Monday, August 22, 2011

Action At GTSI

Last week was an eventful one for potential value stock GTSI. Because of news the company issued after markets closed on Friday, the stock's price action today will be interesting to watch. Depending on how the stock price moves today, value investors may be interested in either buying or selling!

The first bit of news that came out during the week was the company's earnings for the quarter. GTSI showed a small loss, but that's not the interesting part. As the company continued to convert its working capital into cash, it temporarily had a market cap ($42 million) that was less than its cash balance ($46 million)!

This anomaly occurred only temporarily because a day later the company announced a $15 million purchase of a private company. About 90% of that $15 million will show up in the form of Goodwill and other intangibles in the company's next set of statements, so it's very difficult for shareholders to know what they got in return. This latest announcement is no doubt bad news for investors who were hoping for a cash distribution, but the story isn't over yet.

Late Friday, the company announced that it had sold an equity stake it was carrying on its books for $11.5 million for $20 million in cash. Once again, this pushes the company's cash balance above its market cap, by some $10 million (minus any taxes on the transaction).

Theoretically, with this combination of cash and market cap, the company could buy back all of its shares and make its final shareholder holdout a very rich person. In practice, however, market liquidity and exchange/SEC regulations make this impossible. Nevertheless, the company could still buy back some shares and/or issue a special dividend that rewards shareholders who buy in at the current price. Or, perhaps the stock will move today in response to this news, giving current shareholders the opportunity to sell.

Either way, value investors should pay attention to this situation. Depending on Mr. Market's mood today, they may be offered a chance to buy or sell at a good price.

More on this company over at Whopper Investments.

Disclosure: Author has a long position in shares of GTSI


Peter said...

What do you think of the market action today? Tough not to be a buyer here...

Saj Karsan said...

Hi Peter,

I was surprised it spent some time in negative territory!