Highlights

• Liquidity Services, Inc., (LQDT) is a Small-Cap value stock selling at less than 6 times prior (2012) peak earnings, and yielding 13% on free cash flow.
• Several company Insider’s have recently purchased the stock. You can still buy in below their entry point.
• LQDT is currently a Joel Greenblatt ‘Magic Formula’ stock.
• More than 50% upside indicated by my calculation of Intrinsic Value
• See Important Update at end of Article

Company

Liquidity Services Inc. (LQDT) is in the surplus assets industry. They offer a number of online auction marketplaces for wholesale, surplus and salvage assets, enabling buyers and sellers to transact in an efficient, online auction environment offering over 500 product categories. Clients can maximize the value of their underutilized, obsolete, and surplus industrial machinery, equipment, materials, vehicles, and inventory. Online marketplaces include:

Liquidation.com – bulk lots of surplus and returned commercial inventory from large retailers and manufacturers
GovLiquidation.com – Surplus and scrap assets from the Federal Department of Defense
GovDeals.com – Surplus and confiscated items from State and Local governments
NetworkInternational.com – Surplus capital assets from the oil, energy and mining industries
GoIndustryDoveBid.com – Source for used industrial equipment
TruckCenter.com – Surplus fleet and transportation vehicles and equipment

Liquidity Services believes they are still in the early days of growth, with multiple large markets still in the early stage of online adoption. They estimate the online surplus management market may be $150 billion, with LQDT still representing just 2-3% of the market.

Valuation

Liquidity Services, one of Forbes 2013 ‘America’s Fastest Growing Tech Companies.’ was flying high two years ago, with a stock price above $64 per share. Since then they have lost an important Department of Defense contract. The stock has fallen more than 85% and can now be purchased under $11 per share. I believe now’s the time to buy in to this as a wonderful long-term opportunity. Insiders are buying as well. In May the CFO and CAO purchased $0.5 Million in stock, buying in around $13 per share.

LQDT has a market cap of $319 Million, is debt free and sells for less than 6 times prior (2012) peak earnings. Additonal valuation metrics and my estimation of LQDT’s Intrinisic Value (based on Warren Buffet’s Three Pillars approach) is presented in the following table:

I purchased LQDT at $10.42 per share recently, and believe it offers compelling value below $10.70. At an estimated Intrinsic Value of $16.50 we have more than 50% potential upside.

Allocation

Utilizing the Kelly Formula for Stock Investing, I allocated 5% of my stock portfolio to LQDT.

Technical

When I find a significant bargain in the stock market I’m not always too concerned about technicals, but I was happily surprised when I checked LQDT. LQDT is forming an ‘Aggressive Sequential’ buy signal this month, a very strong indication that the long 2-year downtrend is near its end. To find a buy signal with this indicator on a monthly (instead of weekly or daily) basis supports that LQDT is reaching a significant bottom. This signal began in August 2012 and should complete at month’s end. See cell AF114 in spreadsheet below:

This trend exhaustion indicator is more fully explained at ‘Trend Exhaustion Market Timing Excel Spreadsheet.’

Summary

At an estimated Intrinsic Value of $16.50 per share, LQDT offers more than 50% potential upside. I recently purchased the stock with 5% of my portfolio and hope to hold on for the long-term as they continue to grow into the surplus assets market.

UPDATE
In December, Liquidity Services announced they’ve lost Wal-Mart as a client. Wal-Mart provided nearly 10% of LQDT’s product sales. Losing Wal-Mart as a client was not a good way to start the important holiday shopping season, but LQDT now trading as 0% future revenue growth (historic 20%) and margins cut in half to 4% (was 8-10%). Seems too low for a stock with plenty of growth opportunity, no debt and trading near 30% cash. Given the loss of Wal-Mart, I’ve revised my Intrinsic Value estimate to $13.10 per share. Shares currently trade around $8.00