6/20/2017

The Rubicon Project: Who and why selling is creating a bargain price?


If profit is investors motive. Why or who sells a stock worth a dollar for 50 cent? This is an enormous and exciting topic. Charlie Munger's sage advice, "think forwards and backwards - invert, always invert". Focus your efforts capitalizing on overlooked yet simple investing techniques.Why bargains happen is too vast and intricate a topic for complete coverage in a blog post. Instead, this post will cover one significant driver of this price inefficiency. Rule-based institutional transactions are often the catalyst of a stock's inefficient price. The financial entity's investment charter often drives irrational buying and selling.

The topic of who sells a dollar for 50 cent can include overreaction to changing fundamentals, drop in stock value (fear/greed), career risk, liquidity requirements or a financial institutions' investment charter. An investment charter includes style (growth, value, market size, specialty) that if violated the stock sold regardless of positive exceptions. There exist over 7,000 mutual funds, near 2,000 ETFs and approximate 11,000 hedge funds. The investment behavior of these institutions covers a large part of the buying and selling volume. So, this activity creates short and medium term buying or selling opportunities. Investors can exploit these price inefficiencies.

"There's only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you've got to look for where the public is most frightened and pessimistic." Sir John Templeton



This brings me to an oversold idea, The Rubicon Project (RUBI). It fell victim to institutional selling based on growth attribute noncompliance. Rubicon's sales growth missteps forced their original institutional base to sell. Also, recent brokerage sentiment reinforced RUBI is no longer a growth story at least in the short term. At first, value institutions sat on the sidelines. But, they are trickling back.

No credence is given to Rubicon's beneficial exceptions. Or, the mean reverting -60% 52-week price change. Rubicon's favorable exceptions ignored by selling growth institutions include the strong financial position with 3.88 per share in cash, no debt, positive cash flow, high gross margins versus the current $5.55 price or $1.77 enterprise value per share. Last week on 06/07/17 the stock closed at $4.69, 68% off its 52-week high of $14.79 and 75% from the all-time June 2016 high. The stock has drifted 15% higher over this past week to close on Friday, 07/16/17 at $5.55. RUBI still warrants a closer look.


The Rubicon Project (RUBI) sells a technology solution to automate the buy and sale of a wide range of advertising units for buyers and sellers. 

Valuation






















Relative Valuation





















Rubicon's stock price crashed 60% over the past 52 weeks. The price drop relates to the YOY 30% decline in revenue. The revenue decline is the direct results of Rubicon's slow transition to change its advertising technology as customers shifted towards alternatives. But, the board quickly addressed revenue decline. CEO and co-founder Frank Addante replaced by an industry veteran Michael Barrett during March 2017. Addante will stay on the board as chairman and founder. Before Barrett's arrival, Rubicon laid off around 19% of its workforce or 125 employees including senior management at the end of 2016. Further, RD spends over the TTM is at a historical high since the 2014 IPO showing their commitment to any industry's technology shifts.

Barrett industry reputation is for cleaning and selling the business. Before Barrett's arrival, Rubicon was for sale. January 2017, The Wall Street Journal reported that Rubicon Project "is exploring strategic options, including a potential sale, with the help of Morgan Stanley. After Barrett's recent arrival he stated: "the company is not for sale". But industry rumors continue around the possible Rubicon sale.



Long:RUBI


6/06/2017

Unique Value, No Catalyst, Net Cash 64% of Market Cap, Insider Buying, 52 WK low: Acacia Research (ACTG)


Acacia Research (ACTG) is an intermediary in the patent market. It facilitates efficiency and delivers financial gains for patent owners by leveraging its legal and technology expertise.

"Acacia signed more licensing deals generated more revenue and has more experience analyzing, valuing and monetizing IP than just about anyone focused in the IP space. We have been challenged by the largest, smartest, best capitalized companies and law firms in the world and have a proven track record of success." 

Acacia only represents prejudiced patent owners that prove in courts to be valid and infringed. As a result, Acacia has returned over $750 million for patent partners. So far, over 1,530 license agreements executed across 192 patent portfolios. Up until now, Acacia generated near 1.40 billion in gross licensing revenue.

It's A+ financial position with no real direct competition, asset light business model and historical although uneven success can offer investors uncommon value. Acacia benefits from a low risk high reward service model where companies, inventors, or research labs use their expertise to fully monetize their IP licensing. The service is mutually beneficial. Customer include small companies, sole inventors, or research labs. Further, large corporations can and do use their expertise to fully license their IP business.

During the Q1 2017 earnings call management commented on recent subsequent Q1 wins.
Acacia subsidiary Saint Lawrence Communications received a 9.2M jury verdict against MOTOROLA. A second trial seeking additional damages because the infringement was found willful is scheduled within the next few weeks. 

Subsidiary Cellular Communications Equipment (CCE) patent trial against Apple begins on July 31 2017. CCE succeeded with its Apple litigation in Germany. Initially Apple asserted the suit was unjustified. The reason being the European counterparts is the same as US patent dispute lost during the September infringement verdict. The related German infringement trial against Apple occurs late this year. This win favorably impacts the new US Apple suit lost September of last year that crushed the stock price. Read below and immediately following John Rogers (Ariel) comments on the original lost trial.

"Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost. We have added to the shares because we remain confident in the original thesis." Rogers' January investor comments

Looking forward, Acacia subsidiary Limestone Memory Systems has infringement cases pending against Micron and other defendants. Saint Lawrence found success in Q1 with a patent action in Germany.  Specifically, Germany court granted an injunction and enforcement proceeding against both Motorola and ZTE. Saint Lawrence has a trial scheduled against Apple in February of 2018.



Quarter 1, 2017 conference call financial highlights;

Revenues declined 64% (8.9M versus 24.70M). The Q1 non-gaap net loss was 4.2m or .08. after eliminating non-cash charges for amortization and stock options. Average margins for the first quarter were 85% as compared to 77% in the comparable prior quarter. Fixed SGA expenses except non-cash charges, and severance expected to be between $11.5 million to $12 million for 2017. Even with the negative results cash totaled $156.8M or 2.88 per share and net cash per share is 2.55. Management's optimism focused on the current patent assets coupled with recent court victories post Q1 close.

Acacia focus is to leverage their IT expertise. They plan to employ their experience and proprietary data to increase business in areas of IP outside patent licensing. Patent licensing will continue to be an important part of their business. But, it's a tiny subset of the whole patent ecosystem and current opportunities. High growth technology companies can benefit from Acacia's patent expertise, skills and industry relationships

An example of the expanded business strategy, loans made to Veritone. Two loans for 20M in 2016 and an 8M bridge loan before the Veritone (VERI) IPO on 05/26/17. The principal and accrued interest under both Acacia's $20.0 million secured promissory note and Veritone's $8.0 million line of credit converted to equity. Per the 05/26/17 SEC form 4 filing ACTG owns 4,119,521 shares of VERI. The total shares owned include free shares, exercised warrants. I don't have the exact total average cost per share. But most shares purchased at 13.60 and likely an average closer to 10. VERI shares IPOed near 15. Since VERI IPOed on 05/24/17 details are sparse on the VERI future relationship. The current market price for VERI is 13.30. I hope the ACTG sold VERI shares during the IPO. Potential positive news on Veriton, selected as 2016 Red Herring Top 100 North America Award Winner http://prn.to/1XdtrOl. Veritone's proprietary technology protected by over 90 issued and pending patents. The patent technology is likely reason for the relationship.

"We will continue to seek high quality patent licensing opportunities, but we believe alternative IP opportunities will be larger, less risky, more predictable, and more profitable than IP licensing business alone. "




















Net cash is $2.55. Cash per share = $2.88, Current Liabilities = $0.33 with no long term debt.
























The total insider buys for 2016 and YTD 2017 is $6,029,529 or 1,310,235 shares(~2.31% of total shares outstanding).


































John Rogers from Ariel owns 3,413,174 shares at an average price of 12.85. $13,413,174 or 6.75% of TSO.

January 2016 John Rogers commented on Acacia Research. "Intellectual property and patent expert Acacia Research Corp. (ACTG) stock fell -52.14% when it lost a lawsuit that many had expected it to win. In our view, Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost; the lawsuit will be refiled in Germany, where it will be decided by a panel of judges who have technical expertise. We have added to the shares because we remain confident in the original thesis."


Negatives:

Equity Investment in Veritone is not supported by fundamentals. Its highly speculative. 

Stock option expense during Q1 2017 increased 23%. These stock options have market based performance conditions.

Another interim CEO after resignation of interim CEO Martin Key. Key was unwilling to relocate his family to California. Key replaced CEO Matthew Vella in 2016.

Poor visibility for the timing of revenues and profitability. This makes valuation speculative.



Long ACTG




5/25/2017

Idea Discovery Starting with Insider Activity from 2016 to 05/22/17

Self Service Idea Discovery using the filter options on right side.

Filter options include 1) GP % change from 2013 to MRQ: 2) Enterprise value % change from 2013 to MRQ: 3) Shares outstanding % change from 2013 to MRQ: 4) Market Cap option up to 2,000M. 5) Insider year option (2016 or 2017) : 6) Insider transaction type (purchase of sale)

The default filter is set for a market cap less than 100M; 2017 insider transactions not 2016, no adjustments were made for % of EV change from 2013, % change of share outstanding from 2013, or gross margin % change from 2013 or lastly the transaction type (purchase or sale)

Change options or export for additional analysis

5/22/2017

Zero Moat, Dying Industry, Anemic Business Model; Creates A Favorable Stock Price for New York & Co (NWY)



New York and Co (NWY) hit its 52 week low on Tuesday 05/16/17. This coupled with an oversold multiyear price decline and stable fundamentals creates a unsustainable market discount. Further, the market is pricing NWY as if its ultimate future matches recent bankrupt peers; Aeropostale, Limited Stores, PACIFIC SUNWEAR, Wet Seal, and others. This post started as an effort to find mispriced survivors within a devastated industry.


Some investors can view NWY as a value trade if you're unwilling to wait for improved and convincing execution. Apparel store's industry negatives are declining mall traffic, expensive leases, falling sales, and the shift toward online shopping. But, New York and Co (NWY) current market price, historical and relative cheap valuation may offer an opportunity.


New York and Co (NWY) is a specialty retailer of women's apparel and accessories.  Headquartered in New York and founded in 1918. It's a modern wear to-work women's retailer offering feminine fashion, trending and versatile styles. The target customers are women between the ages of 25 and 45. Lastly, as of January 2017 NWY operated 466 stores in 39 states along with an online presence nyandcompany.com.

Investment thesis is simple. The current valuation underestimates years of steady although not exceptional financial results. Years of consistent top line revenue supported by dependable positive CFFO, EBITDA, and improving gross margins. NMY's conservative financial management is evident by years of positive M Scores, Sloan Ratios, and Z Scores. To summarize, market ignores years of reasonable and stable financial performance coupled with opportunities for improved operational execution.

Bottom line for the bears, quarter after quarter NWY reports negative net income. However, this negative does not justify the current stock price. The most conservative EPV (Earnings Power Value) calculation supports a higher stock price. Adjust expenses down for future growth captured within SGA, DDA (Depreciation Depletion Amortization), capital expenditures, new leases, and related taxes. Use the reduced expense calculation coupled with estimated revenues. Then total with the cash balance of 88M less LTD.  This aggregate calculation is positive and after applying a conservative market multiple the calculation supports a higher price. Additionally, look at the current 20.20M enterprise value. Now compare to TTM revenue of 929.08M, gross profit 263.98, EBITDA 7.42M or the 20.71M average from 2012 to 2016.

Okay, the challenges are real with no moat, no growth, and within a permanently depressed industry. Yet, NWY has operational opportunities to add on with their years of sound financial management.
  
Operational positives were discussed during the May 18th Q1 2017 conference call. They covered eCommerce,gross margins,inventory,real estate, celebrity collaboration and sub brands performance.

Gross margins continue to improve. In fact, Q1 2017 GM% reached its highest level since Q1 2008. Ecommerce reported strong double digit increase in sales. Management commented during the Q1 2017 conference call. "strength of eCommerce in Q1 was amazing and was driven by improved conversion, increased traffic and strong product acceptance along with our continued focus as an omni-channel business." Ecommerce business grew from $88 million during 2013 to $226 million in 2016. Inventory, management extends improved execution with an 8% decline for on hand inventory per store.Real Estate, management negotiates rent reductions and flexible terms. Over 60% of leases are on two-year renewals. NWY plans to open 6 to 10 stores in premier locations at attractive rents with low capital investments. During the first quarter the Company opened five New York and Company stores,one outlet store and refreshed three stores. Eight NWY stores closed and one outlet. Unique apparel offerings with celebrity collaboration and sub brands. These performed above expectations and is expanding.




Historical Comparisons aggregated into three buckets, Avg 2012 to 2016, 2015, Current/TTM. 





























Current Valuation offers reasonable fundamentals. Enterprise value per share calculation (see below) is $0.3155. This compares favorably to the gross profit annual average per share since 2013 to the MRQ of 4.11. Annual revenue per share since 2013 to the MRQ is 14.96, CFFO per share annual average since 2013 to MRQ is .43. The year ending 2014 enterprise per share was 3.42 per share versus today's value of .3155 (90% drop in value). Share count is stable with 63.24M as of 2014 versus today's count of 64.20M


Enterprise Value Calculation = MC 96.66 - Cash (88.37M) + LTD and Capital Lease Obligation (11.485m) +Current Portion (.841M) = 20.25M or EV Per share = .3155



 No insider selling during 2017.










Apparel Store Comparison

Comments: NWY is at or near the worst stock performing stock against 26 peers for 12 months and 3-year time periods. Furthermore, lowest valuation for EV/Sales. Ranked 22 out of 26 for the largest annual revenue with TTM revenue of 929.081. Enterprise is near lowest at 22M coupled with the lowest short ratio (1.60%) and institutional ownership (35.19%).














Negatives:
Apparel Stores continue to rack up bankruptcies. The declining mall traffic, expensive leases, payroll costs , and growing competition from online shopping.





























NWY large inside ownership makes acquisition less likely.

No moat with a heavy payroll burden.





In conclusion, my long position is rationalized with "there are no bad assets just bad prices".



Long NWY

5/18/2017

Zero Moat, Dying Industry, Anemic Business Model, Creates A Favorable Stock Price


New York and Co (NWY) hit its 52 week low on Tuesday 05/16/17. This coupled with an oversold multiyear price decline and stable fundamentals creates a discount. Further, the market is pricing NWY as if its ultimate future matches recent bankrupt peers; Aeropostale, Limited Stores, PACIFIC SUNWEAR, Wet Seal, and others.

Some investors can view NWY as a value trade if you're unwilling to wait for improved and convincing execution. Apparel store's industry negatives are declining mall traffic, expensive leases, falling sales, and the shift toward online shopping. But, New York and Co (NWY) current market price, historical and relative cheap valuation may offer an opportunity.

The post started as an effort to find survivors within a devastated industry. My comprehensive thoughts to be published at end of this week. However, I hate to watch ideas move higher while I struggle to budget time for release, hence today's note.

New York and Co (NWY) is a specialty retailer of women's apparel and accessories.  Headquartered in New York  and founded in 1918. It's a modern wear to-work women's retailer offering feminine fashion, trending and versatile styles. The target customers are women between the ages of 25 and 45. Lastly, as of January 2017 NWY operated 466 stores in 39 states along with online presence www.nyandcompany.com.

To be continued



Long NWY

5/07/2017

Deep Value Opportunity for Patient Investors



Warning: Illiquid, closely held, de-registration (suspending SEC reporting) susceptible towards an unfriendly shareholder environment. The negatives are significant and is only suitable for patient longer term investors.

But I'm embracing the words of Mohnish Pabrai's, "Heads I Win, Tails I Don't Lose Much".








During the prior 5 years, Pendrell (PCO) acquired and monetized IP (Intellectual Property) rights. The company continues to monetize existing IP assets. But today's main focus is on deploying and leveraging its cash, and NOL by acquiring new business opportunities.

To optimize its new business strategy management aggressively reduced expenses, headcount and simplified operations. Further, the board recommended and approved de-registration/de-listing as the next step in further reducing overhead expenses and improve strategic focus. Additionally, de- registration concentrate management's efforts on purchasing and leveraging NOL assets with new acquisitions, continued IP monetization, and further license their existing patents.

Near $2.5 billion in NOL (net operating losses) created when PCO was ICO Global Communication. ICO Global filed for chapter 11 bankruptcy August 1999 after their satellite was destroyed during its launch attempt. Then telecom billionaire Craig McCaw's steps forward to acquire in 2000. McCaw has controlled PCO ever since and is Executive Chairman. More importantly this large NOL creates advantages when competing to find a profitable company.

This talented equity compensated management team is uniquely qualified to allocate the large balance of cash, NOL and remaining hidden assets to increase the company's market value. Management has deep expertise in finance, taxes, mergers, acquisitions and technology licensing with proven entrepreneurship success. Today the total number of employees are 14. SGA annual expense was 30.078M in 2012 reduced 75% to 7.508M for the year ending 2016. This drastic reduction of SGA expenses supports their commitment towards value enhancement.

Pendrell's CEO Lee Mikles served as Future Fuel (2005 to 2013) CEO. He has extensive experience in corporate finance, chairman of Mikles/Miller Management. Pendrell CFO Steve Ednie has 20 years' experience in senior finance, accounting and tax roles. He served as Director of Tax at Expedia, Chief Tax Officer for XO Communications and Clearwire Corporation. Pendrell's Corporate Counsel is Timothy Dozois. Securities law compliance, mergers, acquisitions, divestitures, and technology licensing are his areas of expertise. Executive Chairman Craig O. McCaw's experience; founded Clearwire in 2003, director at Nextel Communications acquired by Sprint in 2005 and XO Communications. Further, he was the Chairman and CEO of McCaw Cellular Communications which he built into the nation's leading provider of cellular services in over 100 U.S. cities. It sold in 1994 for 12.60 billion to ATT. Lastly, McCaw is the CEO of the venture capital firm Eagle River Investments. The firm's focus is on strategic investments in telecommunication and technology companies.


Pendrell sits on valuable patent assets. I admit knowing nothing of the fair value or the uncertain outcome of pending litigation. The trial against ScanDisk is set on October 2017 for importing patent infringing products. They continue to discuss their digital rights licensing with motion picture studios and theater operators.  In addition, PCO continue to pursue appeal of two adverse jury decisions against Apple,Google and manufacturers of Android devices. For a more informed analysis  of Pendrell's patents check out  http://ujinv.blogspot.com/search/label/Pendrell




Valuation:












A few repetitive but notable comments on the table below.
Current net cash per share at $5.79 and current AR of $.61 for a total of $6.40 per share. This compares favorably to the current market price of $6.00. In addition, large net operating losses to leverage with the purchase of a profitable acquisition. During the most recent quarter, Pendrell smartly allocated its capital by purchasing 2,232,293 of its own shares at $6.55 per share for a total of $15,935,465. The existing patents generated positive 2.23M operating income and 3.44M net income for 2016.































Ownership

































In conclusion, I understand the risk and its not suitable for all investors. But, I purchased after last year's writeup and consider the current price an opportunity. The net cash, NOL, capable equity incentivized management, optionality from patent litigation and the ultimate new acquisition to leverage corporate assets are reasons for my interest.  



Long PCO

4/17/2017

Cash Rich, Market Ignored Restructuring Opportunity, CafePress (PRSS)

Profile:

CafePress (PRSS) sells customized t-shirts/clothing, bags, drinkware, stationary, cases, home accessories, hobby, and related items. http://www.cafepress.com/. Competition exists in this fragmented industry. More direct competitors are privately held Zazzle (http://bit.ly/1xefWC7) , Society6 (https://society6.com/) , and online Australian retailer Redbubble (http://rdbl.co/1duw5VC). 


Curious about the business of CafePress? Watch this interesting video.

CafePress (PRSS) is an illiquid tiny company and may NOT be suitable for many investors. Further, operations are still a work in progress. However, its 2.5 year turnaround plan became obvious during FY 2016. Particularly, Q4 2016 the business stabilized generating free cash flow. But, the market continues to ignore tangible turn around wins . Although, it has not gone unnoticed by guru micro cap value investor Lloyd Miller. He recently added to his 18% stake on 04/13/17 along with his heavy insider buying during 2016.In addition, the company's 2 founders and now CEO and CMO recognized improvements by adding to their existing large inside ownership throughout 2016.


August 2014, co-founder and former CEO Fred Durham returned as the CEO along with Maheesh (co-founder and prior executive) as Chief Marketing Officer. Durham promised transparency throughout the turnaround process. This included an assurance to reduce expenses with a laser focus on a quick as possible increase in shareholder value. With significant skin in the game, Durham and Maheesh are two of the biggest shareholders and have a strong incentive to align with investors. They now own 15% and 12% respectively.

Part one of the 3-part turnaround plan requires the heaviest lifting before maximizing 2 and 3. Part one is business stabilization.  This means doing more with less. Eliminate unnecessary complexity that has over time diluted and then destroyed the company’s value. The prior CEO’s drive for growth is the most troubling ingredient that destroyed the stock price. The business focus became diluted and the customer experience suffered. Over time, they discovered managing a large group of brands had become counterproductive. So, a goal set to streamline operation, enhance the balance sheet, and unlock value by selling the non-core assets. The long-term growth strategy is the more efficient and profitable realization of a higher portion of repeatable sales.

These are some of the TANGIBLE RESULTS ACHIEVED OVER THEIR RECENT TENURE (2.50 YEARS) TO STABILIZE AND IMPROVE THE BUSINESS.  
Closed the experimental Louisville Kentucky retail store; sold their stationery business (InvitationBox.com); Arts and Groups properties sold for $40 million in cash.

An important valuation comment is the 2015 Art and Group sale (http://on.mktw.net/2oEFf0t). It represent 20% of total CafePress revenue sold during 2015. The most encouraging fact of the sale is it sold for an EV/Sales of around 1.50 versus the PRSS current EV/Sales of .05. I calculated the Arts and Group valuation based on the final 40M cash sale stated by management and financial data in the press release http://on.mktw.net/2oEFf0t 
"The Art business represented approximately 20 percent of CafePress’s total revenues in 2014." PRSS total sales for 2014 was 132.10M hence 20% of sales = 26.42M for the Art Group. Management stated the sale settled for ~40M in cash. So the EV/Sales valuation for the Art group was 40M/26.42M = 1.51 EV/Sales valuation or near this figure. Again the current market value for PRSS EV/Sales is .05 versus Art's sale valuation of ~1.51


The above mentioned asset sales are a key for stabilizing and moving the business forward. 

Furthermore, a reduced number of production facilities enables engineers to focus on CafePress, improve quality and efficiency. Fewer websites means developers can focus on enhancing the customer experience and conversion on CafePress. Fewer marketing systems concentrates the focus on improving marketing efficiency and customer transactions. 

An external consulting firm was used to do an extensive audit of margins, customer satisfaction, site conversion and volume. The discovered results now guide improvements in efficiency, merchandising, pricing and customer experience. Additionally, a review of over 600 products by starting at the bottom 10%, in terms of sales, margin and quality were removed and discontinued on their site.

After the above mentioned asset divestiture, engineering efforts can focus on improving mobile and social technology. The company is constantly looking to leverage technology progress that can cut friction and conversion. These technology improvement efforts will improve the customers experience. Overall, meaningful opportunities exist to drive an improved CafePress as their mobile channel matures and gains scale.

Lets continue reviewing the turnaround plan.  Durham commented an improved customer experience is an important personal area of focus. He promised to drive the team on consumer side quality and encourage a world class customer experience. Customer service now reports directly to Durham.





The tables below show Quarterly and Annual financial results. This underscores CafePress' deep asset value discount to its current market price, coupled with a stabilizing and improving 2016 financial results.











































 





Only Insider Buying no Selling from 2015 to 04/13/2014






















04/13/17 Valuation:  Market Cap = 48.10M, Enterprise Value = 4.66M, P/B = 1.08, EV/Sales = .05, YOY qtrly revenue growth = 6.06%, Total Cash = 43.79M, Cash per share = 2.63, 52 Week High = $3.82, 52 Week Low = $2.78, Share Outstanding = 16.64M, Float = 7.94M, % held by insiders = 46.33%, % held by institutions = 22.10%






Opportunities

Deep discount to its historical and relative valuation. To repeat the above comment, Arts and Groups properties sold during February 2015 had an EV/Sales valuation sale price ~ = 1.50. This compares favorably to PRSS current EV/Sale value of .05

It’s too cheap to ignore. A 04/13/17 closing price of $2.85 and  an enterprise value per share =.33 versus cash per share = 2.62, no debt, TTM gross profit per share = 2.51 and net cash per share = 1.52.

Large federal and state operating loss carry forwards available to reduce future taxable income. 25.2 million of Federal and $19.0 million for the State.

The original founders came back to turn the company around with skin in the game.Their combined ownership is over 25% TSO. They continued insider buying since their 2014 rearrival.

Successful small cap activist Lloyd Miller can’t get enough shares , 18% of TSO with additional buys reported on 04/13/17.

Major turnaround activities completed. FY 2016 shows tangible signs of improvements. "Year-over-year revenue growth improved each quarter from negative 23% in Q1 to positive 7.5% in Q4". Positive CFFO during FY 2016 Quarters 3 and 4. Positive FCF in quarter 4 2016. 


Mean reverting price attributes with 52 week market price change of -23%, -64% drop in the enterprise value from the 2014 value of 15.37M to 04/13/17 value of 5.54M.

Aggressive share buyback program, year end 2013 17.17M shares outstanding versus the MRQ reduced balance of 16.66M

Three new industry proven board members. Ken McBride is the CEO of Stamps.com. "He played a crucial role in the company's turnaround and has since lead it through steady improvements to impressive success." Nick Swinmurn, the founder of Zappos, is "a pioneer in consumer e-commerce and brings valuable consumer centric experience and creativity to the company".  Tony Allen is the CFO of Sypris Solutions and brings extensive financial experience and expertise to our Board.

Acquisition target, going private transaction or special cash dividend based with the 2.62 per share in cash. Activist Lloyd has a history of forcing special dividends. These are all high probabilistic events ignored by the market.
 
Risk
Lacks a strong moat.

Illiquid nano cap deters institutional ownership and lacks strong Wall Street coverage.

Closely held with 46% held by insiders.

May be unable to generate sustainable consistent profits and could be adversely impacted by competition.


Long: PRSS

4/09/2017

Good Company for a Cheap Price, DHI Group (DHX)


This post began by searching for stocks hitting their 52 week low. The DHI Group DHX reached its 52 low on Monday 04/03/17. At $3.90 it offered investors value. Then, the stock (DHX) moved up over the next few days as I prepared this post. DHX closed Friday (04/07/17) at $4.50.

The DHI Group (DHX) is a micro-cap with historical and impressive, consistent high FCF margins that the market forgot. Revenue growth challenges from a difficult specialized job market and increased competition (mostly perceived) chased away the original shareholder base of magic formula growth investors. This overlooked investment has an asset light business model that consistently generates the staffing industry's highest FCF yields. Also,coupled with its aggressive, opportunistic share buybacks, debt reduction and activist interest the stock offers longer term value investors a tempting opportunity.

Profile:
DHI Group (DHX) offers employment related professional connections through several specialized job recruitment websites. Additionally, their software services access, search and analyze their proprietary resume databases. These targeted professionals work within technology, financial services, energy, healthcare and the hospitality industries. Above all, the goal is to allow professionals and organizations to access proprietary data to compete for employment connections. Employers and recruiters use their websites and services to find the most qualified professionals within their skilled occupations. Individual professionals use their websites and services to find the best jobs, industry news, detailed salary information, and expand networking opportunities.

Their online recruitment packages target the difficult to fill employment categories experiencing a scarcity of skilled professionals relative to market demand. These online marketplaces are where employers and recruiters find employees. Professionals use the services to find job postings, news, career development and recruiting services. It's DHI Group (DHX) of recognized web sites, quality and size of its database of industry candidates that creates a competitive advantage. Last, DHI (DHX) has been in the recruiting and career development business for over 26 years.

Based on FASB accounting rules DHI has three reportable segments; Tech and Clearance (Dice, Dice Europe and ClearanceJobs); Global Industry Group (eFinancialCareers, Rigzone, Hcareers and BioSpace); Healthcare (Health eCareers). The remaining other services and activities individually are less than 10% of consolidated revenues, operating income or total assets.

Most of the revenues come from employers and recruiters who pay a monthly or longer-term contractual agreements for recruitment packages. These packages offer a combination of website job postings and access to their database of resumes on Dice, Rigzone, eFinancialCareers, ClearanceJobs, Health eCareers, BioSpace and Hcareers

This post will not be an operational deep dive. Or an analysis of the recruitment industry.Instead I will use DHI’s historical and competitors’ financial results for my investment case to justify its deep relative and historical valuation discount.

Current Valuation per Yahoo Finance as of  04/07/17:
 Market Cap= 272.67M, Enterprise Value =  272.67M, EV/EBITDA = 5.79, 52 week change = -45.30%,YOY revenue change -15.60%, Gross Profit Per Share = 3.92, Price Per Share on 04/07/17 =$4.50

Noteworthy comments on the below historical valuation table.
A consistent high FCF margin, current gross profit per share near its current market price.

An aggressive share count and long term debt reduction compares favorably to a mean reverting attribute , an unjustified enterprise value drop of 44% from 2013.

Historical low valuation for EV/GP at 1.36 versus the average of 2.42 over 2013 to 2016. EV/Revenue also at historical low valuation.






































DHI Group Versus 15 Staffing Industry Peers

Price Performance: Annualized 3-year stock return is -14.78% versus the +2.13% for the comparable 15 staffing peers, YTD% stock return is negative -29.60% versus industry average of positive +2.78%.

The Enterprise value dropped -44.89% from 2013 versus the industry's positive +19.55% over the same 3-year period.

DHI Group's FCF and Gross margins trounce its industry peers. TTM GM% is +85.85% versus industry +36.61%, FCF margins for the TTM is 14.19% versus the industry TTM average of 3.17%, 3 year (2013 to MRQ) average FCF margins is 16.68% versus the 3-year industry average of 4.16%.

Vigorous capital structure improvements with reduction in shares outstanding and debt from 2013 to the MRQ. Long Term Debt per share for 2013 to the MRQ reduced by 16.67% versus the industry increasing long term debt by 46.22%. Over the same 3-year period 2013 to MRQ shares outstanding reduced by 7.74% versus the industry .79%. See below supporting table

Industry Analysis


































Risk:

LinkedIn's increased entry into the recruitment market is an industry concern. This along with other competitors will impact pricing and growth.

A recession or weak economic growth.

An ill-conceived or poorly integrated acquisition pressured by the need for growth.

Subscriber decline will impact the brands value and pricing power.

Recent insider selling.

Opportunities:

An attractive absolute and relative valuation. Mean reverting candidate with a valuation gap and the industry's worst performing stock price. Valuation at 5 year low for P/B,P/S, and stock price returns.

A history of sound capital allocation with management correctly weighing the benefits of acquisitions, technology improvements, debt reduction or share buybacks.

In the fourth quarter of 2016, announced a decision to explore strategic alternatives. A financial advisor retained to aid its exploration of strategic alternatives.



Long: DHX