Value Fail: Blonder Tongue

When I buy a company trading at a discount to its net current assets, I don't expect operational miracles; obviously, the company is trading at a discount for a reason. But ideally, a company is that not earning a decent return on its capital does not continue to invest and try to grow. In that respect, Blonder Tongue has become an investment of nightmarish proportions, forcing me to sell all my shares at a loss.

Colour That Tongue Blond!

The Q&A sessions during company conference calls are usually filled with the questions of analysts with very short-term mindsets. This is illustrated by the nature of their questions, which can range from "Is your gross margin next quarter likely to be 23.3% or 23.4%?" to "Were sales in the 3rd week of July higher or lower than they were in the 2nd week in July?". But on the most recent conference call for Blonder Tongue (BDR), a shareholder with a different agenda appeared. The price has fallen so low, that the caller wanted to talk liquidation value!

Stock Returns Of 70%+

Yesterday, shares of Blonder Tongue Labs (BDR) rose by 70%. You won't find stock returns of this magnitude in large-cap companies, which is why for truly exceptional returns, investors should look for value among the thousands of small and micro-cap companies that are for sale to the public.

Many of these small, obscure companies trade at large discounts to their intrinsic values. Can these discounts be identified and exploited by value investors? Absolutely. Just four months ago, BDR was identified on this site as a potential value investment, and has been sitting on the Stock Ideas page ever since. Today, its price is more than 100% higher.

Sales of BDR's newest digital product have taken off, resulting in large 2010 Q2 profits which were announced yesterday. But investors did not have to see the success of this new product coming; for the last year, the company has been trading at a massive discount to its net current assets and its land under ownership. The patient value investor had protected his capital from downside erosion (the first rule of value investing) and had left himself plenty of room for upside should the outlook for this company change.

Sometimes, investor outlooks for companies don't change for years. In other cases, the outlook can change in a hurry. If the value investor concentrates on protecting the downside and leaving plenty of room for upside potential, he should do well in either case.

Disclosure: Author has a long position in shares of BDR

Management Trolls

Investors who conduct stock research online (e.g. readers of this site, or those who use www.sec.gov to access annual reports, as opposed to waiting for their snail mail copies) have likely spent at least some time in a stock message board. Unfortunately, there is a lot of misplaced advertising, spamming, falsities, and trolling that takes place on these boards that renders them virtually useless for the serious long-term investor. As such, it would seem highly unlikely that senior management would see it fit to spend any time perusing such non-valuable, non-credible arenas.

But that assumption would be wrong. The following exchange illustrates Blonder Tongue (BDR) COO Robert Palle's response to questions about management on the Yahoo! Message Board for BDR:

ajofny says: Where is this company going? The Chairman and CEO is 79, the COO is 63. What is its strategy?

newkram says: There is no strategy. management (such as it is) is just treading water till they retire or pass on ( whichever comes first). This is a company that should never have been allowed to go public. It is essentially a privately-held/family-owned company masquerading as a public company.

gands2 says: The family owned/family run image was reinforced when Palle, the co's president and largest shareholder, wasn't on the last CC, with Ms Nikoo the chairman's daughter as substitute. Nepotism an investor's red flag imo.

bobpalle22 says: At BT we are in the process of grooming the next generation of management. The last CC was reasonably benign as the numbers were in line with expectations. I chose to allow Ms Nikoo to represent me on this particular call. I think she performed wonderfully. Did you have any questions she could not answer? re my ownership....Come on girls, I am a buyer, and still a buyer, but the SEC window must be open to buy. Bob Palle

The other conversers are listed as male, leaving a question as to why Palle is referring to them as "girls".

How do we know this is actually Palle, and not some faker? The company issued a release to basically cancel his statement: "...[P]lease disregard Mr. Palle's message posted this morning and review the Company's press releases and SEC filings."

So here we have a company whose CEO recently underwent personal bankruptcy, and whose COO is going around responding to message board trolls. Meanwhile, just one day earlier, the company announced a new $4.1 million contract (last quarter's revenue: $7 million) for one of its brand new products. What to make of this company?

Disclosure: Author has a long position in shares of BDR

Licking Up The Profits

Blonder Tongue (BDR), a manufacturer of cable tv electronics, is a stock idea with some interesting elements to it. While the company has had a difficult time making money in recent years, it has begun shifting much of its production overseas, which should make it more cost competitive. However, it's not the company's earnings situation which makes this stock appealing, but rather its assets.

Blonder Tongue trades on the AMEX for under $7 million, but has current assets of over $14 million against total liabilities of under $6 million. In addition, the company owns several acres of land at its manufacturing site which is likely worth a few million dollars. Furthermore, the company has classified $4 million of its inventory as long-term (and therefore is not included in current assets) because it doesn't expect to sell it this year. While the risk of obsolescence in an industry such as this one is high, this extra inventory is offered to the current investor for free, since the company trades at a discount to its net current assets.

The most troubling thing about this company, however, is how its CEO manages money. Not so much the money within the business, but the money in his personal life. You see, CEO James Luksch declared bankrtuptcy less than a year and a half ago.

Should this kind of information be relevant in assessing a manager's on-the-job ability? It would certainly appear so. If one can't safely manage finances in one's own life, how can one be expected to do so for a public company?

It gets worse, however. Luksch had taken out interest-free loans from Blonder Tongue before declaring bankruptcy. Luksch's daughter and son-in-law are also executive officers of the company, and therefore the CEO's personal business is clearly company business; he has made it so!

In deciding whether to try to take advantage of this opportunity, investors will have to weigh the company's compelling price relative to its net assets against the murky earnings outlook and weak track-record of the chief executive officer.

Disclosure: Author has a long position in shares of BDR