Caught in a Black Box

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Tuesday February 20, 2018

What should one do when a stock is purchased and there is a quick realization that the buy was either a complete screw-up or very, very premature?

This is what happened to us when we acquired digital-services provider Black Box for our personal accounts at around US$3.60 a share in November. Today, it trades at around US$2.10. Oopsie.

There were many reasons to like this Lawrence, Pa.-based enterprise, which has been operating under the Black Box name since changing its moniker from Expandor in 1982.

Besides its mostly successful history — it traded at more than US$38 in 2010 and is profitable in most years — the key reason for our purchase was the hire of Joel Trammell as chief executive. This gent knew the company well, having been on the board of directors since 2013.

He has an exceptional track record. Two companies that he founded were taken over for mucho dinero. He teaches a nine-week CEO program, authored The CEO Tightrope and writes for Forbes and Entrepreneur. Indeed, this is a dude qualified to lead a turnaround.

His work is cut out for him. Revenue has been declining since 2015, touching down to US$195 million last quarter, and the pretax loss of US$9.8 million ultimately registered US$27.9 million, owing to a provision of US$18.1 million because of American tax reform.

Cash used in the quarter was US$27.5 million, compared with cash generated in the prior 90 days of US$600,000. That is a move in a very yucky direction.

As reported in its quarterly 10-Q filing required by the US Securities and Exchange Commission, the company faced a liquidity crisis last summer, which led to a renegotiated credit agreement.

While currently in compliance with all debt covenants, the pro forma indicates that will not be the case in the fourth quarter without a further change to the constraints. Other options include a sale of assets or the whole company, a renegotiation of debt or a refinancing. If unsuccessful, a default could occur and shareholders such as us could be wiped out.

High risk? You betcha.

Given the move from the tepid water when the stock was acquired to the boiling liquid roiling today, consideration was certainly given to selling, grabbing the tax loss, crying into our Scotch and moving on. That might be the wisest decision, but our conclusion has been to stay the course, at least at this point.

One option often measured when our stocks are beaten down is whether to average down. When confident that the turnaround will be successful or that the potential reward greatly outweighs the risk, it can be an excellent decision. However, balancing the pros and cons of this situation, we have decided to stand still.

If we did not own the stock, would we initiate a position? Possibly, but that would be done with the knowledge that this company has moved down the continuum from an “investment” to speculative status. Certainly, using the grocery or rental money to acquire shares would be unwise.

Unfortunately, even after doing due diligence, sometimes investments do not work out as planned. That is the nature of this game. Virtually everyone who has played the market long enough will have some failures to admit. If they do not, they are either brilliant, exceedingly lucky, choosing to ignore reality or liars.

Our solution is to take a situation such as this and try to learn from it, while hoping that with patience it will prove to be an error in timing rather than a permanent loss of capital.