The futility of selling early — Mind CTI again

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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

446822940_bf49440a9c_b (1)Having read my earlier postings about a programmatic approach to investment by way of MNDO (start here,) the equity of Mind CTI, and my earlier postings about the potential folly of dividend speculation (start here,) a reader of this blog suggested to me that selling ones position of MNDO immediately before the ex-dividend date would be an appropriate strategy, capitalizing on the — and I quote — “stupidity” of the dividend speculators.

Although the notion of capitalizing on the greed and ignorance of dividend speculators does appeal to me, I do not believe the reader’s approach to be long-term viable.

The issue is one of tax, liquidity, transaction expenses, and timing.

Assuming a cyclic behavior consisting of sell-before-ex-dividend-date followed by buy-after-price-drop, which, of course, implies a holding period of less than 12 months, the investor would be subject to taxation on a short term basis, which for me, for instance, effectively would result in a Federal income tax hit climbing towards 40%, supplemented by a state and local tax bordering on 10%, for a total tax bordering on 50%.

Had I, for instance, acquired $100 thousand worth of shares in 2013 at an average price per share of $1.75, amounting to approximately 55 thousand shares, and sold these at today’s rate ($2.30 per share,) my pre-tax yield would be $125 thousand, or so (accounting for transaction expenses and supply/demand pricing issues,) for a net pre-tax gain of $25,000 and a post-tax gain of $12,500.

Naturally, this approach raises demand for liquidity and is impacted by transaction issues and expenses — and, importantly, it is characterized by a per share price risk and the broad assumption that the price will not go up immediately after the ex-dividend date adjustment. Moreover, the ugly pairing of requirement for superb timing (the cause of death of many a trader) and risk comes into play — in particular since it is ultimately impossible to know, for sure that: (1) an initial position can be secured, (2) that the initial position can be sold at a the required premium, (3) that a later position can be secured, and (4) that a dividend will actually occur.

A 12.5% gain on a six to nine months investment is, of course, not shabby when compared to the average 0% interest that your local bank savings account carries, but it does not in any way perform substantially better in the long run than does the pure dividend play, which with more than 55,000 shares, no transaction costs, and, critically, no per share price risk, handily and consistently delivers more than $12,000 after taxes, assuming a dividend taxation of 15%, and produces more shares — and thus more dividends — year after year.

Now, it would, of course, be possible to argue that applying this strategy for a position held in an tax-advantageous retirement vehicle such as an IRA might work (it would certainly negate some of the tax issues,) but, generally, tax-advantageous retirement vehicle are best suited for long term hold strategies and the use of these vehicles for other investment strategies is something that should be thought through very carefully.

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Please, sir, I want some more — Mind CTI redux

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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

2163042781_29c776780e_oEarlier, I wrote about a programmatic approach to investment related to Mind CTI Ltd and its equity MNDO, laying out a simple formula that would have yielded an estimated 388% gain over a five year period:

(1) settle in for a long run, (2) pony up $100,000, (3) every year re-invest the entire dividend payout (less a mandatory 25% (or so.. the amount varies from year to year) dividend tax withholding) by buying additional shares exactly 90 days after the previous dividend was paid out, and (4) — and this is the really important step — ignore any and all temptation to trade the equity, game the system, or cash in on short term gains in the per share price.

My posting (read it here) generated quite a lot of traffic and follow-up questions, in particular after Mind CTI announced is fourth quarter and full year results for its fiscal year 2013 (read more about this here,) and — again — announced a REIT like dividend.

So without further ado, I provide more information related to my rudimentary modeling.

First, here is the previously published results table, updated with information about an element that I had not commented on: A U.S. tax credit available on top of the discussed position gains, amounting to almost $22 thousand over the period in question:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

Please note that these computations are really rudimentary, making very simple assumptions about the tax rates and trade viability across the periods.

Ok, now that we got the disclaimer, let’s look at the evolution in position value, not including the $22 thousand tax credit:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

We note a couple of interesting things…

First, the position value was at its peak ($518 thousand) in april of 2011, immediately prior to the exit of a very large institutional holder, whose position liquidation caused a drastic drop in the per share price.

Second, the position value was at its low ($59 thousand) in March of 2009, reflecting the overall market conditions.

Third, the appreciation since the low (from a low of $59 thousand to a high of $518 thousand) has been enormous, and to deviate from the programmatic approach when the position value dropped in conjunction with the market would have been a blunder of the highest magnitude.

When reflecting on the third point it is important to remember that a proper analysis of Mind CTI would have uncovered a very healthy, debt-free, cash-flow positive, and consistently dividend-paying business, and, so, it should have been clear that the market gyrations were — fundamentally — irrelevant.

So, in the immortal words of Mr. Bumble:

“Come, Oliver! Wipe your eyes with the cuffs of your jacket, and don’t cry into your gruel; that’s a very foolish action, Oliver.”

That’s it. Have a nice day.

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $25 is suggested — however, any donation is, of course, appreciated.


Mind CTI is prepared for 2014

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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

2178452403_a7ddd24205_o

Onwards and up

Mind CTI Ltd. released its financial results for the fourth quarter of fiscal year 2014 and full fiscal year 2014 on Tuesday, February 25th, 2014.

As usual, I have summarized these results and my commentary on these in a dynamic posting that you can find here. The dynamic posting also provides summaries of previous quarters’ results and associated commentaries.

After several quarters of re-gearing, with added expenses and headcount and lowered operating income, the company ended its fiscal year with a bang, turning in a fourth quarter that was way better than expected, establishing a significant foothold for the 2014 fiscal year, and paying its patient shareholders a significant dividend.

On the back-end of significant wins in the fourth quarter of fiscal year 2013, the company appears very optimistic about fiscal year 2014 and it backed this confidence up with a $0.24 dividend, payable in the first quarter of fiscal year 2013, and constituting a 10% yield or better (read more about the very special dividend situation for Mind CTI here.)

For more information, please refer to the dynamic posting (here.)

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $10 is suggested — however, any donation is, of course, appreciated.


Genius — Formula Systems pulls a Berkshire Hathaway

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.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

2163825760_6b856d0771_oIn earlier postings (here and here,) I wrote about Formula Systems (1985) Ltd., a company that generated $785 million in revenues and $22 million in net income over the last twelve months, while — and this is no mean feat — maintaining zero debt and growing both revenues and net income significantly.

The point of my earlier postings was that the company, which controls three companies (Matrix IT Ltd (traded on TASE as MTRX,) Magic Software Enterprises Ltd. (traded on Nasdaq and TASE as MGIC,) and Sapiens International Corp. NV (traded on NASDAQ and TASE as SPNS,)) has a market-capitalization that is significant lower than the market capitalization of its controlling stake in its three subsidiaries.

In my postings I explained how this capitalization discount was a function of holding company discount, a quite common occurrence, and I also explained how the holding company discount could sometimes become a holding company premium, as it is the case for Berkshire Hathaway:

Holding companies are not unusual either. Rather, they are the norm. For instance, Berkshire Hathaway, perhaps the world’s most successful company, is a holding company. In Berkshire Hathaway there is clearly no discount (in fact, in Berkshire Hathaway’s case there is a premium, with the value of the sum (the holding company) exceeding the value of the parts (the subsidiaries,) which is predicated on a decade long establishment of trust in the investment worthiness of the subsidiaries and the integrity of the principal managers, Mr. Warren Buffett and Mr. Charlie Munger.

Formula Systems is, without a doubt, undervalued by the market, but its credit rating is stellar — a function of an incredible balance sheet and incredible, sustained growth on a near-zero debt basis.

And so, recently, the company did something unusual: It took on approximately $50 million in debt through a commercial loan.

Why?, you ask. After all, the company, directly and through its subsidiaries, holds more than $100 million in cash, so why in god’s name would Formula Systems take on an interest bearing loan.

Well, the simple answer is, of course, that the loan is cheap and that there is no reason to not bite when given access to a carrot.

This leaves only the question of what to use the cheap cash for.

Yesterday afternoon an answer to that question started emerging, when Magic Software announced a secondary offering for six million shares and with, this morning, Formula Systems and Magic Software announcing that, in a totally unrelated move (hint, hint, wink wink) Formula Systems would acquire 700 thousand shares of Magic Software in the secondary offering at a price of $8.50.

This move is clever on so many levels that it borders on genius.

First, with the secondary offering, Formula Systems had to top off the tank on its holding of Magic Software stocks in order to maintain control. Second, with one bold stroke Formula Systems solidified Magic Software’s offering by guaranteeing almost twelve percent of the available shares. Third, with a offering pricing of $8.50, a ten percent discount over yesterday’s trading price of MGIC, the equity of Magic Software on Nasdaq, Formula Systems secured its top off at a staggering discount to the market.

Yes, for sure, the announcement of the secondary offering shook the market this morning, resulting in a market capitalization drop of almost ten percent for Magic Software, but that, as we know, is immaterial, reflecting only the market’s lack of fundamental understanding of secondary offerings and the inherent value of Magic Software. In fact, I would wager dollars to donuts that MGIC will quickly — very quickly — rise to a per share price that is higher than yesterday’s close, reflecting the size of the secondary offering ($51 million,) the implied acquisition and/or expansion, and Magic Software’s incredible track record in the areas of acquisition and growth.

But that is not what is notable. What made me pay attention is that Formula Systems did was exactly what a first rate holding company is supposed to do: use its stellar balance sheet as leverage, helping a subsidiary achieve velocity.

Oh, and the money given to Magic Software are not going to go to waste. Magic Software, which has a track-record of growing capitalization, revenues, and net income at a staggering pace, can now, without breaking a sweat, acquire a company in the price range of between $75 million and $150 million (after the closing of the secondary offering, cash on hand in Magic Software will be bumping up against $100 million,) and, in fact, I would expect to see Magic Software make a major acquisition soon — very soon.

By the way, it is also possible for Magic Software to issue a special dividend in the range of $1 per share, which would be a real stunt, immediately returning $20 million to Formula Systems.

So, there we have it…

Take that Berkshire Hathaway!

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A paradigm for programmatic investment — 388% gain with Mind CTI

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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

ISO-computer3Tomorrow, February 25th, 2014, Mind CTI Ltd. releases its financial results for its 2013 fiscal year.

As the reader of this blog probably knows by now, Mind CTI is an Israeli company that I follow with a lot of interest and believes yields a significant earnings opportunity for investor.

A quick glance at Mind CTI does not reveal something very exciting. The company is small and its equity is trading at the sub-$5 level of a micro-cap stock.

Look behind the facade, however, and you will find an extra-ordinary dividend investment opportunity anchored in a rock-solid company with a stellar record of producing lots of cash, providing something quite unique: The opportunity to make substantial gains through a programmatic investment paradigm — the holy grail for any long-term investor.

I will explain, but first let me provide some background.

In 2008/2009, the per share price of MNDO, the Nasdaq traded equity of Mind CTI, experienced significant troubles because of the company’s investment of approximately $20 million into inherently worthless Auction Rate Securities (read more about how that came about on Mind CTI’s Wikipedia entry (here) — a tale of fraud and deceit by professionals in the securities industry) and in spite of a rock-solid operation and stable cash-flow.

Had you in 2008, when the company’s shares in a reaction to the Auction Rate Securities debacle reached a per share price level of less than $1, analyzed the company’s situation and fundamentals and reached the conclusion that the Auction Rate Securities issue was annoying, but, fundamentally, irrelevant, you could have acquired MNDO shares cheaply.

Had you also recognized that Mind CTI’s operational and cash-flow performance was not a fluke, you could have laid out a very simple mechanism for generating very substantial long-term gains: (1) settle in for a long run, (2) pony up $100,000, (3) every year re-invest the entire dividend payout (less a mandatory 25% (or so.. the amount varies from year to year) dividend tax withholding) by buying additional shares exactly 90 days after the previous dividend was paid out, and (4) — and this is the really important step — ignore any and all temptation to trade the equity, game the system, or cash in on short term gains in the per share price.

Had you done so, you would today be holding 177 thousand shares, valued at $380 thousand if you liquidated your position now, or — if you were to keep applying the programmatic approach, generating $42 thousand in dividend in 2014.

Moreover, should you decide to liquidate your position, it will be taxed on the basis of a long-term investment at a rate of 15%, making your post-tax payout $338 thousand, for a post-tax gain of $238 thousand, or a 338% return on your investment. More importantly, however, you had achieved this staggering return with near-zero risk, negligible heart-burn, limited transaction expenses, no portfolio oversight, and no exhausting discussions with the IRS — in other words with little or no fuss. It would quite literally be the easiest money that you ever made.

Here is an immensely simplified table showing how this would have gone down:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

Now, if you had followed MIND CTI in detail, you may also have arrived at the conclusion that the company’s intrinsic value exceeds its market value by a significant margin (read here about Mr. Igor Novgorodtsev’s conclusion that the gap is 40% to 56%) and that the per share price of MNDO would grow to $5, $7.50, or $10 over 3 years, and, so, you may conclude that 177 thousand shares alone (i.e. not including the increase in shares that you would experience over the next three years,) would reach a value of $884 thousand, $1.3 million, or 1.8 million, respectively.

Ok, I hear Hold it a minute buddy…. Surely, the depressed value is a function of the dividend policy and resulting payouts, and, so, there cannot be any gains.

Well, not really. In an efficient market, a conservative no-debt company that consistently throws off the sort of dividends that we are talking about here (a yield of between 10% and 20%) should be worth far more than Mind CTI’s capitalization implies.

Ok, so let’s assume that we put the efficient market aside for a second… If Mind CTI was to suspend its dividend, then the cash being horded would automatically — and dramatically — increase the company’s value (and, presumably, its market capitalization.)

And guess what? If the company did not suspend its dividend, then the worst thing that would happen to an investor would be that he or she would be provided with an option to let the programmatic approach continue to do its job, offering a continuous accumulation of MNDO shares.

Even in an inefficient market, the per share price of MNDO will, of course, eventually, go up, as it did in 2011 when it exceeded $3.45, probably at part of a cycle where the financial market turns away from flashy social media shares with excessive valuation and seek out solid, debt-free, cash-producing companies such as Mind CTI.

By the way. Had you, in our not-so-hypothetical scenario, exited in 2011, at a per share price of $3.45, you would have netted $500 thousand before taxes or $440 thousand on a post-tax basis. Not shabby for an investment that does not have the sex appeal of Facebook, Twitter, or LinkedIn.

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $25 is suggested — however, any donation is, of course, appreciated.


FORTY — per share price in a choppy sea

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.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

wavesIn an earlier posting (here,) I wrote about the continued holding company discount around FORTY, the equity of Formula Systems (1985) Ltd., noting that Formula Systems has a market-capitalization that is significantly lower than the market capitalization of its controlling stake in its three subsidiaries, Matrix IT, Magic Software, and Sapiens International.

Reviewing the posting it occurred to me that I had forgotten to highlight that the reason that it was hard to capitalize on this discount (it is a clear arbitrage opportunity, of course,) is the near-complete lack of trading liquidity and extreme price volatility.

I have written at length about the trading liquidity and associated volatility (here and here,) getting some mileage out of illustrating the volatility in terms of leverage (did you, for instance, know that with the leverage inherent in the volatility of FORTY, you can buy a $350,000 dwelling for precisely five cents down, or that you could put up $643, leveraging up to $4.5 billion, and buy a Nimitz class carrier?)

This volatility is currently rearing its ugly head with the price of FORTY oscillating by $3 to $5 dollars (and that is on an equity trading in the (absurdly cheap) $25 to $30 range,) which is ironic since Magic Software, one of Formula Systems’ three subsidiaries has just released its earnings results, yielding the enormous growth in revenue and income that we have become used to with Formula Systems and its subsidiaries (revenue increased 15% on a year-over-year basis and operating income grew 34% on a year-over-year basis.)

Dont be a Mooch!

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2 + 2 = 3.2 — Formula Systems just can’t catch up with itself

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.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

In an earlier posting (here,) I wrote about Formula Systems (1985) Ltd., a company that generated $785 million in revenues and $22 million in net income over the last twelve months, while — and this is no mean feat — maintaining zero debt and growing both revenues and net income significantly.

The point of my earlier posting was that the company, which controls three companies (Matrix IT Ltd (traded on TASE as MTRX,) Magic Software Enterprises Ltd. (traded on Nasdaq and TASE as MGIC,) and Sapiens International Corp. NV (traded on NASDAQ and TASE as SPNS,)) has a market-capitalization that is significant lower than the market capitalization of its controlling stake in its three subsidiaries.

Today a nice little cash dividend from Formula Systems arrived in my brokerage account, prompting me to take a closer look at the market capitalization of the company and its subsidiaries.

And guess what?

In spite of the company growing its market capitalization by 21.82% since June 20th, 2013, the capitalization is still dragging by 20% — an improvement of only 2% over a period of almost six months (and, in real economic terms, the drag actually did not decrease… rather it increased by $3.4 million from $85.39 million to $88.78 million — a fact that is obscured by the relativity of the percentages for the large amounts that we are talking about here.)

Here is the current capitalization snapshot:

 (c) Per Jacobsen, 2013 and 2014.  All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

For the reader’s convenience, here is the capitalization snapshot from June 20th, 2013:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

To learn more about the underlying issue, read my earlier posting on holding company discounts (here.)

Dont be a Mooch!

If you have enjoyed or think you will benefit from this posting, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $10 is suggested.