Tuesday, July 12, 2011

Paulson Capital On The Cheap

Paulson Capital (PLCC) helps take small companies public, acts as a brokerage, and trades in securities for its own account. The company's investment account took a huge beating during the financial crisis (the company lost $17 million in 2008) but the stock price took an even bigger hit, as the company's market cap remains down 80% from its 2008 high.

But while the company now trades for a paltry $7 million, it has current assets of $19 million against total liabilities of just $2 million. Current assets are mostly made up of a $7 million deposit it has made at its clearing organization (RBC Capital Markets) to facilitate principal trading, and securities held by the firm worth $9 million.

Unfortunately, some of the securities held by the firm are not marketable. They may be debt or equity securities of private firms, or warrants to buy securities of firms Paulson has taken public. It's very difficult for outside investors to place any confidence in the value of such a portfolio. Fortunately, however, $5.6 million of Paulson's portfolio trades publicly. As such, the privately held securities/warrants and most of the public portfolio are basically thrown in for free to investors who buy in at current prices.

Investors needn't be worried about a reckless management team destroying capital and thus endangering the apparent margin of safety, either. The company is still run by the man who founded it in 1970, Chester Paulson. Paulson owns 37% of the company, which serves to align his interests with those of shareholders.

Unfortunately, a drawback of a small-cap with such large management ownership is a lack of liquidity for the company's shares. Some days, PLCC doesn't even trade, while even on the best of days only a few thousand shares exchange hands. This lack of liquidity combined with SEC buyback provisions is probably a major reason why the company is not buying back shares.

The IPO market and trading conditions for US small-caps may be poor in the near future, causing Paulson Capital to break-even or even lose money in the coming quarters. However, when market sentiment does turn, the upside for this company is high. This is despite the fact that downside risk appears minimal due to the large discount to current assets at which this company trades.

Disclosure: No position


Anonymous said...

Hi Saj

Any thoughts on QXM. There was no catalyst in June in the end as far as I am aware and the stock has dropped 40% since!

Saj Karsan said...

Hi Anon,

I don't really know what to make of it. Hopefully it's not a fraud

Simon's Thoughts In London Fall '07 said...

Hi Saj,

As always, wonderful site. I just had a quick question. You mentioned that "some of the securities held by the firm are not marketable" just out of curiosity where did you find that information. Meaning, in which filing?

The reason I ask is because, so much of the time we read of highly successful value investors picking thru reports that list "hidden" assets such as securities or bonds which yield a sold return but most importantly are assets to consider in a company's valuation. I have had trouble finding such information on companies. Any pointers on where I should look to find this info?

Saj Karsan said...

Thanks, Simon. You can find this info under Note 3 of the most recent quarterly report linked here

Anonymous said...

Do you still like this one Saj? It's even cheaper. Quarter wasn't as bad as it seemed if you were looking at CF.

Saj Karsan said...

Sorry must have missed your comment, Anon. Yeah I've liked it for a while.