Every year, I scroll through the last twelve months or so of teaser picks and look for one that really stands out as the stinker of the bunch, to be called the Turkey of the Year and hold that place of honor at Thanksgiving time. Hopefully, we can all give thanks that we didn’t own that particular stock (though we’ve all got a little gobbler hiding somewhere in our portfolios, no?)
And it’s not just a falling stock price that wins you the prize — rare is the year when we don’t have a bumper crop of teaser picks that are down big. In a typical year, we usually end up with about 2/3 of the teaser picks in negative territory or trailing the S&P 500, and about one third beating the market — with a few very strong outliers that are fantastic, up several hundred percent, or horrifically down by 90%+. It’s those collapsed stocks that we’re looking through to find our turkeys.
You’ve got to be pretty bad to stick out — either because the teaser ad promise was so dramatically fantastic, or because the stock blew up in some surprising way, or what have you… mere losses do not a turkey make, there needs to be a little story behind it.
So who are our candidates of the last twelve months or so? Since it doesn’t seem fair to call out a “Turkey” just a month or two after we write about it, the time frame is roughly August 2014-August 2015 for seeking out this year’s candidates.
One potential gobbler is Abakan (ABKI), which was teased by Nick Hodge as an “End of Rust” story last year that he said would win the “Oscar of Innovation” — a really, really teensy stock, and I tend to try to be pretty open minded… but the first line of my Quick Take in that teaser solution article was “Smells a little fishy to me” as Hodge was saying that this 80 cent stock was about to “corner a $1.2 trillion empire.”
It has not gotten less fishy, as far as I can tell, though it’s sure cheaper… the business still seems about the same if you look at the financials (tiny bit of revenue, big chunk of expenses, not much change to either) and the stock is down 94% or so, from 88 cents to a nickel. So that may not quite be our Turkey, but I am getting a little hankering for some cranberry sauce.
And also from late in the Summer of 2014 we’ve got Capstone Turbine (CPST), with a dramatic fall from $20+ to a dollar after Sara Nunnally pitched it for Macro Trader… a turkey, for sure, and a terrible company that was in bad shape already and then got hit with some headwinds, too, in the rising dollar and falling oil prices. They needed 20%+ revenue growth for a few years to have a chance of getting to profitability (though they and the analysts kept saying “next year” for that profit), and now revenue is actually declining. And they’re getting delisting warnings, and so many investor lawsuits it’s presumably making their heads spin.
I don’t know if they did something stupid or illegal or just got unlucky, but, well, this probably takes the cake as the ultimate 15-year “story stock” … always that enticing potential, never a profit. 15 years in business as a public company without a profit is pretty impressive for a company that’s not an “all or nothing” story in biotech or mining or one of the other acknowledged “high speculative risk” categories. They sell fancy small gas turbine generators. And apparently they’re not very good at it. But for keeping the story alive for 15 years, I feel like we should at least give them a pumpkin pie.
More recently, some stocks that have fallen “only” 50% or so this year came close to the top of the list as I pondered the Turkey… like Wynn Resorts (WYNN), which was pitched by Tony Sagami for Yield Shark with the line “Dividend opportunities this strong don’t pop up often”… just a couple weeks before the dividend was cut by 2/3. Still yields better than 3% today, though that’s because the stock fell from $130 to $60. But that’s not quite bad enough.
And we can’t really settle on a Turkey that’s only a month old, but my eye did linger on the misleading Billionaire’s Portfolio pitch about Cliffs (CLF), which comes awfully close to our criteria and is down more than 20% already… maybe a candidate next year. Calling out a stock as one that an activist has gone “all in” on after that activist has lost 90% on the stock is at least silly, and probably worse. But it’s only been a month, so…
I should also note that, though a lot of the stocks near the bottom of our tracking spreadsheets are (not surprisingly) mining and energy stocks, I didn’t spend too much time looking at most of those — we know why they’re down over the past year, and they’re all down for the same reason.
So with that, we get down to our three finalists:
JG Wentworth (JGW) has been a disaster this year, despite the love Bill Patalon showed for them in his Private Briefing ads with predictions of 201% gains. Interest rate worries hurt them, it seems, but things were pretty ugly all around (when there’s a “JG Wentworth Tumbles Because…” article every couple months, things are bleak) as structured settlements became less profitable and their cost of borrowing went up. That hoped-for 201% gain has instead been an 80% loss as the shares dropped from $10 back in May to about $2 now, and along the way the CFO left, insiders sold more shares, and, well, it’s hard to find any good news (maybe that means it’s time to buy! Gotta have a little optimism, right? Buy when there’s blood in the streets and all that? No, I’m not buying personally, but, well, that’s because I still don’t understand how to value their structured settlements).
And Sphere 3D (ANY) was also a pretty recent teaser pick, this time by The Cutting Edge back in July (we’re trying to include lots of stock pickers today, don’t want anyone left out!). Jason Stutman is the editor, he was pitching an imminent takeover for this “containerization” company, and it hasn’t happened yet… what has hit the stock are two weak quarters without revenue growth and more small equity sales to keep the lights on. Companies that have to raise money each quarter with relatively small equity sales (a few million bucks per quarter for each of the last three quarters) don’t inspire a lot of confidence… don’t know if there was anything else particularly bad happening with Sphere, but the financials have been weak. Howeer, Stutman did stop by and share a couple comments and was a good sport when we covered it back in July, so we’ll give him a hair’s breadth of an edge over our final contestant.
For our Turkey of the Year, it’s hard to beat the one business over the last year or so that was teased by a big-name newsletter and seems to have completely disappeared.
CT Partners (was CTP, no longer trading) was, according to the Thinkolator, picked in October of 2014 by Louis Navellier and was still doing OK a month later when Thanksgiving hit last year, but man has it fallen apart since… This stock was (briefly) a hot IPO a few years back, but then fell apart in dramatic fashion over the last year when all their employees started leaving.
CT Partners is an executive search firm, or it was, and they were in talks to be acquired as a way to rescue the company, but it looks like the firm that was going to acquire them just up and hired all their employees that it wanted instead. The company website is still up, but seems not to have been touched since June. They’ve been delisted and defaulted on their debt, and I’m not sure whether there’s even a law firm working on their behalf anymore… I didn’t scour through all their SEC filings or contact them. From just a glimpse at their financials, you wouldn’t necessarily have seen this coming — the balance sheet still said there were assets owned by shareholders as of March, they were roughly breaking even, but then there’s this from the Management Discussion & Analysis:
“Commencing in December 2014, we began receiving unfavorable publicity regarding a complaint submitted to the EEOC by a former employee. We also withdrew an announced public equity offering in December 2014. In January 2015, we announced preliminary fourth quarter results that fell short of our expectations and then subsequently revised those preliminary results downward. We also withdrew our first quarter and full year 2015 earnings guidance at that time. In light of that revision and withdrawal of guidance, we suspended marketing efforts for another announced public equity offering before completing a significantly downsized offering at the end of January 2015 for $4.2 million in net proceeds after underwriting discounts and expenses. Our stock price declined significantly in December 2014 and January 2015, and several research analysts covering our Company ceased coverage. Several law firms have announced investigations into whether we violated securities laws, and a purported class action on behalf of purchasers of our common stock during the period between February 26, 2014 and January 28, 2015 was filed against us on February 27, 2015 on the United States District Court for the Southern District of New York. We believe these allegations have no merit.
“The foregoing events have created significant challenges surrounding our business and, in particular, our ability to retain consultants and customers. Since December 31, 2014, approximately 30 of our consultants have departed the firm. These departures had a material effect on our ability to generate revenue consistent with our historical trends.
“The Company announced, effective April 16, 2015, our Chief Operating Officer David C. Nocifora would replace Brian Sullivan as Chief Executive Officer and that we were conducting a search for a new non-executive director to chair the Board. Michael Feiner, an independent director, has agreed to serve as interim Chairman of the Board.
“On February 6, 2015, we received an unsolicited, non-binding proposal from DHR International to acquire all of the outstanding shares of the Company. The special committee of the Company’s board of directors, which was formed to evaluate the Company’s strategic alternatives, has agreed to negotiate exclusively with DHR for a limited period of time in an effort to reach a definitive agreement. The preliminary price range set forth in the indication of interest is lower than the $7.00 per share DHR had proposed to pay in a February 5, 2015 letter to the CTP board of directors. All terms of a definitive agreement, including price, are subject to DHR’s confirmatory due diligence and negotiation between the parties.
“We recently amended our credit agreement and entered into an additional $12.5 million note purchase agreement. The Company is in violation of certain covenants under those agreements. For further discussion, refer to “Liquidity and Capital Resources” section of Management’s Discussion and Analysis.”
The lesson here? Hard to say, but do keep an eye on the companies you invest in — not just the numbers, but also the press releases and commentary, since apparently this freight train was heading toward them for at least a few months and shareholders must have had some opportunity to get out of the way.
And if you run a business that’s dependent on the relationships your employees have built up, treat them well or build something powerful and unique around their talents to nurture and keep them — you don’t want to sit there at 9am each morning wondering whether your company will walk in the door or not. And it doesn’t matter how you amortize your “client relationships” as assets if those clients stop taking your calls.
And, you know, maybe some noncompete clauses or something.
Here’s what CT Partners says now:
“The Company’s business and financial condition have continued to deteriorate as consultant departures have continued through the second quarter of 2015. The Company has been informed that DHR is seeking to acquire certain of the Company’s assets in a transaction with the Company’s lenders, who have the right to acquire those assets pursuant to the underlying debt documents. DHR has indicated that it expects to employ many of the Company’s consultants and employees. There is no assurance that any such transaction will be completed, and, if completed, the proceeds of such a transaction are not likely to be sufficient to satisfy all of the Company’s obligations to its lenders and other creditors, and are not expected to result in any payment to the Company’s shareholders.
“The Company expects that it would need additional funding to continue operating beyond June 30, 2015 but does not anticipate obtaining adequate funds from its current lenders or otherwise. Consequently, the Company intends to wind down its remaining operations in an orderly manner, but it may be required cease operations entirely or seek bankruptcy protection.”
So… I guess that’s the kind of thing that happens from time to time, but it sure is shocking to see it happen so quickly — they only went public in December of 2010, so after only four years, which included lots of small acquisitions of other search firms, they were already bleeding “consultants” and losing the business. This stock was teased as one of several “Raging Bull” picks by Navellier last year, so we can’t say that he was going “all in” on this one — just that it hit an “A” grade in his Portfolio Grader and he was calling it a “super supplier” and a strong buy. Presumably he would have had his subscribers sell at some point last Winter, as a growth and momentum investor he drops the stocks that falter fairly quickly… but man, what a Turkey that was.
And lest you think that I’m sitting here in my glass house, throwing stones, I should tell you about my biggest turkey — which didn’t go bankrupt or disappear just yet, but has been consistently horrible and getting worse every few months since I featured it favorably back in April (I even had some capital allocated to it personally, though that position has been stopped out now).
What’s the Turkey from the pages of Stock Gumshoe? Iconix Brands (ICON), which I said lovely things about the day before the CFO up and quit earlier this year, and persisted in thinking should be valuable based on the strength of their cash flow for months now as the stock faltered and dropped from $32 to where it is now, below $7, because of SEC attention, restatements, executive departures, and reduced guidance as the Peanuts revenue expectations are bumped down and their men’s fashion brands suffer.
At some point you’d like to think that whatever could go wrong, has gone wrong… but sometimes you just have to clear your plate so you don’t have to look at that damn stock anymore. They are still way, way too cheap based on their real cash flow, but now that I’ve thought that at $28, $17, and $14 it seems foolish to keep banging my head against the wall and saying it’s still true with the stock at $7. So I sold my worst turkey of the year, finally (I didn’t actually own the stock, but sold puts against it at $12 and closed them out at a loss)… so maybe now that turkey will be able to fly, we’ll see. No matter how far a stock has fallen, it can still always fall by as much as 100% from the moment you buy your shares.
All in good fun, friends — everyone who invests in individual equities picks lousy stocks from time to time, but sometimes looking back at a few of the worst ones will help us to be smarter in the future. If you’ve got a favorite turkey from the last year, either one I’ve liked or one you owned or one that we’ve de-teased from the newsletter hype machinations, feel free to throw it on the pile with a comment below… maybe a little cleansing will be good for us all.