Here’s Why Silver Ring Value Partners Remains Optimistic in Charles and Colvard Ltd. (CTHR)

Silver Ring Value Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. The partnership has compounded capital at an annualized rate of over 17% per year net of fees since inception. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Silver Ring Value Partners, in their Q1 2021 investor letter, mentioned Charles & Colvard, Ltd. (NASDAQ: CTHR), and shared their insights on the company. Charles & Colvard, Ltd. is a Morrisville, North Carolina-based jewelry company that currently has a $106 million market capitalization. Since the beginning of the year, CTHR delivered a decent 180.49% return, impressively extending its 12-month gains to 422.81%. As of May 03, 2021, the stock closed at $3.66 per share.

Here is what Silver Ring Value Partners has to say about Charles & Colvard, Ltd. in their Q1 2021 investor letter:

Charles & Colvard (CTHR)

The company reported a surprisingly strong Q4, with organic sales growth of 14% y/y. This was all the more impressive given that this growth was all driven by the roughly half of the business that is online, given that retail sales were flat due to the impact of COVID on shopping trends. These results were matched by substantial growth in profitability.

While Moissanite has been around for many years, its popularity started to gain traction in the second half of 2020. Consider the following Google Trends results: (Click to view the table at Page 9)

To put it another way, January 2021 traffic to the site appears to have been roughly equal to the typically seasonally high December traffic.

If these data points are a beginning of a long-term trend, then the stock is extremely cheap despite the recent upward move in the price. I estimate that the company’s current run-rate EPS, fully taxed, is north of 20c per share, putting the stock at around 10x P/E excluding cash and the value of NOLs. The company’s average sale price is slightly above $1K. It currently does a bit over $30M in annual revenues. If Moissanite is really on the cusp of taking off and management executes, 5 to 10 years out there is no reason why the company can’t be 5x-10x+ its current size.

Balancing against these recent positive developments is the company’s long-term history. The company has been at this for a long time, albeit not under the current management team. There have been a number of false starts in the past where it seemed like the company’s business was finally reaching escape velocity, with each instance proving to be a false start. There is also substantial competition, both from lower-priced Chinese knock-offs and from lab-created diamonds. These are formidable risks, and ones that I take seriously.

I sold approximately a third of our position during Q1 in order to manage risk consistent with my investment process. The Portfolio at Risk (PaR) exceeded my maximum of 10%, and I reduced the position in order to bring risk down to acceptable levels. Despite managing a concentrated portfolio, I know very well that I am fallible and can make mistakes. I don’t want any single mistake to be large enough to overwhelm the rest of my decisions in the portfolio. Over time, I want the disciplined and repeatable execution of my investment process to drive the results, not any one investment.

On balance, I remain optimistic and believe that the risk/reward remains very attractive. I will be monitoring developments carefully in order to better gauge whether the company is really poised for a much brighter future than its past, or if this is just another flash in the pan.”

Our calculations show that Charles & Colvard, Ltd. (NASDAQ: CTHR) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Charles & Colvard, Ltd. was in 2 hedge fund portfolios, compared to 1 fund in the third quarter. CTHR delivered a 66.67% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.