Often, the market overreacts to news and stock prices plunge. Such was the case last week when two reliable growth stocks got hammered after it released news that didn’t sit well with the market. Those two companies were Savaria (TSX:SIS) and Aritzia (TSX:ATZ).
On Tuesday, Savaria announced preliminary fourth-quarter results that failed to impress. On the same day, Aritzia announced a secondary offering. Aritzia dropped around 8% on the news, while Savaria closed out the week down 12%. The question now becomes, were the drops overdone?
Savaria’s reduces guidance
Let’s start with Savaria. The company announced preliminary fourth-quarter and year-end results. Although revenue is expected to come in above guidance, adjusted earnings before interest, taxes, depreciation and amortization (EBIDTA) will come up short at approximately $40 million for the year.
Margin decompression is never good. However, it is important to note that Savaria has been making several acquisitions over the past number of years. Achieving synergies is not always an exact science and the company has hit a bump in the road. As a result, the company not only expects to come up short in 2018, but it also guided down for 2019. It now expects revenue of $385 to $400 million and adjusted EBITDA between $55 to $60 million.
This is by no means doom and gloom. It still represents growth of 40%+ over full-year 2018. As a result of recent weakness, it is trading at 18 time forward earnings and at a price-to-earnings (P/E) to growth (PEG) ratio of 0.67. A PEG under one signifies that the company is undervalued.
Aritzia’s share offering
Aritzia’s shares were halted on the news of a $330 million secondary offering of subordinate voting shares. A point of clarification: there are not new shares and Aritzia receives no proceeds from the offering. What happened? Berkshire Partners, a key backer of the company, decided to cash in and dispose of its stake.
A series of underwriters agree to purchase around 19 million shares at an average price of $16.90 per share. Likewise, Aritzia jumped in on the action and agreed to purchase 6.3 million shares for cancellation. The latter is actually good news for shareholders.
It isn’t surprising that Aritzia’s shares dropped on the news. The stock was trading at 18$ prior to the announcement. Although it will take some time for the market to digest these shares, it will no doubt rebound. Remember, no additional shares were issued by the company and it is buying back six million.
Much like Savaria, Aritzia is trading at a cheap forward P/E of 17.46 and at a PEG ratio below one given the company’s 25% expected growth rate.
Both are examples of noise trading. That is, trades that are being influenced by sentiment rather than fact-based financials. I’m not denying the news is negative in the short term, but Aritzia and Savaria are both great long-term plays. The market simply decided to provide investors with a great opportunity. Act now: it won’t last long.
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Fool contributor mlitalien has no position in any of the stocks mentioned.