Alpha Pro Tech and the value of optionality

Today I noticed a former holding of mine Alpha Pro Tech (APT) gained about 30% in just two days on very strong volumes. So, what happened that caused the stock to spike like this?

It’s dangerous to talk about “the reasons” for a stock (or the stock market) going up or down. I find it funny to see the market headlines on Google Finance or Yahoo change during a trading day. For example: a story might first explain a rising market by claiming that something Bernanke said at Jackson Hole caused the market to rise, but at the end of the day they might explain a decline of the S&P by saying investors lost confidence because he did not say something. The earlier headline and story are forgotten and the fitting headline is remembered and recorded as ‘fact’. Some poker players call this type of reasoning ‘results oriented thinking’ and it is one reason why newspapers and online news can be dangerous. It is often better to know nothing at all than to be misinformed.

Back to APT though, sorry for the digression. 🙂 So, while we can’t know for sure what caused the stock to go up suddenly, we can speculate. As long as we recognize and label it as speculating, all is fine.

As far as I can see, APT has not released any news or filings these last days (even weeks). The answer, I believe, may lie in what the company sells. From the business description in the latest 10-K (emphasis mine):

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets through our wholly owned subsidiary, Alpha Pro Tech, Inc. We also manufacture a line of building supply construction weatherization products through our wholly owned subsidiary, Alpha ProTech Engineered Products, Inc.

Is it the flu?

The ‘infection control’ products are things like face masks and face shields. Examples can be found on the Alpha Pro Tech website.

This year the flu season is pretty bad, I have heard and read. This might be what is causing the sudden rise in APT’s stock price. Investors could be speculating that APT will sell many more face masks because of this flu epidemic.

History repeats?

Look at a long term graph of APT: Yahoo Finance: APT chart. You will notice a large spike in late 2009. What happened there?

This excerpt is from the 10-K for the fiscal year ended December 31, 2009 (emphasis mine):

Infection Control segment sales for the twelve months ended December 31, 2009 increased by $14,343,000, or 194.7%, to an annual record of $21,710,000, compared to $7,367,000 for the same period of 2008. Mask sales were up by 283.3%, or $12,827,000, to $17,354,000, shield sales were up by 86.8%, or $1,767,000, to $3,803,000 and medical bed pad and pet beds were down 31.2%, or $251,000, to $553,000, compared to the twelve months ended December 31, 2008.

The overall increase in mask sales for 2009 was primarily attributable to the surge in N-95 respirator mask sales, which began in the second quarter of 2009 due to concerns relating to the H1N1 Influenza A pandemic. Our N-95 respirator mask sales started to slow down in the latter part of the fourth quarter and are expected to return to pre-H1N1 levels in 2010 unless concerns relating to the global H1N1 Influenza A pandemic resume. Shield sales were up primarily due to a $1.7 million non-recurring shield order received in the fourth quarter of 2008 and due to the H1N1 Influenza A pandemic.

If I remember correctly, APT had a mask that was approved by the authorities for use during that particular H1N1 epidemic. This caused a huge surge in sales and net income. The stock price followed, maybe helped by the $2.1m the company spent on share repurchases that year.


After reading Antifragile by Nassim Taleb I have been thinking about his ideas about optionality. The idea is that you pay a small price for something that has huge, somewhat hidden upside that is not recognized or valued by others. Usually the upside does not materialize and you end up losing your “bet” and the price you paid for it. Once in a while though, your bet does pay off and you get the benefits.

Initially I thought this idea of optionality was mainly applicable to derivatives. Michael Burry making his CDS bets came to my mind. Prem Watsa of Fairfax Financial buying cheap insurance against deflation a while ago might be a current example. Fairfax also profited handsomely during the credit crisis. So I thought this idea was something strictly for professionals who had access to all these exotic instruments and who had the brilliant minds to realize things that others totally miss. Reading on in his book, Taleb showed me I was wrong and that this idea can be applied in many areas of life, also outside of investing.

After finishing the book I was thinking about current and past positions in my portfolio and I thought that APT was a stock that did have this optionality. I bought the stock for $1.07 in August 2011. The market cap was $24.0m. Book value stood at $35.7m (intangibles were negligible). Cash was $6.4m and total liabilities were $1.7m. The company was profitable (although marginally) and had shown a long string of profitable years.

Buying at a big discount to book was a good bet, I believe. I think buying at that price gave an investor good downside protection, while maintaining the big upside in the case of an outbreak of influenza or some other airborne disease. The beauty is that you don’t have to know if it hits, which disease it is or when it hits. You get the option for free if you are right that the business is worth more than the current market price.

By the way, I did not recognize this free option in APT at the time I bought the stock. I mainly bought it for the discount to tangible book, the profitable history of the company and the earlier willingness of management to buy back stock. It was only after finishing Taleb’s book that I started thinking about all this. I ended up selling the stock at around $1.50, well before the run-up of the last few days. I also didn’t think APT was a wonderful business that I would like to own for the long term or anything like that. There are plenty of negative things to say about APT as well, this post focuses on the optionality that I believe was in this stock.

The perception can be enough

Also, the event doesn’t even have to materialize. It could be that APT doesn’t profit significantly from this current outbreak of the flu, I have no idea. Even investors becoming more aware of the possibility of APT profiting from an outbreak could cause the stock price to rise. The perception of the possible upside by others can be enough for you to benefit from the optionality you recognized.

I have to credit Whopper Investments for recognizing this in APT in his post on Alpha Pro Tech from May, 2011: An interesting but volatile value investment (APT). Here is a quote from his post (emphasis mine):

The main question going forward is if the company can return to their previous level of earnings. First, the company’s products (protective gear) are in much higher demand during times of panic or crisis (similar to ABIX, another protective product company mentioned as a potential value investment that subsequently doubled). In a way, this can make the company’s stock act as disaster insurance, as earnings will spike (and thus, the share price could rise) in the event of a disaster, but earnings will remain flattish in normal times.

It was probably his post that made me remember APT after reading Antifragile and thinking about this idea. His post probably contributed to me buying the stock in the first place. It is one example of a blog I have benefited greatly from, some others can be found on the right side of this page.


Let me close by saying again that these ideas about the suddenly rising APT stock price are speculative. APT also has a rapidly growing segment that sells housewrap and synthetic roof underlayment. Perhaps investors are becoming enthusiastic about these products, because they think housing is recovering. I don’t know. There is no proof and there are no answers to the question of what makes stocks and markets go up or down. This post was mainly to discuss this idea that optionality is hiding in stocks and other areas and that small investors can profit from them as well.

If you have some examples of your own or you can think up one, I would love to hear them in the comments.

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