Stock Jumps 317% in Two Weeks And Why You Should Avoid It… Unless You Want to Get Burned

Since news that the first case of Ebola was confirmed in the US, shares of Lakeland Industries (NASDAQ: LAKE) have risen by 317.27% in two weeks (Sep 30-Oct 13). The company manufactures and sells hazmat suits used by healthcare workers to prevent contact with diseases.

lake-chart Chart: ChartNexus

This is by every definition what you call a “hot stock”. Now if you were to jump in blindly, without any due diligence, just because this particular stock has returned over 317% in a couple of weeks, you could get burned.

When news of this stock broke, I was naturally curious and decided to delve a bit deeper and do a quick check on Lakeland Industries. I used a method we teach in the Investment Quadrant called the “30-second filter”.

The 30-second filter analyses five items in a company’s financial performance:

  • Revenue
  • Margins
  • Operating cash flow
  • ROE
  • Debt

If a company can’t even pass this basic filter, we leave it aside and we move on to the next investment idea; there’s no point even analysing further. This saves us precious time and effort. But if a stock does pass the filter, we then run it through a full analysis using the Investment Quadrant to decide if it’s a good investment or not.

So let’s see what I pulled out for Lakeland Industries.

lake-table

lake-table2

lake-chart3Source: Morningstar.com

From the data above, you can tell that…

  • Revenue has been stagnant for the last ten years. This company has no growth.
  • Gross margins have been consistent but net margins have been falling with the last three years negative
  • Operating cash flow has been erratic and negative five years out of ten
  • ROE is poor and negative the last three years
  • Debt levels are low which is good

So just from a quick glance at Lakeland’s financial performance and ratios, besides its low debt levels, it’s easy to tell that this company hasn’t been doing well at all the last ten years.

So why then would the stock jump by 317% in just two weeks?

This is where the irrationality of the stock market comes in. With Ebola hitting US shores and fears that the virus might spread further, the US state department ordered 160,000 hazmat suits. The interesting thing is that the US state department has only put out a bid for the 160,000 suits — they have yet to be fulfilled by Lakeland or anyone else at all!

In other words, Lakeland hasn’t actually secured any contract yet and the fundamental value of its business remains the same, but its market cap has more than quadrupled simply based on speculation that it will be a big winner in this Ebola outbreak.

Sure enough, after hitting a peak of $29 on Oct 13, the stock has fallen by over 4o% over the last week to $16.98.

lake-chart2 Chart: ChartNexus

Right now, no one can predict which way this stock is going to go. From what we’ve seen, it’s pretty clear Lakeland’s business fundamentals do not support its sky-high stock price right now and we could already be seeing it come down to where it came from.

At the same time, I wouldn’t be surprised if Lakeland goes on another rally if fear of the ebola outbreak escalates. But even if it does, sooner or later the bubble is going to pop if there are no fundamentals to support the valuation of the stock and when the speculation eventually runs out.

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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