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.]
Greenbackd 