Sunday, December 4

Exploiting Investors

Exploit investors negligence with counter intuitive financial attributes. Leverage the powerful overlooked mean reversion attributes with historically low quality, unprofitable and under performing but asset rich companies.

Projecting companies with a high ROIC (quality measure) to continue on average is a flawed expectation. If use a quality metrics (ROIC) coupled with a value measure such as EV/EBIT the quality measure detracts from future returns compared to only the value metric EV/EBIT.  The magic formula uses ROIC and EV/EBIT in combination for rankings. The ROIC qualitymeasure detracts from the magic formula’s future returns. 

Bottom line, studies show value (cheapness) is far more important than quality. Quality when ranked with value reduces future expected returns. Therefore when searching for value don’t include quality measures thinking you found a cheap stock with high quality. Focus on ugly cheap ideas. It’s discovering mispricing that generates outsized returns.These mispricings are found with ugly stocks.

Graham favored NCAV securities with positive earnings and a dividend. But, Oppenheimer research uncovered that NCAV stocks operating at a loss outperformed those with a dividend or positive earnings. 

"Oppenheimer's conclusion. NCAV ideas with positive earnings generated monthly returns of 1.96%. By contrast, firms with negative earnings generated monthly returns of 3.38%. Firms with positive earnings paying dividends in the preceding year provided monthly returns of 1.48%, a lower mean return than portfolios of firms with positive earnings with no dividend paid in the preceding year (2.42%), but did  have a lower systematic risk."
Ben Graham's Net Nets: Seventy-Five Years Old and Outperforming 
 Read more on the fascinating fully documented counterintuitive investment research in Deep Value. A must read and a personal favorite for deep value, contrarian investors.
Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations; by Carlisle, Tobias

Investment Idea Summary (SPRT $.69) is a simple deep value story. It’s a provider of cloud-based software and services for technology support. Its solutions include a SaaS-based Nexus Service Platform, mobile and desktop apps, and a scalable workforce of technology specialists. (SPRT) is a ben graham net-net, deep value, negative enterprise value with a catalyst.
Net Current Asset value ($1.03) is 49% greater than the current price of $.69. Net cash ($.83) is 20.28% greater than the current price. Further , note the extreme cheapness with a negative 15.671M enterprise value versus 10.973M in TTM gross profit, 62.764M TTM revenue, total current assets of 66.04M. A clean capital structure makes SPRT a strong candidate for aggressive activism or acquisition. No Debt with a non-dilutive relatively stable shares count.

Operationally SPRT has struggled for several years. The last positive EBITDA quarter was posted on September 2014. The last full year of positive EBITDA was fiscal year end December 2013 with .232 per share or EV/EBITDA = 10.38 or EV/EBIT of 12.05. Fiscal 2013 reported 11.05% revenue growth versus the TTM negative 25%. P/S TTM is .61 versus 2013 2.30.

Potential catalysts; 

Activist’s June 2016 presentation from VIEX Capital Advisors,

06/24/16: VIEX Capital the largest stockholder of (NASDAQ: SPRT) owns ~ 14.9% of the outstanding shares. They announced stockholders voted to choose all five VIEX nominees – Richard Bloom, Brian Kelley, Bradley Radoff, Joshua Schechter and Eric Singer – to’s Board of Directors.

10/31/16: CEO Elizabeth M. Cholawsky stepped down after years of poor performance. 

10/31/16: names VIEX Capital’s board of director nomine Rick Bloom as the Interim President and CEO. I’m sure VIEX Capital will push for added share repurchase with shares selling below net cash value (NCV).

11/03/16: Q3 EPS of -$0.02 beats by $0.04, Revenue of $15.5M (-13.2% Y/Y) beats by $0.4M.
My investment interest in SPRT is driven by its deep discount to cash and current assets coupled with a realistic goal of reverting to profitability. Warning, I’m not near an expert on SPRT’s technical competitiveness.

The Q3 operations were not profitable as expected. During Q3 interim CEO Rick Bloom elected by the Board . There were several Q3 operational positives. Note the customer concentration risk. Q3 Comcast represented 60% of our total revenue and Office Depot represented 15%.

Two services wins launched as expected in Q3 2016.  First, Sears is a bundled offering with the Sears extended warranty to offer home hardware and tech support. This is a new offering to the marketplace, it will start small with subscriptions expected to grow. The second is target not named but announced on the July 2016 conference. Targets 'My Target Tech' transitioned to Technology capabilities were an important differentiator in a competitive bid. SPRT offered deep retail ability and high quality service delivery. Two great retail names for the 2016 holiday season and potentially expanding programs in 2017.

The cloud product expects to exit 2016 with an annual recurring revenue run rate of between $1.1 million and $1.4 million. The total number of seats reported to-date has exceeded the high-end goal for 2016.


Wednesday, November 23

Basket of Deplorable Stocks

is my effort to uncover oversold opportunities. Each one of these ideas have several mean reverting attributes with my market outperform expectations. The search started with stocks below 2 billion in market size for US listed exchanges, NASDAQ, NYSE, AMEX, OTCBB, OTCPK. The result for this stock search was an average market size of 35M.

These ideas are not the best managed companies but contain attributes for potential market out performance. The approach included analyzing insider activity as it relates to current market price, shares in float and existing share ownership. Review of historical shorts as % of float, stock’s performance versus its industry and  market. Reputation of Institutional ownership and its changes to measure conviction.  Multiyear review of debt and share count changes. Relative and historical valuations to include changes in financial strength, P/TB, EV/Sales, EV/GP, F score,short ratio.

Think of this as a watch list to be considered on further weakness and research.

Click for quotes on all stocks below
The prices below were entered when this post was started on 11/18/16; some prices higher or lower when published

RFIL ($1.60)     INFU ($1.80)  ICCC ($5.06)   SGMA ($5.22) IMN ($.61)
ELON ($4.30)   AETI ($1.60)  EGY ($.71)      IZEA ($4.47)    JCS  ($4.30)
LBIX ($1.60)    VSR ($1.33)   PRSS ($2.82)   QUMU ($2.97) OESX ($1.81)    KRLTF ($.62)
CUI ($5.65)

CafePress (PRSS) provides e-commerce platform which enables customers to create, buy and sell a variety of customized and personalized products.

PRSS' mean reverting attributes are the following.
A 14.15M enterprise value versus TTM gross profit of 41.44M , 96.78M in TTM revenue, negative -51% 52-week price change, 341,912 shares purchased by insiders during 2016 for an average price of $3.03, F score improved from 3 during 2013 to 6 for the MRQ, shares outstanding reduced from 17.17M for 2013 versus 16.66 MRQ, total liabilities 57.79M for 2013 reduced to 12.47 MRQ, improved gross margin % from 34.22% for 2014 to 40.75%TTM

RF Industries (RFIL) is engaged in the design, manufacture, and marketing of interconnect products and systems, including coaxial and specialty cables, fiber optic cables and connectors, and electrical and electronic specialty cables.

Enterprise value decreased by 58% from 2015.This compares to a stable share count from 2013, historically cheap back to 2013 for P/TB,EV/Rev,revenue per share, P/Current Assets less Ttl Liab and EV/GP.

Imation (IMN) is a data storage and data security company. It helps organizations to create an integrated storage, private cloud, file sync and share enterprise solution

Karnalyte Resources (KRLTF $.62 )  (KRN.TO $.78)

Karnalyte Resources engages in the exploration and development of potash and magnesium products for agriculture and industry.

Market Cap = 17.94M USD or 21.65m CND , Enterprise value = 3.71M USD or 1.39M CND

Communications Systems  (JCS  $4.30) manufactures and sells modular connecting & wiring devices, digital subscriber line filters, structured wiring systems, and media and rate conversion products in North America and EMEA region.

Market Cap = 38.02M ... Enterprise Value = 25.88M

Versar (VSR $1.32) 

Versar provides solutions to government and commercial clients relating construction management, environmental services, munitions response, telecommunications, and energy in the United States.

Market Cap = 13.16M ... Enterprise Value = 33.92M