As markets have plunged, Lakeland Industries (NASDAQ:LAKE) stock has soared. Traders have been betting that the coronavirus from China will boost sales of the company’s protective gear — and drive demand for Lakeland Industries stock.
Some rally makes some sense. Lakeland Industries should see higher demand for items like masks and coveralls. 3M (NYSE:MMM) stock has been boosted by its mask business, and that’s a company with a market capitalization of $88 billion. LAKE has a market value of just $135 million at the moment.
At the same time, however, we’ve been here before. Lakeland Industries has been a hot play on past pandemics. Each time, the rally fizzled. That’s already begun to happen here — and I expect that will continue.
The Case for LAKE
It’s worth pointing out that the buying in Lakeland Industries stock isn’t a purely speculative frenzy. There’s a nice business here.
Lakeland was founded nearly 40 years ago. It’s generated over $100 million in revenue over its last four quarters. Management remains incentivized. Chairman Christopher Ryan, who stepped down as chief executive officer just last month, is Lakeland’s largest shareholder.
The business is profitable. The balance sheet is clean. Even before the recent rally, Lakeland Industries stock had more than doubled from 2013 lows.
As far as coronavirus stocks go, then, this is a different story. Even the volatile trading in LAKE has been nothing like the froth that has accompanied former nano-cap Alpha Pro Tech (NYSEMKT:APT), whose shares have risen almost 400% so far this year.
This isn’t Co-Diagnostics (NASDAQ:CODX), whose market capitalization was $30 million at the start of the year — and is $300 million now based purely on speculative hopes for its coronavirus test. It’s not Inovio Pharmaceuticals (NASDAQ:INO), another money-losing biotech that has soared.
Rather, LAKE heading into 2020 was an intriguing, and maybe even sensible, nano-cap value play. But for value plays, price particularly matters. Up 55% year-to-date, Lakeland Industries stock certainly is more expensive.
We’ve Been Here Before
And history suggests LAKE is more expensive than it should be. The stock has seen similar moves in the past.
Starting in September 2014, the Ebola virus spread in West Africa. It would be the largest such Ebola epidemic in history. Then, as now, buyers flocked to Lakeland Industries stock, figuring the company would benefit from higher sales. Between late September and mid-October, Lakeland Industries stock quadrupled. By the end of that year, all but the initial one-day, 30% gain had been given back.
The following year, avian flu worries again spiked the stock. In mid-September, LAKE rallied 42% in three sessions. The gains were gone by January.
To be sure, the outbreaks did provide some help to sales. In the fourth quarter of fiscal 2015, for instance, Ebola-related demand led sales to increase 24% excluding the impact from the company’s decision to exit the Brazilian market. Revenue increased 14% the following quarter.
But those benefits were one-time boosts. They will be again. This is a different case from, say, Zoom Video Communications (NASDAQ:ZM). That video conferencing provider could have a long-term benefit from coronavirus fears, as customers rush to try the product and then stick around once fears have calmed.
A similar case holds for Costco Wholesale (NASDAQ:COST), which I recommended just this week. New customers looking to stock up will buy memberships — and presumably some of them will keep those memberships, boosting long-term profits.
Lakeland Industries Stock Looks Too Expensive
The coronavirus outbreak will be material to Lakeland Industries stock. Again, the company has a market capitalization of $135 million. It well could see tens of millions of dollars in incremental sales of coveralls, masks and other protective gear.
But gross margins are below 40%. Even an incremental $50 million in revenue — almost half the trailing 12-month total — adds less than $20 million in gross profit. Deduct commissions, expenses needed to ramp production and taxes, and the steep boost in demand adds maybe $10 million in net earnings.
That’s enough to bump a company this size. But not a 50%-plus gain. Investors have figured that out before. I expect they will do so again.
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.