Market Overview

Tees, Clubs, and Stocks: Three Passions of Every Golfer

With the 93rd PGA Championship just around the corner, investors are looking forward to taking a break from the insane market volatility and watching some pros on the greens. On August 8-14, Johns Creek, Georgia will be full of quiet spectators carefully watching the performances of Tiger Woods, John Rollins, and Craig Stevens, among others.

What opportunities exist for investors looking for cheap stocks amid the giant swings in the market? Are there any opportunities for value investors or risk-averse stock traders? When searching for publicly traded golf companies, only a few major players come to the top of the list.

Callaway Golf (NYSE: ELY), for example, is one of the largest golf-focused companies trading on the exchanges, but its shares have been hit in the recent market swoons, with the stock already down over 30% since the beginning of the year. Likewise, major contracts for the company have failed to come through at 100% payout, due in part, to declining golf viewership. Tiger Woods' sex scandal, and subsequent loss of sponsorships, has also hurt the sport.

An interesting company, however, surfaces in an investors' search in the golfing sector: Adam's Golf (NASDAQ: ADGF). Adam's Golf designs, assembles, and distributes golf clubs and accessories. The products are sold worldwide at retailers, specialty shops, and at major golf events such as the PGA Tour. With a low market capitalization of $44.6 million, Adam's Golf is an interesting stock which may pique golf enthusiasts' interests.

The company's balance sheet has been growing since the market crash in 2008. Cash on hand has decreased from $13 million to $7 million, but receivables and inventories have grown significantly. The company has also increased capital expenditures to purchase property and equipment, which may be a hint at future plans for expansion.

The company has also been able to shrink its liabilities. Payables slightly increased whereas current liabilities decreased from $11 million to $8 million. Shareholders' equity has also grown by increasing paid-in capital and retained earnings. The firm's accounting policies also hint at efficiency and are favorable for Adam's Golf investors.

Given the innate volatility of the golf accessory market, inventories are of a paramount concern for companies. Adam's Golf has been increasing its inventories in order to offer customers the widest range of products, and has also been streamlining its debt collection from clients. Accordingly, it has significantly conducted due diligence on all of its customers, so that its allowance for doubtful accounts is maintained efficiently.

Adam's Golf uses the First-In-First-Out (FIFO) method to account for inventory turnover. This method is better suited for accurately measuring the movement of goods. The method also lends company profits in an inflationary environment just by holding on to inventory. Therefore, Adam's Golf's inventory is able to help its balance sheet grow as a function of the current economic environment.

Adam's Golf is also an attractive stock versus comparable companies. The stock trades at a cheaper rate than its competitors using several measures, including price/earnings, price/book, and price/sales. Due to the market downturn in 2008, revenue growth and operating margins were worse than competitors' performances over the last two years.

In contrast, the company has achieved superior return on equity over its competitors – about 15.6% versus the 9.6% average – indicating that growth has recently been rebounding. Lastly, the company does not have much leverage, with a debt/equity ratio of nearly 0. Its competitors hold an average ratio of 4, and in contrast to Adam's Golf, may be in serious trouble if equity market volatility continues and punishes firms with high leverage.

Considering the company's accounting policies and its financial position when compared to its closest competitors, Adam's Golf presents a case worth delving into. Investors attempting to find a small-cap equity that is undervalued and maintains a fundamentally sound balance sheet should consider the NASDAQ listed security. Especially given the recent equity market pullback, Adam's Golf may currently have an appropriate entry point for investors.

ACTION ITEMS:

Bullish View:
Traders who believe that Adam's Golf is an appropriate long investment might want to consider the following trades:

  • For a small-cap company, the accounting standards are stringent and clearly depict its year-over-year growth.
  • Adam's Golf is undervalued compared to direct competitors, despite having better return on equity.
  • The PGA Tour is currently in full swing, and the company's sales are most likely going to be increasing during the time of year.

Bearish:
Traders who believe that Adam's Golf is more suited for a short play may consider an alternate position:

  • The company's stock is not as liquid as some other companies' stocks.
  • Other companies were not affected by the 2008 market crash as badly as Adam's Golf.
  • Adam's Golf is a small cap equity, and may not be appropriate for certain investors' risk appetite.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas Small Cap Analysis Markets Trading Ideas Best of Benzinga

 

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