Being an Excellent InvestorPosted: March 18, 2013 | |
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
I recently posted a reply to a posting on a Yahoo Finance message board for Mind CTI in which the poster asked:
Is Mr. Market valuing MNDO correctly?
How much is MNDO’s business worth? For $20 million ($40 million market cap minus $20 million cash) you are buying a business that generates $4-$5 million in annual FCF and a recurring revenue base. This means an ex-cash FCF yield of 20-25%!
So board – What am I missing?
As you can read about in a previous posting I have had a long-standing interest in Mind CTI predicated mostly on the market’s inability to — for a period of more than five years — value the company’s equity, MNDO, correctly. My interest in Mind CTI, however, is not limited to its potential value from a fundamental investor’s standpoint, but also includes the way that MNDO has been subject to dividend related speculation for the last couple of years — something that appears to have ended as of this year, but, as they say, that’s another story.
By way of background, Mind CTI’s dividend payouts since 2003 have been spectacular, with, for instance, the yield for this year’s dividend being around 10%. In 2009, for instance, on the tail-end of a per share price of $0.65 at the beginning of the year, the dividend payout was $0.80 per share. Let me say this again… In 2009, you could buy MNDO shares for $0.65 by shares in the beginning of the year and collect $0.80 per share in dividend at the end of the year.
My response to the poster, which started out as a direct answer to the question posed, quickly became a quasi-rant along the lines of Mr. John F. Kennedy’s now famous ask-not-what statement reflecting my overall feeling that being a long-term investor requires more than just moving some money across the table and then sitting back and hoping for the best.
Here is what I wrote, edited only slightly….
Answering the question directly
From a pure fundamentals standpoint, yes, the market is wrong.
However, from pure fundamentals standpoint, the market has been wrong 99% of the time when it comes to MNDO and Mind CTI — perhaps never more so than when the company’s per share price sunk to $0.65 per share, giving a valuation of somewhere in the range of $12.5 million for a company that since 2003 has thrown of several million dollars per year in dividend and has had ample cash reserves.
Rolling with the idiotic $0.65 per share price, I am no longer expecting that the market understands — or even cares — about Mind CTI and its equity. In fact, I am more on the other side on the fence where I am taking a Buffett-like view and saying that the more the market is wrong, the cheaper MNDO is, and as long as it continues to throw of dividend payments at the pace that it has done to date, then it is hard to complain.
You can rationally argue that the market is wrong by looking at fundamentals such as FCF, but until such time that Mind CTI begins growing its top-line, you can also argue that the market is right — assuming that there is a way to achieve more than +10% ROE, something that I believe most investors fool themselves into thinking.
The idea of investing in a sub $100 million micro-micro-cap company with the expectation of a regular +10% yield is simply not what most investors look for. In fact, to the extent that someone is chasing that dividend yield, I think they look for large companies such as, say, utilities, where they — right or wrong — can get some level of assurance that they can’t get from a company such as Mind CTI.
Releasing potential value
The formula for spectacular top-line growth is not nuclear physics: You invest in sales, marketing, and R&D or you invest in mergers and acquisitions, praying (and a prayer it is — always) that you will get a return. The more growth you want, the more you invest, and the more you risk.
And therein lies the rub….
Should Mind CTI’s management and Board of Directors wish to accelerate sales, they must (1) take a risk and (2) reduce the dividend (one way or another,) something which would, I am guessing, lead to a near-immediate drop in the per share price unless orchestrated very carefully from a PR standpoint (needless to say PR is not exactly Mind CTI’s greatest strength.)
To my mind, the answer is to grow the top-line in a measured way, minimizing the risk and the cash outlay, so as to protect the dividend (and, therefore, the capitalization.) This could be through a combination of some sort, but it would need to be a sure-fire, fire-sale kind of things, and those a few and far between.
But, of course, that ain’t sexy, and, since price increase requires market-participation, the return to some balanced fundamentals-to-capitalization may be a ways of.
I genuinely think that this sort of approach is exactly what the company’s Board of Directors and management team wants to take. However, unfortunately, we are now finding ourselves in a situation where the high-margin business is going away, and, so, the company has to focus its attention on replacing this business with something else (and current market logic dictates that the replacement for high margin is high revenue with lower margin) in order to — again — protect the dividend and the capitalization.
Only once the high-margin business is replaced, can new market-capitalization increasing growth kick in.
Personally, I think the challenge of protecting the dividend without running over the cliff because of expenses is a significant one, requiring the company’s full attention. Although anyone can pontificate on how to do that, only a select few of them could actually handle such a challenge.
The P/E reflects, of course, this reality, and if you compare the P/E for MNDO with that of, say, MTSL, the equity of MER Telemanagement Solutions, you can see it clearly reflected. MTSL, an equity far inferior to MNDO is, on a forward basis, considered to be twice as valuable to MNDO, and have over the last quarters rewarded speculators with a huge return.
MTSL’s P/E, however, comes at a price. To get to the current situation, the equity became near worthless (actually, let me rephrase, the equity became worthless,) and even had to go through the dreaded — and totally useless — reverse split, only saved by insiders infusion of cash into the business. This is a path that I, for one, do not want to see Mind CTI follow, because, at the end of the day, once you tip over and head for the ground you cannot be assured that you will be able to pull out of the dive.
There is, of course, an alternative to all this: Selling the company. However, the uncertainty surrounding such an event is vast and with an employee base of 339, I think most potential buyers of Mind CTI would be rather hesitant to pay a premium. Basically, a good premium is achievable, I think, but only after the company’s top-line grows and shows future growth.
The job of investors
At its very core, the reason why investors hire a management team is to navigate exactly these challenges. Certainly, the management team, which is fairly seasoned should be able to do so (yes, there has been mistakes in the past — some of them ugly,) and I, for one, think we have to support the team in its work.
I am not saying that the shareholders should sit passively. As co-owners, I believe, in fact, that it is shareholders’ duty (and in their interest) to support the team, let the team know what they expect, present ideas to the team, promote the company to investors and potential prospects, and generally act as if though they care. Until this happens, I am not sure that that shareholders have the right to wish for a better capitalization.
If you think about it, you, as a co-owner, is the only resource available to the company that is entirely free and have no negative impact on the bottom-line whatsoever. In fact, every ounce of energy that you put into promoting or otherwise helping the company goes directly to the bottom line.
So, my point was that being an excellent investor includes more than just allocating money. In its simplest and most direct form it includes voting on proxy matters, including, yes, the firing of the Board of Directors (much the same way you would fire your attorney or an employee if you found that he or she did not adequately represent your interest,) and at its most sophisticated it includes advocating to and on behalf of the company. In a sense, of course, the demand for advocacy is what makes being a contrarian, value-focused investor most difficult.
By the way, I have written about MTSL in the past, and I will continue to write about it in the future, since it is one of the most interesting examples of speculative market behavior that I have had an opportunity to observe up close and personal. Stay tuned….
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