Project Description

Special Situation: Short Alpha Pro Tech

Ticker: APT

February 27, 2020

Price: $18.50

Market Cap: $238MM

Enterprise Value: $232MM

Price Target: $5.00 (-73%)

Overview

Alpha Pro Tech is a nice little United States based company that manufactures disposable protective apparel, building supply, and infection control products.

Over the past 10 years, revenue has grown at a 3.7% CAGR while net income has grown at a 8.8% rate.

Over the past 10 years, it has traded at a median EV/EBITDA multiple of 10.8x and a EV/Sales multiple of 0.7x.

However, every once in a while there is a health scare, be it SARS in 2003, H1N1 in 2009, and Ebola in 2014.

During these periods, APT’s stock goes nuts as shown below.

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Source: Ycharts

We are in one of those periods due to fears of Coronavirus and the stockpiling of infection control masks which APT sells.

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Source: Alpha Pro Tech

So while APT typically (10 year median) sells for 10.8x EBITDA, it is currently trading at 33.9x.

On a EV/Revenue basis, it is trading at 5.0x versus it’s 0.7x typical multiple.

Price Performance In Previous Health Crises

SARS (2003)

In 2003, sales were up 24% due to SARS. Net of SARS revenue sales were up 7.7%. The stock rallied from $0.88 on March 13, 2003 to $3.09 on April 25, 2003, +251%!!

It then dropped by 32% to $2.10 by April 30, 2003. Eventually it bottomed at $1.33 on August 8, 2003, 4 months after its peak, down 57%.

H1N1 (2009)

On March 12, 2009 (prior to the H1N1 scare), the stock traded at $0.78. It eventually peaked to $7.16 on October 23, 2009, up 818% over a 7 month period.

It then bottomed at $3.96 on December 21, 2009, down 44% over a two month period.

Ebola (2014)

On October 6, 2014 (prior to the Ebola scare), the stock traded at $3.15.It peaked on October 13, 2014 at $10.05. +219%.

It then closed at $2.49 on December 30, 2014 (two months later), down 75%.

Coronavirus (2020)

On January 17, 2020 (prior to the Coronavirus scare), the stock traded at $3.50. Today (February 26, 2020), it is up 429% and trades at $18.50.

Where will the stock peak?

I think the best way to estimate where APT will peak is to look at the previous health scares and analyze previous  EV/Revenue multiples.

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Based on the above data, APT should have peaked at a multiple between 2.4x and 4.0x. It is currently trading at 5.0x revenue.

Based on prior peak EV/Revenue multiples, APT should have peaked at $15. It’s currently trading at $18.50.

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What is the downside (upside)?

Once previous health scares have been resolved, APT, on average,  has historically fallen by 59% over 4.3 months as shown below.

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Another way to think about the downside is to analyze what EV/Revenue multiple APT troughed at following the resolution of previous health scares.

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Based on the above data, APT has historically troughed following resolution of previous health scares at a multiple between 0.8x and 2.2x historically.

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As such, APT’s share price should trough between $3 and $9, if historical trends remain intact as shown above.

Given the above analysis, I think there is significant downside over the next 4-6 months for APT, and I recommend shorting the stock. My price target is $5, implying 73% downside.

Shorting Strategy

First, APT is currently “hard to borrow”.

That means your brokerage firm may not have shares that you can borrow to short. To establish my initial position, I entered my order several times and was ultimately able to get it filled in after hours trading.

If your brokerage firm does have shares available, you will likely have to pay a high rate of interest to borrow shares. Currently the cost to borrow APT to short it is 40% (!!!) on an annualized basis. While this may seem like an incredibly high cost to pay, I believe it is worthwhile given that I expect the stock to trade down significantly in the near term. Historically, APT has troughed within 4 months of its peak (I believe we are at or very near a peak). Therefore, I will only have to pay 13.3% interest over my expected holding period (4 months / 12 months = 33%, 33% x 40% = 13.3%.

Therefore, my expected return declines from 73% to 60%.

Second, I’m going to start with a half short position in APT.

While I’m highly confident that the stock will fall dramatically over the next 4-6 months, I also have an appreciation for the words of John Maynard Keynes, “The market can stay irrational longer you can stay solvent.”

I think it’s possible that APT could continue to rise, and if it does, I will add to my short position at higher prices.

Disclosure:

Rich Howe, owner of Stock Spin-off Investing (“SSOI”), is short APT. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.