Heading into 2020, Alpha Pro Tech (NYSE:APT) was a sleepy nano-cap of which few investors had ever heard. APT stock had spent the last three years trading right around $3.50. Shares, in fact, declined 2% between the beginning of 2017 and the end of 2019.
There was a decent value case for the stock. APT traded at about 15x 2019 earnings per share. There was cash on the balance sheet, and no debt.
But earnings declined 17% in 2019. Revenue growth was basically zero. APT stock might have been cheap, but there were plenty of reasons why.
Then the coronavirus panic hit. Investors realized that APT’s protective mask business could benefit. The stock gained 38.6% on Jan. 21 — on volume 350x what it had been the session before. A little over a month later, APT stock closed above $25. At that point, it had rallied over 600%.
A good chunk of those gains have faded. But at Friday’s close above $10, APT stock still has more than tripled so far in 2020. Even that’s too much.
The Long View
Successful investors need to take the long view. That’s important in any market — but it’s particularly important in volatile times like these.
The need for a long-term focus usually gets emphasized by those advising investors not to panic. It’s advice I myself have given of late.
Remember that stocks are based on the value of their future earnings — all of their future earnings. There’s going to be a short-term hit to profits for many, and likely most, companies. But that hit for a company like Nvidia (NASDAQ:NVDA) (to pick just one) does not justify the 30% or even 40% haircuts many quality stocks have seen. It doesn’t even come close.
The converse holds too. A short-term boost to earnings doesn’t materially change the total value of earnings — or suggest that a stock should triple, as has APT.
We’ve seen too many investors in this market focus too intently on the short term — in both directions. They’ve sold off good long-term stocks based on temporary worries. And they’ve bid up speculative plays based on sales and profit increases that simply aren’t going to last that long — and may not be that large to begin with.
APT Stock Has Run Too Far
Alpha Pro Tech is a great example of that trend. Again, coming into 2020, the market value of APT stock was about $45 million. It’s now roughly $100 million higher.
But the company itself has updated investors on orders for its N-95 respirator. As of Mar. 11, the company had booked $22.6 million in respirator orders since Jan. 27. Its face shield product added another $1.6 million.
That’s a little over $24 million in orders. In 2019, Alpha Pro Tech had gross margins of 36.4%. Even assuming pricing power improves that near-term figure, the company is seeing a roughly $10 million short-term increase in gross profit.
APT stock has added ten times that much in market value. And while orders may stay elevated for some time, the company doesn’t expect to fill existing orders until the third quarter. In the meantime, giants like Honeywell (NYSE:HON) and 3M (NYSE:MMM) are ramping their own production levels as fast as they can.
Even with a sharp pullback in the stock in recent weeks, APT stock still is pricing in years of incremental growth driven by the coronavirus. Such growth seems unlikely. The long-term benefit to Alpha Pro Tech simply isn’t what investors continue to price in.
In fact, even insiders see the stock as overvalued. The company’s largest shareholder sold 350,000 shares on Feb. 28. Chief executive officer Lloyd Hoffman dumped over $7 million worth — and now holds only 1,000 shares.
Insider buying and selling isn’t always predictive. But APT executives have exited huge positions as soon as they can. They, too, understand what a fleeting boost to revenue Alpha Pro Tech is receiving at the moment.
We’ve Seen This Story Before
We’ve seen this same story play out with APT stock before. In 2014, amid an Ebola outbreak, shares went from a little over $2 to $10 in a matter of weeks. Within months, the gains were gone.
It’s not just Alpha Pro Tech, either. As I detailed earlier this month, protective gear manufacturer Lakeland Industries (NASDAQ:LAKE) saw the exact same pattern play out in 2014. The same is true for Allied Health Products (NASDAQ:AHPI), which has been literally the best stock in the market so far in 2020.
Those companies all are real businesses. They will receive a short-term bump from the coronavirus response. But the key word there is “short term.” Again, investors need to take the long view — and not just in terms of stocks they want to buy, but those they should avoid.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.