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.


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.


MNDO dividend speculation — a bad neighborhood

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.

17620vOn January 23rd, 2014, I wrote a posting (here) about how someone or something had bought perhaps 750 thousand shares of MNDO, the equity of Mind CTI, a micro-cap that I have written about in the past (refer to the XREFs section (here) to get a handle on previous articles about Mind CTI.)

This purchase — at a simple average purchase price of $2.19 per share — represented an investment of at least $1.6 million. A tidy sum by any measure.

Dividend March 2013Yesterday, Mind CTI announced that it had received court approval for a dividend in the amount of $0.24 per share (under Israeli company law, a company that distributes profit must seek court approval for such distribution in certain circumstances where profit and distribution is reasonably close to each other or distribution exceeds profit, and, since Mind CTI’s dividend policy essentially sets a regular dividend equal to EBITDA, the company routinely seeks and gets such approval.)

On a pre-tax basis, a dividend of $0.24 per share equals a yield of more than 10%, a unique gold-standard for profit sharing that I have written about in the past (here.) In fact, had you bought MNDO on one of the its annual regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price excursions, your yield would be close to 15%, unparalleled in the world of micro-cap technology stocks.

There is a distinct possibility that the buyer of the 750 thousand shares has extremely short-term interests in MNDO, gambling, in essence, on achieving a two-for-one benefit, in the form of an increase in the per share price in the time period leading up to the dividend issue and the actual dividend payment itself.

If so, the buyer is, of course, playing with fire since, when you take into effect the mandatory tax withholding and the aforementioned regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price, there can be no assurance that an average exit price of $2.19 plus some margin (to account for the tax withholding) can be achieved. In fact, even if the per share price does increase over the coming period, 750 thousand shares is so much out of proportion to the average daily volume that the actual exit can cause a collapse in the per share price, making the speculative dividend play a loser.

I sure hope that whoever engineered the purchase knows what he or she is doing. Normally you would, of course, assume so, but I am a bit jaded as I keep running into investment professionals who does not appear to grasp that dividends are a zero-sum game and that the very nature of Mind CTI’s dividends, which are so large and so spaced out in time as to make the automatic post-dividend adjustment of the per share price sufficiently significant that the market simply absorb it the same way that it can for, say, a quarterly dividend paid by a utility, makes it negative-sum game.

Crudely speaking, unless the entry point is timed meticulously, a dividend speculator will lose his or her shirt on MNDO.

Regardless of this particular buyer’s intelligence, the developments have not been good lately. The purchase, which, as it must for low liquidity stocks, happened piece-meal, drove the per share price from $2.10 to $2.25.

With the per share price now having reverted to $2.10 and assuming an average buy price of $2.19, the mystery purchaser is faced with a negative balance of almost $70 thousand.

Should the dividend clock ring tomorrow, the purchaser would, if he or she attempted to exit immediately, face a net loss somewhere in the neighborhood of $200 thousand when taxes plus downward pressure on the per share price are taken into account.

That, of course, is a pretty bad neighborhood to be in, so perhaps the purchaser has other plans.

Participate, please….

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Action!

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.

4976468511_5a6f17288b_oToday was a crazy day with two monumental events unfolding at warp speed.

First, the trading volume for MNDO, Mind CTI’s NASDAQ traded equity, increased dramatically, possibly reflecting very good news from the company and the expectation of another dividend in the 10% yield class.

Second, MER Telemanagement Solutions fell flat on its head again, announcing the cancellation of a three year contract that it had entered into in the third or fourth quarter of its 2013 fiscal year, causing a near-immediate drop in the per share price of its equity.

Mind CTI

I have written extensively about Mind CTI, an Israeli company that I follow with a lot of interest – primarily because I think that MNDO, the company’s equity, yields a significant earnings opportunity for myself, but also because the trading patterns that were found around MNDO in relation to the annual dividend payouts by MIND CTI during the period from 2009 through 2012 (but, I hasten to say, are no longer be in effect) are intellectually interesting.

If you are new to Mind CTI go to my recent posting about Mind CTI’s third quarter (here) and work your way back through earlier postings to get a sense of why I think MNDO is a gem.

As I wrote in an earlier posting (here,) long time followers of Mind CTI and MNDO were watching for two inter-connected issues as the company closed out its third quarter:

First, there will be a focus on net income, with the expectation that third quarter earnings for fiscal year 2013 will dictate the disposition of the annual dividend (Mind CTI has what is perhaps the strongest dividend track-record of any technology stocks in the market today, and, accordingly, its investor base is extremely stable — read more about Mind CTI’s dividend here.) Second, there will be a focus on the progress made on the acquisition and the obvious question of whether or not Mind CTI, which has strong cash reserves and strong free cash flow, can achieve a meaningful acquisition while maintaining its dividend track-record.) Currently, however, the consensus appears to be that almost regardless of the quarterly results, the per share price of MNDO will begin an ascent after or around the day of the earnings release with the only question being how radical this ascent will be.

As I wrote about in the posting discussing the third quarter’s results (here,) the company addressed both these issues in its earnings release for the third quarter of its 2013 fiscal year, confirming its intent to issue a dividend and undertake an acquisition.

And that would have been enough to make anyone who were following the company sit up and pay attention. But, wait!, there is more!

One of the key challenges facing MIND CTI in 2013 was the loss of some key high margin contract, impacting five to ten percent of the company’s revenue and, of course, the company’s gross margin.

The company responded to this challenge in a most unusual way, increasing its staffing profile, gambling that if it increased its staffing it could attract more work and, therefore, generate more revenue, and, eventually, make up for the lost margin.

Increasing your burn while increasing profitability is a tall order and certainly not something that most companies could pull off. But Mind CTI is not most companies and on December 23rd, 2013, the company released a press release with the excellent news that the strategy appears to be succeeding and had lead to two “meaningful” wins:

“We are pleased to announce these two new important wins. For the last few years we have focused on preparing the company for such potential wins. We have maintained a global presence and have increased our workforce to enable support of these larger prospects in our pipeline as they turn into new projects. These latest wins show how MIND’s solutions are gaining market share”, said Monica Iancu, President and CEO of MIND CTI. “We continue to experience increased interest in our solutions and we expect to meet our goal of internal growth.”

If you had snoozed through the third quarter announcement, then now was the time to pay attention.

And today somebody did. In the 11:30 a.m. to 4 p.m. trading window, close to one million of the outstanding MNDO shares were traded, causing an 8% spike in the per share price. This volume should be contrasted to an average daily trading volume of less than 50 thousand shares and a float of slightly less than 19 million shares.

The effect was immediate and noticable. For my portfolio, for instance, it caused a near-immediate leap of more than $40 thousand, a tidy sum by any standard.

Much of the gain would disappear later in the day. An interesting fact in itself — for what does it signify when a buying frenzy does not create a sustainable increase in the per share price?

Something was definitely cooking with MNDO today, and I can’t wait to see what happens next.

MER Telemanagement Solutions

MER Telemanagement Solutions is another Israeli company that I follow with great interest and that I think could eventually, over time be an interesting investment object.

However, while Mind CTI is a paragon of virtue when it comes to communicating in an open and straightforward manner with its investors and, so to speak, talking-the-talk-and-walking-the-walk, MER Telemanagement Solutions is an investor’s worst nightmare, a company that is oblique in its communications.

As I have written about in the past (here,) I believe, in fact, that the company’s communication style has the potential to seriously hurt the company in the long run, exposing it, among other things, to litigation and market speculation risks.

And that is really a shame since the company, in my view, has potential for carving out a nice little niche in the OSS/BSS marketspace addressing MVNOs and MVNEs.

The communications issues range in scope, but regardless of how small or large they are, they are consistently adding unacceptable risk to any investment thesis that could be applied to MTSL, the company’s equity.

Today marked another milestone in MER Telemanagement Solutions seemingly endless history of communications issues. Having announced the signing up of SBC Communications, LLC, a somewhat mysterious communications outfit out of South Carolina, for a multi-year contract on October 15th, 2013, the company today announced the termination of the same contract, noting that the agreement was being terminated because of SBC Communications, LLC’s failure to fulfill its obligations.

The original announcement had been a bit awkward, because of SBC Communications, LLC’s similarity in name to SBC Communications, Inc. (now AT&T) and the press release’s reference to SBC Communications, LLC as a “… large U. S. based service provider of internet, cable TV, home phone and wireless services,” probably stretching the definition of large quite a bit, since, in my book, Verizon is large, but SBC Communications, LLC is not and may, in fact, be very small (for a quite similar issue with DataXoom, another MER Telemanagement Solutions’ customer, read my earlier posting here.)

This awkwardness, however, pales when compared to this new announcement, telling us that the deal, which had propelled the per share price of MTSL from $1.85, or so, to approximately $2.75, was, in fact, dead as a door nail.

Naturally, today’s announcement caused a significant drop — OK, more of a freefall — of the per share price of MTSL, erasing almost 15% of the capitalization of MER Telemanagement Solutions in a blink of an eye.

Now, granted, the deal was never with AT&T, and, as they say, caveat emptor, but, still, this is just plain embarrassing, not to say costly to a lot of traders and investors.

Moreover, with today’s announcement, the per share price is effectively back at where it was at in the third quarter of last year, which is hardly satisfactory.

But it gets worse. With this misstep (and possible accounting ramifications) and the expected terminal events for a contract with Simple Mobile contract (read more about this here,) the fourth quarter of the 2013 fiscal year and/or first quarter of the 2014 fiscal year may very well prove to be an unmitigated disaster, and, so, in a spectacular case of — in tennis parlance — unforced errors, the per share price of MTSL may be headed towards a the $1.50 mark, a 52 week low.

And, as bad as it is, it can quickly get much worse. Should, for instance, SBC Communications, LLC, sue MER Telemanagement Solutions for breach of contract (stranger things have happened in the world of OSS/BSS supply) or should the security class action lawyers smell blood (as they did with Unitek Global Services,) all bets would be off.

Participate, please….

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Mind CTI steaming ahead

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.

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Onwards and up

Mind CTI Ltd. released its financial results for the third quarter of its 2013 fiscal year on November 5th, 2013.

As usual, I have summarized these results in a dynamic posting that you can find here.

As the reader of this blog probably knows by now, Mind CTI is an Israeli company that I follow with a lot of interest – primarily because I think that MNDO, the company’s equity, yields a significant earnings opportunity for myself, but also because the trading patterns that were found around MNDO in relation to the annual dividend payouts by MIND CTI during the period from 2009 through 2012 (but, I hasten to say, are no longer be in effect) are intellectually interesting.

The quarter’s results were quite good. Here are some of the highlights from the aforementioned dynamic posting:

Again, this quarter, the results were not in line with the stellar results of the last fiscal year, but, overall, they were not really bad. This quarter brought nice bumps in revenues, operating income, and net income compared to these of the last quarter.

The company continues closing business at a moderate to fair pace, adding one net-new customer and several follow-on orders this quarter.

The growth in the company’s staffing level and associated expenses continue, reflecting the challenge of increasing the number and size of customer engagements to make up for the recent loss of high-margin revenues. …

[T]he company made a tentative commitment to the yearly dividend, announcing that the company would seek court approval for a possible distribution for the year 2013 in the amount of up to $4.6 million, or +$0.20 per share…

[T]he company’s CEO commented on the company’s intent to undertake acquisitions:

“We are well positioned and have the required resources to respond to potentially increasing market needs and at the same time target potential acquisitions that could benefit the company results.”

The progress on a quarter-over-quarter basis is encouraging, and the promise of one or more acquisitions is exciting. Clearly, the company is executing on a well thought-out plan for restoring the bottom-line and boosting the top-line, and the dividend announcement is, I think, a strong indicator of the company’s confidence in its operations and sales.

The key to MNDO and Mind CTI as an investment is, of course, its unique, one in a million, dividend policy, which resembles that of an REIT, coupled with its uncanny ability to maintain profitability and generate huge cash-flow almost irrespective of the top-line.

Novgorodtsev’s second set of finding

Sometime last year, Mr. Igor Novgorodtsev wrote an article about a pattern of speculation around Mind CTI’s consistent dividend (you can read about Mr. Novgorodtsev article and the speculation in one of my earlier postings (here.))

Unfortunately for Mr. Novgorodtsev, the pattern that he had uncovered was a wave-event related to an extra-ordinary dividend paid by Mind CT in a couple of years ago, and, at the time that Mr. Novgorodtsev wrote his article, the waves had more or loss subsided into nothingness.

Mr. Novgorodtsev is now back, having written his second article about Mind CTI and the value inherent in MNDO. This time, however, he is focused on what long time investors has been aware of since before 2010: That Mind CTI is a uniquely consistent operational performer and dividend payer.

You can find Mr. Novgorodtsev’s article here. Although he has the competitive landscape quite a bit wrong, he fundamentally arrives at the right conclusion, so I will simply quote him:

MNDO has an unusual REIT-like dividend policy: it pays out the full EBITDA plus financial income minus taxes on income. Essentially, its payout ratio is above 100% but a strong free cash flow in excess of reported earnings makes it sustainable as it has very little CapEx. It has paid dividends in excess of 10% last 5 years and is likely to pay 14% this year (subject to approval by Israeli court). The management recognizes that MNDO business is slow-growing, so the excess cash should be given to the shareholders via the dividends and stock buy-backs.

There is only one true comp for MNDO valuation: a much larger telecom software provider and direct competitor, Amdocs. While both companies have similar P/E ratio, use no leverage, and few long-term liabilities, MNDO is a true “cash cow” with 15.1% free cash flow yield (Cash Flow from Operations minus CapEx divided by the market cap)….

On a free cash flow and EBITDA basis, MNDO trades at a 40-45% discount to Amdocs. Another way to estimate MNDO value is to use a dividend discount model to calculate its intrinsic value since it has no debt and pays out all its earnings:

Inputs:

Beta = 1.63

Rf = 2.75%

Risk premium = 5%

Nominal growth rate = 2% (long-term inflation)

Dividend = $4.6 million

Value:

$51.7 – 56% larger than its current market price!

By all measures, MNDO CTI is underpriced by the market at least 40%.

Bravo, Mr. Novgorodtsev. Welcome to the club of Mind CTI believers!

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