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  Two Watch List Highlights

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Thursday November 17, 2016

Two keys to being a good investor are to be organized and to do lots of research.

One way we do this is by keeping a Stock Watch List, which currently has about 300 companies on it. While that appears to be an enormous number of enterprises to keep track of, it is simplified by dividing the file into the categories of “December Buys,” “Triple A” and “Double A.”

The December Buys are the stocks of utmost significance and it is labelled in this manner since most of our purchases are made toward the end of the year during tax loss season. Triple A stocks are still in the minor league as the name suggests, but some are on the cusp of being promoted to the big show. Double A positions are of far less relevance. Yes, there is a resemblance to baseball here for you fans.

Two words in the investing lexicon that pique our attention are “strategic alternatives,” which normally means that the company is seeking a buyer. A couple on the Stock Watch List, Ciber Inc. and Otelco Inc. announced just that this month. If a takeover happens, typically it is at a premium and shareholders can make themselves a lovely piece of change. So, the question of buying one or both of the companies for a short-term gain jumps out at us.

Ciber is an IT company that has been on our radar for years and we were close to taking a run at when it was in the $3 (U.S.) range and on our December Buys list. Fortunately, it did not pass final muster as it now trades at around 70 cents. At this woebegone level, the stock is in danger of being delisted from the NYSE and then would have to look for another exchange to trade on. While it is virtually assured that one would be found if the stock was delisted, many institutions and other shareholders would likely sell the stock, prolonging the price slide. On the other hand, if an acquirer can be found, the probability is that the company would be sold for a premium.

Ciber has been dismantling itself. Over the past six months operations in the Netherlands, Norway and Sweden were sold for a total of $27-million. Ultimately though, that did not reduce the debt load because of operational losses. Problems with debt recently led to a default with Wells Fargo but a new credit agreement this month with Faunus Group International has eliminated that crisis. Worth noting is that the loan is against receivables in North America. Normally, that is very expensive money and a sign of a company with one foot in the grave.

Quarterly revenues reported this week were $144-million, down 14 percent year-over-year, contributing to a loss of about $19-million. That brings the nine-month thrashing to a whopping $168-million.

So how much might the company be sold for? That is exceedingly difficult to calculate. However, given the current precarious situation and the fact that this company remains in the deep, dark woods, we will sit this one out and watch from the sidelines.

Telecommunications services provider Otelco has certainly seen its ups and downs while sitting as a Triple A. The last few years have been profitable and its financials have been steady. That was not the case in 2013 when this outfit declared bankruptcy. A primary cause was losing a lucrative contract with Time Warner Cable. Its debt load of $271-million did not help.

Rob Souza, Otelco's chief executive officer stated on the recent conference call, “We believe that the wireless telecommunication industry is poised for further consolidation At this point, we are evaluating a broad range of options.”

Otelco stock leaped about 12 percent on his words, jumping swiftly to the $5 level. More investors have since hopped on the bandwagon and it currently trades around $6.15, still far below the $10 level it touched after the 2013 restructuring.

Otelco stock leaped about 12 percent on his words, jumping swiftly to the $5 level. More investors have since hopped on the bandwagon and it currently trades around $6.15, still far below the $10 level it touched after the 2013 restructuring.

At Otelco, we would like to see the price fall somewhat after the recent jump on the “strategic alternatives” announcement before considering a bid. A price of $4.25 or less would stimulate our interest further. But given that the enterprise is profitable, the danger is far less than with Ciber.

Most of the extensive research that we do ends up in the category of “dead end” with no purchases of stock on our part. That could easily be the result here. In that way, it can feel like time ill-spent. However, when a few investment nuggets are found, the whole process is made worthwhile and potentially very lucrative.


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