Monday, March 5, 2012

Net-Net Plus Catalyst: Paulson

Paulson Capital has already been discussed on this site as a potential value opportunity. But while the company remains deep in net-net territory, somewhat of a catalyst is now present, which could entice those of you value investors who have a catalyst bent.

Last week, this Nasdaq firm with a market cap of just $5 million stated that it has reached an agreement to sell its retail advisory operation (subject to regulatory approval). But there is a lot of uncertainty here, as the purchase price is not yet disclosed!

Seventy-five financial advisors at Paulson manage over $1 billion in client assets, so we could be talking about a sizable sale price relative to Paulson's market cap of just $5 million. At the same time, however, the operation has been losing money, so it's not clear at all what kind of price investors can expect.

Even if the business is sold for a low amount, however, investors are still protected by the company's balance sheet, which should only be bolstered with the funds from the sale of the retail unit. What the company will do with the proceeds is anybody's guess, however. Paulson has issued dividends before, but hasn't since 2006.

Either way, this could be a "heads I win, tails I don't lose" situation. If the purchase price is large and commensurate with the number of client assets being handled, shareholders will own cash far in excess of the current market cap. If the purchase price is low and commensurate with the operation's recent profitability, shareholders will still own a company that trades at a discount to its net current assets.

Disclosure: Author has a long position in shares of PLCC


Ian Clark said...

What gives you confidence in their balance sheet? There are two issues in my eyes. Of their investments, 3.9M are held in private companies. To claim that these are accurately assessed is a guess at best. Their readily marketable securities (3.7M) consist of small companies, and only one (S&W Seed) appears to be liquid. The others I found are illiquid and quite frankly, poor companies. Selling these at book value would prove difficult for most investors. Is it unreasonable with Paulson's history that these will be marked down?
Second, receivables account for a large portion of their assets. 5.1M of receivables are owed from the clearing organization. What happens to them upon the sale? It is not clear to me that they should actually be counted as receivables to their stated value. Will they stick around after the acquisition clears?
If one combines the receivables and privately held companies we get 9M in asset value that certainly has value, but is it as much as stated? I think a discount should be applied.
Finally, at least four family members work there and make ~750K/year in compensation. While they do own a lot of shares outstanding we should not jump to assume they are aligned with the common shareholder (who doesn't receive a paycheck from PLCC). It's easy to see how JHS expects to turn a profit immediately by eliminating a large amount of overhead owed to the Paulson family on a yearly basis.
I'd enjoy hearing any thoughts or disagreements you have with my points. Cheers

Saj Karsan said...

Hi Ian,

I agree that discounts are in order for certain investments and B/S line items. I would also point out that Charles & Colvard was a substantial holding of the company as of Dec 31st 2011. If it still is, PLCC may see strong profits in the current quarter as C&C is up almost 90% YTD.