Contra Guys: This stock pick of ours hasn’t exactly been a gem - but we’re still hopeful of a triple
BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Tuesday September 29, 2020
At Contra, we’re always on the lookout for underloved enterprises that may turn out to be gems. One that Benj bought in 2018 was North Carolina-based Charles & Colvard Ltd. at 85 US cents. Given that it currently trades at around the same price, it has not proved to be a shiny investment.
Charles & Colvard makes and sells moissanite jewellery under its corporate name as well as other handles, such as Forever One — a thoroughly optimistic moniker given the divorce rate. Though moissanite is found in nature, it is exceedingly rare. Charles & Colvard purchases its moissanite from Cree Inc., also headquartered in North Carolina, which manufactures it in a laboratory. Made from silicon carbide crystals under a US patent, Charles & Colvard markets it as “the world’s most brilliant gem.” Perhaps it is.
Suzanne Miglucci, the company’s chief executive officer who was hired in 2015, was a major reason Benj purchased the stock. Ms. Miglucci had an admirable track record, and on the corporate webcasts sounded as if everything was under control and she knew precisely what was necessary to forge a turnaround. Then, this past May, after the company announced a US$6.2 million loss including a US$5.3 million write-off, Ms. Miglucci departed and company veteran Don O’Connell assumed the top role. Mr. O’Connell has been in the jewellery industry for more than 25 years, which prior to Charles & Colvard included seven years with Richline Group Inc., a company owned by Berkshire Hathaway Inc. He also managed a jewellery television shopping network. Might he be the right dude for the job to boost the stock price back over US$7, where it was in 2013? (North of US$20, where it was in 2005, seems too much like wishful thinking.)
Revenue has been largely stagnant for years, clicking in at US$29.2 million in the fiscal year ended June 30, down 9 percent. Fourth-quarter revenue tumbled 42 percent to US$4.4 million from a year earlier — yet another enterprise stumbling with the pandemic. The net loss was US$1 million. On the positive side, operating cash flow in the quarter was US$1.8 million, which increased cash and equivalents to US$14.6 million. The book value is US$1.43, so it trades at a bit better than half of book.
Mr. O’Connell is looking to “right-size” the business via contraction. A quarter of the staff was let go, and advertising rejigged, partly to lower the cost to acquire customers. The management team has also been reorganized.
One new agreement that the company announced in May is with “leading Canadian retailer Hudson’s Bay.” One can ask how “leading” this company is now, but at least the deal expands locations where Charles & Colvard’s products can be sold and might help it gain traction in our country.
A key reason that Benj is high on this enterprise is that moissanite can cost up to 90 percent less than diamonds. Obviously, therefore, it does not have the same cachet, but for couples who still want something bright and shiny, the price point can be very appealing. And given the economic difficulties currently plaguing much of society, many people are likely looking for a better deal than “ice” offers.
Company insiders appear to be seeking a bargain as a bevy of them have been snapping up an appreciable number of shares over the past month. The acquisitions have all been in the range of between 75 and 79 US cents. At this establishment, insider purchases had been nominal at best over the past number of years.
The initial sell target for the company is US$2.84, far below the levels it scaled in the past. If the goal is reached, that would still work out to better than a triple. Perhaps the gain would encourage us to buy some diamonds, albeit we thrifty Contra Guys will likely find something a lot more underloved to splurge on.