The Overnight Sensation: TSR Corp

Two and one-half months ago, TSR Corp. (TSRID) was discussed on this site as a potential value investment. Today, its price sits more than 50% higher. Did the business change at all in the last 2.5 months? Not really.

This isn't one of those companies that saw its price rise over the course of a few months as a result of a constant stream of positive business developments. Instead, the stock price saw almost all of its gains occur on a single day earlier this week on no news, but following the execution of its one-for-two reverse stock split!

In a reverse split, the number of shares outstanding is halved (so if you owned 100 shares pre-split, you would own 50 shares post-split), so one would expect the price of each share to double, which would leave the company's value as a whole (its market cap) unchanged. Instead, the company's market cap increased from 50% to 100% in wild, volatile trading.

What's going on in the mind of Mr. Market? There could be a variety of reasons why demand for this stock is out-pacing supply. Perhaps indexes have to purchase this newly created ticker, TSRID, while potential sellers are unaware that their previously-named TSRI stock currently trades under a different ticker. Either way, it doesn't really matter why Mr. Market's moods change; what matters is what you do with his sometimes foolish, rather illogical behaviour. Value investors who purchased this company because it traded at a large discount to its net current assets and because it was unlikely to lose value were rewarded with a handsome profit, as the stock moves from the Stock Ideas page to the Value In Action page.

Disclosure: None

It's Hard To Lose Money In This Business

TSR Inc. (TSRI) provides IT personnel to its clients for contract work. As companies have aggressively cut costs, TSR has seen reductions from its clients in both hours of work requested as well as price, as the supply of labour in many areas outstrips the demand for labour. But the nature of this industry is such that this company can still make money, even in hard times!

Most businesses see losses when revenues drop by over 10%, as a result of cost structures which contain a large element of fixed costs (e.g. Consider an airline, which has almost the same costs when a plane is full as when it is almost empty.) But TSR does not have to employ workers that are not needed at client locations (i.e. contract workers that are not earning revenue are not causing losses). Therefore, when revenues fall, so do costs.

In a particular quarter, however, losses can of course occur. The company does have some fixed costs (it's impossible to have none), and so if revenue comes in lower than expected, there could be some red ink. But over longer periods, this company is incredibly flexible in how it can manage its costs versus its revenues, which is very important when the outlook is unclear. No management guesses are required in the form of capital outlays (e.g. no plants need to built) which could turn out to be underutilized; the company can simply cut costs or ramp up as is deemed necessary.

When this flexible cost structure is combined with the company's assets, TSR becomes a strong candidate for a value investment. The company trades for just $8 million, but has net current assets of $12 million. Often, companies trading at such discounts to their assets are losing money hand over fist. Due to the weak labour situation, the market appears to be treating this company as if it will lose money. But TSRI's cost structure makes losing money a difficult thing to do, protecting the investor's downside at this price.

Disclosure: Author has a long position in shares of TSRI