Daniel Rudewicz, the managing member of Furlong Samex LLC, has provided a guest post today on Paragon Technologies (PGNT.PK). Furlong Samex is a deep value investment partnership based on the principles of Benjamin Graham. Daniel can be reached at rudewicz [at] furlongsamex [dot] com.
Anyone Need a (Sanborn) Map?
In his 1960 partnership letter, Warren Buffett described his investment in Sanborn Map. At the time of his investment, Sanborn Map was selling for less than the combined value of its cash and investment portfolio. Additionally, the operating portion of the company was profitable. Opportunities like Sanborn Map are a dream for value investors.
The market downturn of 2008 had created some similar opportunities. But by early 2010 the market price of most of those companies had converged to at least the value of their cash and investment portfolio. One company that has managed to stay under the radar is Paragon Technologies. It was trading below its cash level when the company elected to be listed on the Pink Sheets. This also removed the requirement to file with the SEC and now the company is no longer on many of the databases and stock screens.
It’s a fairly illiquid company whose most recent quarter was profitable. As of 9/30/2009, Paragon had just over $6 million in cash, or $3.88 per share.
Cash and cash equivalents $6,094,000 Shares outstanding 1,571,810 Cash per share $3.88 Year to date, its stock has traded between $2.20 and $2.55, quite a discount from its cash. The Board and the interim CEO are looking at strategic alternatives and will consider shareholder proposals. Unfortunately, what we had hoped was a 1960 Buffettesque proposal was turned down. In the proposal we outlined the benefits of the company offering a fixed price tender at $3.88 per share. Maybe next time. To the Board’s credit, they have authorized a large share buyback and have increased the amount authorized several times. The problem is that authorizing an amount and buying back an amount is not the same thing.
While the interim CEO searches for opportunities, the company could conceivably end up buying back enough shares in the open market so that we’re the only shareholder left. The downside is that I’m not sure that we would want that. Even though it was profitable last quarter, the long term earnings record is not that impressive. Looking back at Buffett’s Sanborn Map investment, it seems like Sanborn’s Board should have encouraged Buffett to stay on and manage its investment portfolio. Our hope is that Paragon moves in the direction of becoming a tiny Berkshire or Fairfax by putting a great capital allocator in charge of the cash. It would be a great way to use some of the company’s operating losses to shield future investment gains. So if you’re the next Buffett — or even ‘Net Quick’ Evans — send them your resume. Maybe they’ll hire you (I doubt it).
Our firm’s portfolio is relatively small and we have purchased as much of Paragon as we would like to at this time. If you would like a copy of our letter to the Board or any of our research, feel free to contact us and we’d be happy to share it with you. There are risks involved with this company so do your own research before investing.
Disclosure: Long Paragon Technologies (PGNT.PK). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.
[Full Disclosure: I do not hold PGNT. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
[…] (PGNT). I first heard about the stock over two years ago from this series of posts on greenbackd (here, here, and here). The author of the second and third posts, Sham God, also wrote a book on value […]
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[…] guest post on Paragon Technologies (OTCBB: PGNT), which Daniel Rudewicz of Furlong Samex also covered in January. Sham is the managing partner of Gad Capital Management, a value-focused […]
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[…] guest post on Paragon Technologies (OTCBB: PGNT), which Daniel Rudewicz of Furlong Samex also covered in January. Sham is the managing partner of Gad Capital Management, a value-focused […]
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greenbackd
great point and this i believe would be Joel Greenblatt’s reason to support the magic formula. He is looking for the average performance of a basket of magic formula stocks not a specific stock that has meet the magic formula criteria. And this can explain why the magic formula works and may continue to work.
I first introduced PTG now PGNT.PK WITH 3 other ideas that were creating shareholder value with share buybacks. All the stocks did well except PTG (PGNT.PK) down -5.51% as opposed to the outstanding returns of the other ideas
http://seekingalpha.com/article/123544-creating-shareholder-value
NOOF +48%, PLXT +129%M FEIM +87%, PTG (PGNT.PK) -5.51%
So investors may need to take a basket approach when choosing stocks with a quantitative value method.
John
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Thats definitely right. Back in 2001-3 I played the net-net strategy as a basket. There were about 15 stocks in the basket. 5 ended up being zeros, 5 are STILL hanging out at the same level, and 10 did well. But the 10 that did well did VERY well (VCLK is an example, and TSCM (which is now back to cash but was much higher for awhile)).
However, in this particular case it almost too small. There’s just too much incentive for management to do whatever it takes to stay under the radar (stop filing, delist themselves, etc) and really destroy what little shareholder value there is left. And because of its size its actually harder for an activist to take over the company (without help from management the costs of liquidating the company can wipe out a fair amount of the cash, specifically given their revenues here).
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You may be right, but I would never discount the possibility that this performs quite well. I think this is one of the instances where the arguments on both sides are equally valid, and the investor taking a position or leaving it is equally justified in doing so. Only time will tell. In such an instance, I’d be inclined to take a position because I favor the simple statistical model over qualitative factors and my own judgement. I’d be very happy to see some research on any other factors influencing the performance of sub-cash stocks so I could move from a qualitative analysis to a quantitative one.
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I hold some of PGNT.
One attraction is that the management/board here has been consistently repurchasing shares below NCAV. They may not be as aggressive as I’d like, but they are doing the right thing from a capital allocation perspective.
So, I generally agree with the worries expressed, but in this case, I’m not sure they apply.
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In our current market system, company managers and boards can do almost anything they want regardless of shareholder interests. There are some actions that shareholders can take to protect their interests, but the majority of the power lies with the management/ boards (aka: “the bad guys”).
When large companies rob shareholders, this gets a lot of press and will often “shame” the management teams into more or less doing the right thing.
But small companies can do anything they want and there is almost nothing to stop them. They easily squander away shareholders cash and no one ever even hears about it.
As such we should demand a gigantic discount to intrinsic value when investing in nano-cap companies such as PGNT. Who cares how much value shareholders could get if the board acted in their interest. The board will only act in its own interests. And we can blog about it until the cows come home.
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I always get worried with these ultra-microcaps trading for less than cash. They basically have zero incentive to get the stock price up and every incentive to just drain cash as long as they can. Its a lifelong sinecure for them.
The CEO owns 20,000 shares. So he has two choices. Make $80k (if stock gets to $4), or drain $6mm out of the company for the rest of his life. Ethics aside, what would any rational businessman do here?
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You raise an interesting point here, James. If we use sub-NCAV as a proxy for sub-cash (which may or may not be valid), James Montier’s Graham’s net-nets: outdated or outstanding? is instructive. At an individual company level, a net net is more likely to suffer a permanent loss of capital than the average stock:
Which Montier suggests is the reason these bargains continue to be available:
Paradoxically, what is true at the individual company level is not true at an aggregate level. The net net strategy has fewer down years than the market:
If the parallel between sub-NCAV and sub-cash is valid, a basket of sub-cash should perform well.
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