Comcast to Shareholders: Screw You!

Comcast [[cmcsa]] has agreed to pay its founder a salary for a full five years after he has ________. The logical (and upsetting) conclusion of that sentence is “retired”. No public company or even private company with minority shareholders should ever pay an executive who is retired or otherwise not contributing. However, Comcast has decided to take callous disregard of shareholders to a whole new level by agreeing to pay its founder for five years after he has died. He will even be paid a bonus in that time. Ouch.

Disclosure: I have no position in CMCSA, nor am I a customer. I have a disclosure policy that shall never die!

Echostar’s $63 million dollar mistake

Oops. Echostar [[dish]] lost $63 million more over the last few years because they included the same income in multiple years. A new SEC reg requires companies to disclose financial errors that are not material but through repetition have become material in aggregate. Sadly, companies do not have to run this through the earnings statement and can take it straight to the balance sheet. Unsophisticated investors may never even notice. See the original article by David Milstead over at the Rocky Mountain News. I recommend subscribing to his column via RSS.

Disclosure: I have no position in DISH; I am a customer. I have a disclosure policy.

Tracking your finances in Quicken or Money

If you do not use Intuit Quicken or Microsoft Money (or a similar program) to track your finances, you should start. I take about 30 minutes each week to update my bank accounts, as well as 5 minutes each trading day to update my brokerage accounts. If you just hold index funds and ETFs or long-term investments in individual stock you would not have to update your transactions very often, maybe only once a month.

Most credit cards offer downloading into Quicken. I like using my Discover card because it will download the most easily into Quicken. Most other cards (such as those by Chase) require a visit to the website to download transactions.

A number of brokerages offer automatic downloading into Quicken of transactions, including E*trade, Scottrade, and Ameritrade. My main broker, Interactive Brokers, requires a visit to its website to download trades to Quicken. Of course, buy-and-hold investors should not use IB; the only reason I use it is because it has a good platform for short selling.

A few hints:

  • Track depreciation of assets such as cars. I track all my large assets in Quicken. Each year I have depreciated my car, a 2003 Mazda Protege, using a straight-line 8-year depreciation schedule. This tracks the real loss of value of the car.
  • Use mark-to-market accounting. I own a rental property, a house, and a chunk of land. I anticipate selling the rental property sooner rather than later and have reduced its value in Quicken by the 6% commission I will likely pay. I have also reduced its value by an extra $10,000 in market-value losses I have suffered. I have likewise reduced the value of my house by about $30,000 in market value that it has lost since I bought in 2003. I have increased the value of the land by a couple percent a year. I am still carrying it at a price below what I could get by selling it.
  • Capitalize home improvements. Home improvements (not repairs) increase the value of your home. Capitalize them by transferring the money you pay (in the program) to the asset account of your house. Do not do this for improvements that will not increase the value of the house.
  • Track your net worth. This can be a good motivator. My financial goal is to grow my net worth by over 10% per year. For those with significant debt, seeing a large negative net worth can be a good incentive to save.

Doing all the above lets me track my net worth very closely so that I can see if I am making progress towards my financial goals. If you wish to improve your financial performance it pays to track it. Tracking your finances closely will help you know how you are doing and it will motivate you to do better.

Penny Stock Touting Stays in the Family

I came across the following information when investigating my favorite penny stock, Continental Fuels (OTC BB: CFUL). Continental Fuels hired Crosscheck Capital 7 months ago to pump up its stock. It appears that Crosscheck Capital is associated with George Mahfouz Jr., who was previously fined $230,000 by the SEC back in 2000.

I should note that George Mahfouz Jr. is not listed as a member of Crosscheck Capital, but a trust with the name Mahfouz and a Paula Mahfouz are listed as members. Furthermore, there is a Paula Mahfouz who is a member of Crosscheck and who is related to George Mahfouz Jr. (probably his wife, although I am not sure). How do I know she is related? On a shareholder list of Pantheon Technologies back in 2000, the two are listed as shareholders and have the same address (search the 10sb12g form for ‘Paula Mahfouz’ to find this). Considering how few Mahfouz there are in Arizona (23 total according to phone records), and considering the base rate probability of <.001% of any one person being a penny stock promoter, I can conclude beyond a reasonable doubt (but not with certainty) that the Paula Mahfouz of Crosscheck is related to George Mahfouz Jr. and therefore that George Mahfouz Jr. is thus associated (if not directly involved with) Crosscheck Capital.

I should also mention that if Mr. Mahfouz has been actively involved with Crosscheck Capital from its inception in 2004, then he violated his agreement with the SEC that prohibited him from touting microcaps for five years after September 2000. If he has not been actively involved with the business then he has has not violated his agreement or any law. That being said, sending out fliers to hundreds of thousands of unsophisticated investors touting worthless companies and only disclosing a conflict of interest in the fine print is immoral, even though it is legal.

Disclosure: I hate stock pumpers, whether their activities are legal or illegal. I would also like to express my displeasure with the Arizona state agency that deals with businesses: they had no record of Mr. Mahfouz’s previous business, despite an SEC litigation release that stated it was an LLC formed in Arizona. I have no position in CFUL.

Updated disclosures and disclaimers

Please see the updated disclosures and disclaimers. I now allow myself to trade any time if the trading is non-discretionary–whether across the board tax selling (as I was forced to do earlier today earlier today, selling every stock or ETF I owned that had a loss) or trades motivated by margin calls or Reg SHO calls (as happened to me earlier today as well).

2007 Best & Worst

First, the list of shame:

Worst CEO: RICHARD A. ALTOMARE of Universal Express. See the SEC litigation brief for an explanation of his stock fraud. The best part about this story is that his company took out a full-page ad in the New York Times to criticize “naked short sellers” and other critics. Now that the company is in receivership it looks like the Times won’t get end up getting paid for the ad.

Most Blatantly Overvalued Company: Continental Fuels (OTC BB: CFUL) wins this award. This small distillate distributor at one point had a fully-diluted market cap of $1.5 billion. It continues to trade at 40x my fair value estimate of $0.01 per share.

Most Hypocritical: Jim Cramer, for prattling on about various stocks and infecting people with the stock bug. Following his advice would incur huge trading fees and underperform the market. In his new book he advises investors to use index funds. I guess that advice doesn’t sell well on CNBC.

Dumbest Policy: The NYSE wins this hands down for their insane policy of requiring $2.50 in cash per share to short sell cheap stocks. This effectively prevents short sellers from short selling most penny stocks and makes it easier for pump-and-dump schemes to drive up the price of penny stock shares.

Now, the good list:

Best CEO: Joseph Sorge, formerly of Stratgene. He agreed to sell the company in April to Agilent [[a]] so that he could pursue other opportunities (seriously). The buyout price was at a nice premium to the stock’s price and was almost twice the stock’s 52-week low (near which I had bought). Besides just selling out, Sorge ran Stratagene well and kept investors well-informed. The company was and is highly-regarded for great products and knowledgeable sales people. Congratulations Joseph for being a great scientist and CEO.

Best Investment: Diversified low-cost index funds win! I will continue to say that they win each year until the day I die. I currently have most of my money in index ETFs including DEM, VTI, RZV, DGS, EFV, VWO, IVE, and IJS.

Best Financial Writer: David Baines of the Vancouver BC Sun. He has exposed numerous penny stock scams. He has earned the nickname “****ing piece of ****” from the former CEO of one of the companies he targeted. To misquote someone, while he may be a “****ing piece of ****”, he is OUR “****ing piece of ****”. Thanks David for putting some heat on the scammers and the ‘regulators’ that disgrace our continent.

Best New Investing Blog: Goodevalue.com, obviously.

Best New Investing Blog not written by me: Sequence Inc. Fraud Files, written by forensic accountant Tracy Coenen. While Tracy loses points for being a Packers fan, she gains them back for having red hair. I love her so much that she wins this award despite blogging for just over two years [corrected; I had previously said one year], stretching my definition of new almost to the breaking point. But her blog is new to me, and that is what counts.

Best Short Seller: Hats off to William Ackman of Pershing Square Capital. His bearish call on the bond insurers has been great so far. The carnage in that sector is already worse than almost anyone else imagined and it could get much worse.

Disclosure: I have no interest in any stock mentioned. I own all the ETFs mentioned. I have a strict disclosure policy.

When nobody knows how many shares are outstanding

Perhaps one of the most important pieces of information that an investor needs to decide whether a company is fairly valued or not is the number of shares outstanding, particularly the number of fully diluted shares outstanding. With that and the stock price an investor can calculate the market cap of the company and use earnings and book value figures to calculate valuation ratios or run a DCF analyis.

I just ran across one company that evidently does not think that is important information. Cytocore (OTC BB: CYOE) is not unlike many of the other companies that arouse my ire. It is an OTC-traded microcap with little in the way of book value or revenues. I came across it while searching for more companies to short sell (a favorite hobby of mine). What struck me about Cytocore is that the company has not published figures anywhere that reveal the number of shares outstanding and thus the company’s market cap.

Cytocore (which has the least informative website I have ever seen) had 353 million shares outstanding as of its last 10Q, filed on November 12, 2007. The company also had a proxy statement announcing a meeting of stockholders on November 19, 2007 to vote on whether or not to effect a reverse stock split. The proxy did not have an exact proportion for the split, rather it was a range of “not less than one-for-five and not more than one-for-ten”. Since then the company has not announced in any SEC filing the exact proportion of the reverse stock split and the resulting number of shares outstanding or even if the resolution passed. Depending upon what happened, the company could have a market cap of anywhere from $100 million to $1 billion.

While the question of whether to invest is easily answered–the company is overvalued at any market cap–the question of why this company would fail to disclose something so important is difficult to answer. It appears that the company put out a press release, but it never filed an 8k to document the press release (as appears to be required by law). By the way, Cytocore effected a 1 for 10 reverse stock split (as shown in the above-linked press release fragment).

Forbes Informer put out an article that lambasted Cytocore almost a year ago. Unsurprisingly, Cytocore’s ‘investors’ have underperformed the market by 55% since then.

Disclosure: I have no position in CYOE. I have a disclosure policy.

It pays to save

I just saw an ad for Guaranteed Consumer Funding, which offers to sell electronics (they were hawking a computer) for cheap payments to people with bad credit. For the computer they were offering (worth about $400 on a good day, although it is easy to find a computer for $500 that is far superior), the consumer would have to pay $1569 over one year. This works out to a 400% APR. Ouch. The company hides this fact in its ads and mentions only the $30 weekly payment without saying how many payments are owed.

In comparison, buying a superior computer for $500 and then paying 30% on credit cards for one year would cost $650. Of course, my favorite method, saving the money in a bank account, would cost only $500. It would only take 17 weeks of saving at $30 per week to be able to pay cash for a superior computer than the one issued by Guaranteed Consumer Funding.

Some people wonder why many poor people are poor. Medical problems and job problems are often reasons, but the largest single reason is an unwillingness to delay gratification and save. While income matters, avoiding spending matters even more. I know a man who makes $200,000 per year as a financial adviser who has saved less for retirement than a woman who never made more than $30,000 per year (and who put a kid through college as a single mother).

The best way to save is to make sure you are not tempted to spend. If you get a raise or a better-paying job, increase the proportion of your income that you put into your 401(k) and IRA. You do not need a fancy house or a new car. As for myself and my dear wife, we are taking my advice. My wife will be putting 50% of her income at her new job into her 401(k) and I am putting 100% of my eligible income into a solo 401(k). We will also contribute the maximum to our IRAs. From income that we are not eligible to stick in a tax-deferred account we will have just enough left over for living expenses. That way we will not be tempted to buy unnecessary things such as my next car.

How can we afford that? We have a modest home, drive a 4.5 year old compact car, and because I work from home, we only need one car (that saves us about $5,000 per year). We still have plenty of money left for the good things in life, such as a 7-year old $60 bottle of Tokaji wine I just opened today (which is rated 95 by Wine Spectator; I find it to be marvelous).

Fredrick’s of Hollywood: Reverse Merger Mania in Microcaps!

It is merger time! My favorite micro-cap reverse merger is going to happen in just one month. Movie Star Inc. [[msi]] will buy the larger, private Fredrick’s of Hollywood. I previously wrote about this transaction back in August when MSI’s stock price was around $2.20 per share. It currently trades at $1.60.

After everything is done, the combined company will have no net debt (or net cash), $215 million in annual sales, and 55.75 diluted shares outstanding (including conversion of preferred stock). Given the current price of $1.60, the implied diluted market cap is $89 million. There is a rights offering in mid-January that will raise $20 million. That is priced at $1.76 (only shareholders as of late November can participate). At that price, the implied diluted market cap of MSI/Fredrick’s is $98 million.

Given the combined company’s proforma price to sales ratio of .41, it seems a bit cheap. For comparison, Limited [[ltd]] is priced at .65. However, considering that $64 million (30%) of the combined company’s sales will come from the low-margin manufacturing / distribution business of MSI, the company seems to be price about right (subtracting out the sales of MSI, the P/S ratio rises to .6).

In terms of earnings, I come up with estimated proforma earnings for the year ended last June for the combined company of $2.8 million. I do not include the preferred stock dividend because I assume conversion to common stock (this will not happen, but I must avoid double counting the cost of that preferred stock and I count it as diluted common stock). I take out all direct merger-related costs and I do not include interest expense (most of the debt will be paid off, and there will be $20 million in cash on the balance sheet when the merger goes through).

This gives a proforma P/E of 32. However, it is likely that there will be some significant cost savings of the merger. Assuming that SG&A is cut by just 5% (a modest assumption), I come up with proforma earnings of $5.5 million and a proforma P/E of 16.2. This is a reasonable multiple, especially considering the growth the company should see.

Here are the drivers of growth in sales:

  • 50 anticipated new Fredrick’s stores over the next three years will increase the number of stores by 38%
  • organic growth in same store sales and online/catalog sales will be about 8% per year as old stores are remodeled, Fredrick’s brand regains some cachet, and concentration of stores increases as the store total increases. Fredrick’s averages only about $400 in annual sales per square foot. This should increase to at least $500. For comparison, Victoria’s Secret averages somewhere between $600 and $700 per square foot.

Furthermore, costs should decrease:

  • Cost of goods should decrease as the company’s greater size increases its bargaining power with suppliers and as Fredrick’s sources more of its product from MSI.
  • SG&A as a percentage of sales should decrease due to cost cuts and an increased number of stores and greater sales per store.

MSI/Fredrick’s still remains a risky play. That being said, Fredrick’s has a well-known brand, and it is available on the cheap to the public markets for the first time in about a decade.

Disclosure: I am long MSI and I am a customer of Fredrick’s. I have a disclosure policy.