Normally when it comes to the world of investing, YOUR BOY Nelly follows a similar pattern.
- Finds undervalued stock
- Does research, including writing down my thoughts for y’all
- Buys some, but also keeps some dry powder just in case it drops more
- Patiently twiddles thumbs until it goes up
- Sell when it hits the target price
Step 4 is the hard part, since it often takes years before a stock starts to go up. Remember Reitmans, the stock I’ve been talking about since May of 2013? It was basically dead money for a year and a half before surging more than 25% in December alone. The company’s results have continued to just be okay, so I’m not exactly sure why the surge happened. Maybe people are bullish because of oil hitting the skids, giving the ladies more disposable income? I dunno.
The point is that the waiting is supposed to be boring. There really isn’t much you can do in the meantime besides just keeping an eye on it, so you move onto other things, like hopefully reading this blog and clicking on all the ads. Nelly needs to get paid to keep referring to himself in the 3rd person, yo.
Sometimes, things are a little more exciting, like with the case of Aberdeen International (TSX:AAB), a lowly company with a $14M market cap that invests in private and publicly traded securities of precious resource stocks. Shares currently trade at $0.14.
If you’ve been reading this blog for any longer than a couple of minutes, you’ll know those investments are probably very undervalued by the market. You’d be right. The company has a book value of more than $31M, putting the shares at a 55% discount assuming the value of the company’s private investments is what management says.
There’s strike one. Unlike with Jaguar Financial, it’s not so easy to value the assets. With that company, you’re getting BlackBerry shares at less than 40 cents on the dollar, plus an additional 30% of the company’s assets for free. Aberdeen has lots of private investments, which we really don’t know how to value. We’re stuck taking management’s word for it.
Plus, Aberdeen’s management is paid well for a company with such a dismal track record. Since peaking in 2011 at $1.00 per share, 85% of shareholder value has been eroded. That’s not entirely management’s fault because the gold sector has been terrible, but it seems silly to reward these guys with stock options during such a dismal performance.
That’s exactly what’s been going on, at least according to Ryan Morris of Meson Capital, a San Francisco-based hedge fund that specializes in activist investing. According to Morris, Aberdeen International has bought back $9M in shares over the last year and has rewarded them back to management in easy to achieve stock options.
So Morris took a 5% position in the company and immediately started pushing for change.
Management ran more scared than a six-year old in a haunted house. Even though the company was sitting on more than $3 million in cash as of the last filings, management decided it needed to raise an additional $2 million by issuing 10 million shares each attached with a warrant to buy an additional share at 30 cents. Essentially, management issued a bunch of shares that had the effect of destroying a full 3 cents per share of book value.
Management claims it raised cash to do some buyin’ of some undervalued gold stocks. Morris doesn’t buy it, saying that 100% of the shares were purchased either by Aberdeen’s management or by sympathetic parties. Morris contends that the whole reason for the share issue was to put more shares in the hands of senior managers.
It gets better. When Morris got word of the private placement, he claims to have contacted the company on several occasions with a better deal. Management denies this, saying that Morris wanted in on the original deal and when he didn’t get his way, he backdated a tender offer to give the company the better price. According to Aberdeen, the offer was never officially on the table and so they closed it. This is interesting, you’d think they’d wait a couple of days if they were serious about maximizing shareholder value.
Morris has since accumulated enough votes to be able to call a special meeting of shareholders, which takes place February 3rd in Toronto. (If I lived in Toronto, I know what I’d be doing that day) He’s looking to replace the entire board of directors with his own guys, and although he hasn’t said it publicly, I’m assuming he’s going to liquidate Aberdeen’s investments and pay out shareholders. Or maybe he’ll control it and start his own mini Berkshire Hathaway with it.
Morris went on the offensive, creating FreeAberdeen.ca (maybe the .com was taken?) which outlines his problems with the company’s management. Management has fired back with their own document that outlines how awesome they are. Both are pretty entertaining if you’re interested in this kind of stuff.
Now that management know their jobs are on the line, they went ahead and added a very important clause in their employment contracts. The four main guys at Aberdeen International will now get rewarded more than $6 million in payments if shareholders punt the existing board of directors, under something called a “change of control” clause. This is in addition to the more than $13 million in compensation they’ve collected since the beginning of 2011.
There are already rumblings shareholders were getting fed up. During the last shareholders meeting, most directors only received 80-85% of the shares in their favor, which is a pretty big vote of non-confidence. It’s obvious Morris has researched this one carefully.
Even though Morris has been successful in getting the votes of the new shares to not count at the meeting, I’m still avoiding this stock. Upper management already owns 15% of the stock, and who knows how much is owned by parties sympathetic to management. The bad guys only need 35% of the remaining 85% to win, and remember that if somebody doesn’t vote then those shares automatically vote yes. I’m not sure Morris is going to win this fight. If he loses, the last thing I want is to be stuck with the current management team.