might be today's value investments. Key Tronic shows us that even stocks that trade with what appear to be high P/E ratios can still be extremely undervalued!

Disclosure: Author has a long position in shares of KTCC

Saj Karsan


About the author:

Saj Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

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