EmergingGrowth.com, a leading digital financial media company, Reports on Alco Stores (NASDAQ: ALCS), Target (NYSE: TGT) and Walmart (NYSE: WMT).
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Alco Stores (NASDAQ: ALCO), EmergingGrowth.com Stock Pick
ALCO Stores (NASDAQ: ALCS) is not exactly a household name, unless you happen to live in a small city in the Midwest. The discount retailer operates a similar business model as more mainstream competitors like Target (NYSE: TGT) and Walmart (NYSE: WMT), offering a wide variety of household and consumer goods at discount prices from 216 stores across the American Midwest. But its stores are not as expansive as those of its discount retail competitors, and neither is its overall business: ALCO’s market cap of just $29.7 million pales in comparison to the multi-billion dollar market caps of Target and Walmart. As a regional rather than global retailer, ALCO is simply never going to beat its competitors in terms of scale or pricing, and instead has employed a strategy of targeting communities that lack other large discount retailers.
This strategy has nonetheless been sufficient for modest but sustained business growth. The company opened four new stores during fiscal year 2012, and had seen operating revenue steadily grow for three straight quarters before slipping slightly in the fourth quarter of 2012. Despite their dominance in the discount retail space, Target and Walmart nonetheless leave enough room for small, regional retailers like ALCO to be profitable.
But what makes ALCO inviting as an investment is its outrageously low valuation, in combination with a fundamentally solid--if not particularly sexy--business model. The stock most recently closed at $9.10 for a total market cap of $29.7 million. This puts its price-to-book ratio at only 0.34, an outrageously low figure. That is to say, the value of all the company’s assets minus its liabilities is still about three times higher than the total value that the “market” has assigned to the company.
Looking at ALCO Stores’ balance sheet, most of these assets are held as inventory, which presumably will be sold for more than a third of its listed value. This sort of low price-to-book valuation typically signals a company on the verge of collapse, but there is no indication that this is the case with ALCO Stores. The balance sheet is solid and does not feature an alarming debt burden, and revenue has been fairly consistent. Assuming that ALCO continues to operate a steady business, then its market cap (and stock price) will surely start to catch up to the book value of its assets. Keep an eye on the company’s fundamentals, and don’t hesitate to sell if its core business plan starts to falter. But for now, this seems to be a case where the market has simply overlooked a small but solid company, and individual investors can profit from its gross undervaluation.
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