When there’s blood in the streets, an old Wall Street saying goes, it’s the right time to buy – and at countertop manufacturer CaesarStone, it’s been a veritable hemorrhage in recent weeks. But despite the bad news plaguing the Israeli company, according to Aaron Levitt, an analyst who writes for respected financial website Investor Place, the time to buy CaesarStone stock is now, when the company’s stock has sunk dozens of percent in recent months.
Trading at $31.05 a share at the close of business Monday – after dropping over 17% in one day – the stock should be trading at about $67, according to a UBS report cited by Levitt. “That kind of upside makes CaesarStone one of the best Israeli stocks to buy for a medium-term trade,” Levitt wrote.
Of course, that’s an investment move only for investors with strong stomachs. Over the past two months, CaesarStone (NASDAQ symbol CSTE) has fallen about 45%, after a report was issued in August by investment firm Spruce Point Capital Management basically trashing the Israeli firm. According to the report, CaesarStone contains less quartz – the main element of its countertops – than advertised, and in fact has less quartz than its competitors. The reason: Rising costs and pressure from low-cost competitors may be pushing the company to use cheaper “fillers,” a suspicion that, the report says, is evidence by what is said was a spate of complaints about chipping and staining.
Caesarstone has been making the engineered quartz slabs that made it famous since 1989, after some fits and starts, and has been profitable since 1993. In February 2012, Caesarstone filed an Initial Public Offering on the Nasdaq, with shares initially worth $11 each. On August 3rd, just before the Spruce report, CSTE shares were trading at their historic highs of over $71 a share.
Besides understating the amount of quartz in its countertops, the report accuses CaesarStone of misrepresenting itself as a “premium brand,” and that new materials developed by lower-cost competitors could seriously undercut CSTE’s prices and market share. And, in what amounts to a charge of fraud, the report claims that CaesarStone’s stated annual growth rates and market shares – are inaccurate. In addition, its Israeli accounting firm has, the report claims, not prevented the company from fudging its figures.
And worst of all, according to Spruce, “CSTE is a party to a growing number of lawsuits – six related to death and injury as it relates to injuries suffered by workers and fabricators of its products in Israel (from 14 in 2012, to 60 today).” The company’s insurance, the report said, is unlikely to cover all costs, and is running afoul of US regulators in its new plant in the US. Altogether, Spruce lists CSTE as a “strong sell” stock.
In the latest blow to CaesarStone Monday, a key figure – director Avner Naveh – handed in his resignation, which followed the resignation just a few days ago of another director, Ram Belinkov. Both, CaesarStone said in a press release, had cited “a difference of opinion over matters related to the board’s work and material resolutions” as the reason for their resignations. CSTE’s Chairman of the Board, Maxim Ohana, said Monday that “the board and the company benefit from healthy debate and different opinions and perspectives in the board room. The recent resignations of two directors did not reflect differences of opinion as to the Company’s business, accounting or public disclosures or concerns about any alleged wrongdoing.”
To top it all off, a class-action lawsuit against CSTE has been announced. Based largely on the Spruce report, the lawsuit contends that the company “made false and misleading statements” about market share, quartz content in countertops, and the lawsuits for silicosis-related injuries by workers who claim health problems from working with quartz and silica in fabricating CaesarStone countertops. “As a result of the foregoing, the defendants’ statements about CaesarStone’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis at all relevant times,” according to the law firm organizing the lawsuit.
Despite all that, Levitt is optimistic about CaesarStone’s prospects. A report by UBS said that most of the claims in the Spruce report were unwarranted; that the impact of competition on CaesarStone’s business was overrated, that its prospects for the future were good (considering the revived US housing market), and that much of the Spruce report was based on alleged misrepresentations that misread the market – meaning that the company’s claims of growth were far more accurate than the Spruce report suggested. Altogether, UBS’s Susan Maklari said, the selloff was “unwarranted.”
Spruce, according to Levitt, is “a noted short seller who has a short position in CSTE stock. Aside from the fact that firms have a right to sell products at whatever prices the public is willing to pay for them, the current CSTE stock price doesn’t factor in any growth in the U.S. housing market. According to UBS, that growth should put CaesarStone shares at about $67 — about double today’s selling price,” he added.