MTSL comes crashing to the ground

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.

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2550351665_a2b1ca8bdf_oLet me hasten to say that this posting is about the last days’ run-up and subsequent collapse of the per share price of MTSL, the equity of MER Telemanagement Solution.

As far as I know, MER Telemanagement Solutions, the company, is fine and dandy (in fact, see here how fine I suspect it is.)

MTSL, the company’s equity is another matter, having experienced a 15% drop in per share price from $2.29 (as of August 7th, 2013) to $1.96 (as of 11 a.m., EST, today, August 9th, 2013,) without any adverse news from the company or the media.

Do I hear “What the Dickens is going on?

Actually, I am teasing. We know full well what is going on.

The first speculative craze and its collapse

MER Telemanagement Solutions is an Israel based company that I have written about in the past, primarily related to a speculative craze that played out around the company’s equity in late 2012 and early 2013, ending with a tremendous crash with the per share price of MTSL dropping from $5.11 to $1.56 in a very short time period — first from $5.11 to $3, or so, in a blink of an eye, and, subsequently, in a couple of months dropping further, to $1.56 — leaving a number of shareholders stranded with equity positions that were under water.

The cause of the 2012/2013 speculative run-up and subsequent collapse in the per share price is some thing that I written extensively about before, during, and after it occurred.

In my postings I identified that the run-up in the per share price from the sub $2 level to $5.11 in the period from late 2012 to the middle of March of 2013 was entirely speculative because it was known with near certainty that the company would lose its single most important contract, jeopardizing almost 25% of the company’s revenues and virtually annihilating its operating margin, causing the company to register a tremendous drop in net income, possibly, in fact, bringing the company into a situation where it would incur net losses.

As anticipated, the company did, indeed lose the contract, and the market reacted promptly and violently, punishing the speculators who, frankly, for the most part had not cared to understand the company’s business, financials, or outlook, but rather had followed other speculators in the manner of lemmings, and creating a large number of what is commonly referred to as bagholders (speculative investment involve the equivalent of passing a bag up the line until there no longer is someone to pass it up to, leaving the last holder of the bag, the bagholder, stuck with the bag,) experiencing realized and unrealized losses of up to 250%.

Here is a chart that clearly shows the action:

MTSL first run up and collapse-jpg

Whoever the bagholders were, for sure, they experienced significant pain.

Cashews for silver — finding value in the wasteland

When the meltdown in the per share price was complete, however, MTSL went from being a speculative dead trap to being one of the most compelling value investments that one could find in the middle of 2013. Here is why…

First, the company secured three new deals that in the long run may help in offsetting some — if not all — of the loss of revenue and margin that was caused by the the loss of the key contract. Second, the company made it clear that it was ready to pull the trigger on cost reductions if needed. Third, the company’s market capitalization dropped to $7.2 million, while its cash position grew to $5.26 million, reflecting the addition of $1.1 million in cash in the first quarter of fiscal year 2013. Fourth, it was confirmed that the impact of the loss of the key contract would not be felt before 2014.

Moreover, the $5.26 million in free cash on hand should be understood in the context of the company having no debt and having quarterly net income in excess of $300 thousand, pointing towards a net income of $1.2 million or better for the 2013 year, of which, of course, $300 thousand, or so, is already in hand. Assuming that there are no accounting games at play, the remaining $900 thousand could be added to the cash on hand, for free cash on hand of perhaps $6.2 million at the end of 2013 (see an important disclaimer about this cash in a previous posting (here.))

Update

On August 15th, 2013, the MER Telemangement Solutions released it earnings results for the second quarter of the 2013 fiscal year. Remarkably, the cash on hand grew by $340 thousand, or so, to $5.6 million and strongly headed for my estimate of $6.2 million at the end of the year.

That’s right! In a bull market where value investments were getting harder and harder to find, MER Telemanagement Solutions could (hypothetically and grossly simplifying the market dynamics, of course) be bought for $7.2 million, valuing the company’s operations, infrastructure, goodwill, intellectual property rights, pipeline, backlog, and future customer revenues at $1 million — $366 thousand less than the net income of 2012.

In other words, the entire company could (hypothetically and simplistically, again) be acquired for a net consideration of $1 million, or so — less than the amount of net income that the company will probably generate in its fiscal year 2013.

From a value investor standpoint this is as good as it gets — in fact it was like trading cashews for silver, and I was in. And if I had any doubts (I always do, of course,) I was encouraged by the fact that the total number of shares is incredibly low (four and half million, or so,) and the free float is a fraction of that.

The second speculative craze and its collapse

Over the last month some other investors have started muscling into the opportunity, securing up to 400 thousand shares over two trading days, July 3rd, 2013, and August 5th, 2013.

In an equity with very limited float, this sort of volume — and its resulting impact on the per share price — is notable, and on August 6th, 2013, subsequent to the buing on August 5th, 2013, which raised the per share price from $1.82 to $1.95, the market reacted in yet another speculative craze, raising the per share price from $1.97 to $2.29 on a trading volume of $227 thousand shares, stimulated heavily, I believe, by the momentum traders from Profit.ly (read more about this here.)

Well, the run up was, of course, speculative (there had been no news,) and from August 7th, 2013, through today, the run-up has collapsed, and, as I am writing this, the collapse continues.

Here is a chart that shows the initial buy on August 5th, 2013, and the subsequent speculative run-up and the (ongoing) collapse:

MTSL second run up and collapse-jpg

So, a few momentum traders made some money, and a bunch of them lost their shirt? Big deal… After all, momentum traders (whether swing or day traders) are, literally, habitual losers, as described in Paul B. Farrell’s blog, The Wall Street War Zone (here):

The bottom line is simple — most traders are losers. Earlier, Forbes reported on a study that the “North American Securities Administrators found that 77% of day traders lost money.” Now comes more evidence, BusinessWeek was reporting that 82% of all day traders lose money. That data comes from a recent study by a couple professors at the University of Taipei working in conjunction with University of California behavioral finance professors Terry Odean and Brad Barber. And yes, that is the same Odean and Barber who researched 66,400 Wall Street investors a decade ago and concluded, “The more you trade the less you earn.” …

The only people who really make money trading on a regular basis are the service professionals, especially the commission brokers. These pros make their commissions no matter how much investors and traders lose. Even in bear markets their ads paint a deceptive picture aimed at the wannabe trader’s super-confident but addictive and self-sabotaging genes—ads designed to convince naïve wannabe traders that the pros have some special secret that’ll beat the market—secrets they’re willing to share for a fee, naturally.

The truth is: They can’t … they never do … and they never will beat the market … no matter how long they try … trading’s a loser‘s game. But as I found out one more time in this “debate,” as I do in every “debate” with an expert who may be making a living selling trading secrets … I may as well have been trying to convince Raven the chimpanzee that eventually he too would lose, and lose big.

In that respect however, chimpanzees are superior to human traders. The trader’s DNA control their brains, they have no choice but to keep chasing the impossible dream that they can beat the market. The truth is, they’re addicted to losing. The pros know this, so they can take advantage of the wannabe traders never-ending delusional “winner’s fantasy.” And the game goes on ad infinitum, with the pros having a big laugh as they rake off big fees and commissions and get rich off the 82 percent of all traders who are repeat losers.

It ain’t over yet

All this silly trading activity aside, the fundamental value proposition for MER Telemanagement Solutions is, of course, intact, since the run-up and subsequent collapse had everything to do with momentum traders and blind followers and nothing to do with the fundamentals of the business.

Let me repeat that…. There are no fundamentals and business information that I know of that explains the last days’ changes in the per share price of MTSL, and, as far as I know, the business and the business outlook of MER Telemanagement is substantially the same as it was last week. Moreover, I am seeing a lot of activity from groups and individuals that I would characterize as being ultra-short-term opportunity driven. Therefore, I conclude that the rather crazy price movement of the last days is related to nothing more than speculation.

And here is where it gets really interesting. On or about August 15th, 2013, the company will release its earnings results for the second quarter of it 2013 fiscal year (historically, the company has issued its earnings releases on a Thursday, and in the case of the earnings release for the second quarter, it has typically released these in the second or third week of August.)

The earnings results in the first quarter were, by any objective measure, excellent, but their presentation of the results (the messaging, if you will) was poor, causing the market to react negatively (something that I wrote extensively about here.)

Ceteris paribus, this quarter’s result should also be excellent, confirming that there is significant investment opportunity around MTSL. And so, if the company is able to craft its presentation of these results in a way that is not horrible, the next days are going to be interesting with a dynamics of a collapsing per share price in the day, or days, leading up to the announcement of excellent results.

We will see what happens next, guess. If you are contemplating a blind follower style, speculative trade in MTSL (and, in particular, if you came here by way of a link from Profit.ly or some other, similar, junk broadcast service or chat board,such as thelion.com,) I urge you to read my words of caution (here,) and I remind you that you need to read the disclaimer in the About section.)

Update

On August 15th, 2013, the MER Telemangement Solutions did indeed release its earnings results for the second quarter of the 2013 fiscal year, and, yes, the results were excellent. However, astonishingly, the company repeated its error from the announcement of the earnings results for the first quarter, crafting an evasive and weak release (something that I wrote in detail about here.) The market’s reaction was immediate and severe, and as of the close of the market day on August 16th, 2013, the per share price of MTSL had dropped to $1.87, down from $2.26 before the earnings release, a 17.25% loss of market value over a period of two days.

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