A Booming Segment Gives CLCT Big Upside

Collector’s Universe NASDAQ: CLCT offers authentication and grading services to collectors of coins, trading cards, and sports memorabilia. It is broken down into three segments: Coins, Trading Cards and Autographs, and Other.

Not the most exciting business at first glance, eh?

While the Coins and Other segments are posting modest results, the Trading Cards and Autographs segment, particularly trading cards, looks to be set up for blockbuster growth over the next few years.

Let’s start with a brief overview of how trading cards fit into the overall business, before talking about how they can take CLCT shares to new heights.

Overall

CLCT is a micro-cap company with a market-cap of around $250 million. But founded in 1986, the company has a stable business and stellar brand in the collectibles industry.

It has a TTM P/E ratio of around 22, and a dividend of a little over 2.5%.

In the nine months ending March 31, 2020, the Trading Cards and Autographs segment experienced yoy revenue growth of 27.7%. For the same period, the Coins and Other segments combined to be nearly flat. Trading Cards and Autographs now comprise a little over 40% of CLCT’s revenue – and growing.

The Trading Cards Boom

CLCT’s Professional Sports Authenticator (PSA) business handles the evaluation and grading of trading cards.

The sports trading card industry has had an unprecedented boom over the past year. A quick eBay NASDAQ: EBAY search shows around 176,000 PSA cards have sold for over $100 in the past 90 days alone! And with manufacturers printing more and more cards each year, that number should increase even more.

Which brings us to PSA’s backlog:

On May 6^th, during the Q3 2020 Earnings Call, CLCT CEO Joe Orlando revealed that PSA has a trading card backlog of more than 1 million cards.

PSA has been dealing with a growing backlog for around two years, but it is taking steps to work through it. The company is hiring more people and just raised prices for modern-card submissions, which represented around 80% of the backlog. Submissions of 50-99 cards will now cost $15 each, while bulk orders of 100 or more will now cost $12 a card. These represent pricing increases of around 30% over the prior rates.

At the new rates, the million-card backlog represents at least $12 million in revenue. Not to mention, all the new submissions that will continue to pour in.

But will collectors pony up and pay the higher rates? Or will they flee to a competitor?

PSA is far-and-away the card grading services leader. While Beckett Grading Services (BGS) is a formidable competitor, PSA has built a better brand and level of trust with collectors, leading cards of the same grade to sell for more than their BGS counterpart. And from a pure profitability standpoint, collectors are routinely able to buy ungraded cards for a low price, grade them, and generate a profit that is many multiples higher than even the new $12-15 submission price.

The coronavirus pandemic did cause a (very short-term) slowdown in CLCT’s business, with its headquarters located in California. But just before the brief cease of operations, PSA had three consecutive weeks receiving more than 100,000 units, blowing away its average from the previous quarter of 68,000 units per week. That’s a 47% increase!

While the pandemic was, and continues to be, a significant obstacle, CLCT quickly started moving towards business as usual.

To recap, here is why PSA can drive incredible growth for CLCT:

• Trading Cards already represent 40% of CLCT
• The million-card backlog represents at least $12 million in revenue.
• Prices were recently increased by around 30% but shouldn’t hurt demand.
• New submissions were showing a massive increase just before the coronavirus pandemic kicked into full gear.

Led by PSA, CLCT’s fundamentals are very appealing. Now let’s see if there’s an attractive entry point.

 Technicals

Looking at the long-term chart, CLCT has spent the better part of the past five years range-bound between $15 and $30 a share. Like most other companies, it plummeted during the early stages of the coronavirus pandemic, losing half its value in a little over a month. But over the past two and a half months, it has gained back all of that ground, completing a V-shaped recovery.

The stock is now approaching resistance near $30 and has been consolidating around $25-26 over the past seven trading sessions.

One attractive entry point would be a pullback to $23.50-$24, which represents the 200-day moving average and the breakout point of a month-long May base between $19 and $23.50. Alternatively, you could wait for the stock to test $30 a share and see if it can push to long-term highs.

But Should You Wait?

CLCT stock is attractive and seemingly overlooked at these prices. While it’s ideal to look for a nice entry point, there’s an argument for getting in sooner and holding onto CLCT for the next few years.