Yesterday’s nearly 50% decline in Heely’s (HLYS) caught my eye. I remember their IPO back in December 2006, the closing price in their debut was $32.60. Their stock approached 40 by February and has been on a bit of a downward trend ever since. On Tuesday, August 7th, 2007, their stock closed at $21.90. By the end of the following day, it was down to $11.42. Today, its trading for $10.56.
The market continues to puzzle me with stories like this. This company was clearly capitalizing off a fad and everyone knew it but, when the fad started to slow down, everyone started dumping and when the company predicted yesterday that growth for next year would only be in the 10-15% range (still pretty good if you ask me), their stock was more than halved. If you haven’t heard of Heely’s, you’ve likely seen their products. According to Reuter’s “approximately 98% of Heelys’ net sales were derived from the sale of its HEELYS-wheeled footwear”. Heely’s footware are those shoes that kids wear that look like regular tennis shoes, but actually have a retractable roller skate wheel embedded in the sole so they can zip around the street/school/mall etc. They are neat products, I have to admit, but you have to realize that they probably won’t be as popular as they were around the time of Heely’s IPO forever. The growth was likely to slow down at some point.
Fickleness in general doesn’t surprise me, folks buy fancy clothes and gadgets and want nothing to do with them a year later when they are no longer hip, but how do knowledgeable investors get so confused about the future of a company they are investing in? Surely not all of Heely’s stock holders were individual investors buying only on the fad. Waddell & Reed are listed as the largest institutional investor with 1.1 million shares held. Among the other large institutional owners, Fidelity, Citadel Investment Group, and Columbian Wanger Asset Management totaling another another 2 million+ shares between them. Close to 750 million dollars in market cap dissappeared with Heely’s declining stock price since inception. Was the company never worth a billion to begin with? Is it worth $285 million today? Its hard to say, but how could those huge institutions be so wrong?
I can’t help but look at Heely’s and feel as though it may be a buying opportunity at these levels. If they can pull off a dollar in earnings next year (down from the $1.95 consensus estimate for Fiscal Year 2008 that was predicted), they’ll still be trading with a P/E of around 10 at the current price levels. Take out the $2.55 they currently have in cash (according to Yahoo! Finance) and you see a P/E of 7.5 for next year with predicted 10-15% growth. That equates to a very attractive price to earnings-growth ratio. The company has zero debt and a strong brand. The barriers to entry aren’t huge but, given the predicted slowdown in demand, it seems rather unlikely to me that another player is going to try to enter this space.
More research is warranted for sure, but it seems like the decline in the stock price may be a bit overdone at these levels.
Just My Two Cents…
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