Presley Ann/Getty Images Entertainment When evaluating any respective value play, we like to look at the company’s balance sheet, its valuation, and its profitability. In saying this, the valuation of a beaten-down company only really takes on extra importance when the company is making money and debt is under control. Moreover, timing a value play is of utmost importance. The reason being is that when one is essentially investing against the grain, there always remains a strong probability that the stock will remain out of favor for quite a period of time. Many value investors and teachers recommend doubling down on value plays when playing the long game. Others view this as an opportunity cost.
Take a technical chart of SmileDirectClub, Inc. ( SDC ) (Oral care direct to consumer company), for example. Shares continue to make lower lows and are currently in a battle to take out their 50-day moving average. As we can see from the chart, shares at this time last year were trading well above $10 a share so close to 80% of the company’s market cap has been literally wiped out in the space of just over 12 months. Now being also a chartist, I believe that every known fundamental has been incorporated into SDC’s share-price action on the technical chart. There is nothing I know or the biggest SDC bull (non-insider) knows that the market does not know.
To SDC bulls, this downturn would potentially be an excellent buying opportunity given the huge roadway for growth in markets the company has not tapped yet. This is the real calling card for this stock in that it has treated more than 1.5 million patients already with its products and services. Furthermore, management has already moved on its initial marketing plans in order to try and improve profitability . Suffice it to say, the evidence is certainly there that this initial success can be potentially rolled out in multiple jurisdictions. Smile Direct trying to confirm a long term bottom (Stockcharts) I am not smart enough, however, to know if SDC will indeed realize its potential in the years to come. This author has an opposite viewpoint and more power to him but I need to delve into what the technicals are telling me at this moment in time.
For one, SmileDirectClub remains unprofitable. Operating profit came in a -$84 million in the most recent third quarter which led to a free cash flow print of -$64 million. The net change in cash in the quarter was -$69 million. Suffice it to say, it is not necessarily the fact that SmileDirectClub is not cash flow positive but rather the fact that the market cannot see (as of yet) a clear line of sight to this trend changing. Analysts who cover SDC, for example, believe that revenues will not surpass $1 billion under 2025. Remember, top-line sales hit $750 million in 2019. Therefore, given that elevated capital management will continue to be put to use in order to grow the business, bottom-line profitability will most likely remain subdued for many years to come.
Furthermore, short interest at well over 31% is a worrying trend. What one must remember here is that the risk/reward set up for the short seller is usually not as attractive (Depending on the initial price of the short) as being on the other side of the trade. Suffice it to say, short-sellers in numbers are not taking into account the possibility of a short squeeze here. When a firm’s short interest rises above 10% for whatever reason, we usually give it a pass.
Furthermore, the most recent insider trading occurred in August of last year when a 10% owner liquidated 500,000 shares at around the $5.30 mark. If indeed, SDC is a fantastic opportunity close to its 52-week lows, insiders should be showing the way with some meaningful purchases. To date, it has not been happening.
Long-term debt came in at $733 million at the end of the third quarter. This key line-item almost doubled in the first quarter from a $393 million number in Q4. Although this debt has not been hurting the stock much recently by means of interest expense, the piper always needs to be paid. At present, SDC’s liabilities to equity ratio has moved to 3.56 which is a trend the traditional value investor will certainly not be enamored with.
Therefore, to sum up, the first step for SDC is to beat the normalized EPS estimate of -$0.27 per share in the upcoming Q4 quarterly earnings […]
source SmileDirectClub: Prove Me Wrong Starting With Q4 Numbers
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