Thursday, June 9, 2011

No One Bidding For

Former high flyer (BIDZ) now has a stock price that puts the company firmly in net-net territory. Despite positive free cash flow over the last year, the online jewelry retailer trades for $19 million despite net current assets of $28 million.

But before Ben Graham investor-types get too excited, potential shareholders should consider a subsequent event to the company's quarterly report. The company just engaged a "consultant" to help it land a $10 million, 3+ year loan at an interest rate of 9% or less. In other words, there is a strong likelihood that whatever margin of safety the company currently has with respect to its net current assets will be spent by the company in an apparent bid to grow the business. Shareholders would likely benefit if the company cut its costs commensurate with its lower revenues, but unfortunately that course of action appears unlikely.

In return for their hard work as debt "brokers", the "consultants" will be paid with stock warrants. If a debt deal gets done in the next 90 days, the stock could get diluted by as much as 10%, which is another reason value investors may wish to stay away.

In public companies where value is consistently destroyed, shareholders can often revolt via vote and force the management team out. But not in this case.'s CEO and his sister own a majority of the company's shares.

In most cases, management ownership is a good thing. But investors may not want to get in bed with this management team. The company has been badly mismanaged and the managers have been accused of being of questionable character and of having bad business practices.

Management's response to these accusations? It will no longer answer questions. The company's recent conference calls are rather bizarre, as there is no longer a question and answer session. Instead, management just reads prepared remarks, which are basically just regurgitations of the company's press release! In other words, the conference calls are now completely superfluous.

Some net-nets are more risky than others. In this case, you have a controlling management team that avoids accountability that is also looking to load up on debt for unjustified purposes. Buyer beware!

Disclosure: No position

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