Alpha Pro Tech: Buy For A Long-Term Hold Or Short-Term Trading

Summary

• Alpha Pro Tech stock has strong asset backing well in excess of the current share price, and positive earnings and cash flows.
• This offers an opportunity to buy for a long-term hold for modest capital gains, with the possibility of super profits in the event of a future pandemic.
• There is also an opportunity for short-term gains, buying low and selling high, with small-cap liquidity risk minimized by ongoing share repurchases.

Alpha Pro Tech: Investment Thesis

In my June 21, 2022 article, "Alpha Pro Tech: Time To Buy", I concluded Alpha Pro Tech (NYSE:APT) the shares were a buy at the post market price of $4.00 on June 13, 2022. Subsequently the share price reached a high of $4.99 on Aug. 5, 2022 and a low of $3.88 on Sep. 20, 2022. Following that low the shares reached $4.39 on Feb. 7, 2023 and are now $4.08 at close on Apr. 4, 2023.

This is a good and well run little family business. The balance sheet is strong, with no debt. A dividend is not paid and there appears to be no intention to commence dividend payments. Therefore, the only avenue for gain is through share price increases. Idle cash will not drive share price gains so share repurchases are essential to reduce share count and thus potentially increase market price per share. The current share price of $4.08 is below the value of net assets (shareholders' equity) per the balance sheet. A significant proportion of net assets is in the form of liquid assets such as cash and receivables, and other net current assets including inventories, able to be converted to cash. There appears to be an opportunity here to buy either for a long-term hold or for short-term trading gains, or a combination of both.

Alpha Pro Tech: A potential long-term hold:

• Further disease pandemics - A compelling reason for buying for a long term hold is the possibility of further disease pandemics. Table 1 below, from my Mar. 16, 2020 article, "Alpha Pro Tech: The 'Greater Fool' Theory Is Alive And Well", shows three disease outbreaks, previous to COVID-19, which caused earnings and share price to soar higher before settling back to normal levels.

Table 1 - APT Income Statement - Selected Years 2002 To 2015

• A sale or takeover of the business - A 100 percent takeover acquisition would likely need to be a "friendly" takeover to succeed due to the number of shares held by insiders, including founders, who might be committed to continuing to operate the business. However, it is believed the principal parties are or soon will be reaching an age at which they might wish to retire from active involvement. As discussed below, the market cap is currently well below the book value and a sale might be a means of realizing full value.

Alpha Pro Tech: A potential short-term trading stock:

I generally only write about mature stocks, mostly dividend paying, and suitable for a long-term hold providing income and capital growth. However, Alpha Pro Tech has features that likely make it suitable for seeking short term trading gains, with a high degree of safety. Reasons as follows:

• Stock Liquidity - There is a danger with small cap companies a trader could be left with no one to buy their shares, at any price. This is highly unlikely with Alpha pro Tech. The company has ~$16 million in cash, sufficient to buy back over 30% of issued shares at current share price. The company is actively repurchasing shares, and continually approving new allocations for repurchases as per Table 2 below.

Table 2

• Asset backing in excess of share price - Alpha Pro Tech's balance sheet at end of Fy-2022 shows shareholder's equity of $4.98 is well above the share price of $4.08 at market close on Apr. 4, 2023. In addition, the shares have liquid and current net asset backing of $4.11 per share, also above the current share price. The liquid and current net assets are in the form of cash $1.33, receivables $0.57 and inventory and other net working capital of $2.21 per share. The balance of net asset backing of $0.87 reflected in the balance sheet is comprised of tangible productive assets, including investment in the Indian production facilities. There is no debt.
• The company continues to be profitable - Earnings for FY-2022 were $0.26 per share and the TTM P/E ratio is 16.15 at current share price. Earnings will continue to grow the asset backing or be used to repurchase additional shares.
• The company is generating positive cash flows - For FY-2022, Cash generated from operations and employee share issues was $4.4 million. Of this, $0.5 million was used for capital expenditures and $3.9 million for share repurchases. It is noteworthy the whole of the repurchase of 910,700 shares in FY-2022, per Table 2 above, was funded out of current operating cash flows. This left the $16 million cash balance at end of FY-2021 unchanged at end of FY-2022.
• There has been sufficient volatility in the share price to provide opportunities to buy low and sell high:

Figure 1

Fig. 1 above shows there have been a number of opportunities over the last twelve months to buy APT stock at or around the $4 mark and sell at a higher price.

Summary and Conclusions

Alpha Pro Tech stock appears to offer opportunities both as a long-term hold or for short-term trading. There has been sufficient volatility in the share price to indicate the possibility of purchasing shares at or around $4.00 and either holding long-term or selling at a higher share price within a reasonably short period of time, with the process possibly being repeated. Whether buying with the intent of a long-term hold or short-term gain there also appears to be the possibility of switching between these strategies depending on future events. The stock should likely remain relatively liquid due to ongoing share repurchases, despite a limited float, but any reduction or cessation of share repurchases would be a matter for concern.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.