iGo Inc.: a Change in Circumstance
It's a bit ironic that two and a half weeks after I recommend that investors on our Net Net Hunter newsletter take a look iGo Inc. (NASDAQ: IGO) management comes out and does something dumb.
A Turn for the Worst
Back on October 26th, as part of the free subscription service we offer deep value investors, I suggested that investors take a long hard look at iGo Inc. as a potential investment candidate. Every month subscribers get to sample some of the stocks that Net Net Hunter members have full access to. Often these stocks are firms that I have personally invested in. They're the cream of the crop, the absolute best net net stock investments in the 6 international markets that we cover.
At the time of writing, iGo Inc. was a pretty good snapshot of what I look for in a net net stock investment. It was cheap, trading at only 56% of NCAV. It also had no long-term debt and a massive current ratio. To top it off, the company had net cash and a new major activist investor calling the shots. It seemed like a very good situation to be involved in.
Just this past week, however, the company came out with a press release announcing its intention to delist from the NASDAQ.
What's frustrating is that this is a voluntary delisting -- the company is not being forced off of the NASDAQ due to its inability to comply with minimum listing requirements. In essence, the company thinks that the cost of being traded on the NASDAQ outweighs the benefits of being listed.
I'm normally all for a company cutting its costs the most it possibly can without affecting the business in a negative way. This situation, though, is a little different. By delisting the company's stock the firm is making it much harder for smaller net net stock investors to realize capital gains.
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What it Means
On Old School Value I wrote that net net investors can profit one of three ways when investing in a net net stock: liquidation, turnaround, or a dead-cat-bounce. Liquidation seldom happens but it's also a very quick way to realize profits. Because net net investors are investing below a conservative estimate of a company's liquidation value, liquidation means a quick payout to current investors. Turnarounds, on the other hand, are very common. In this situation the company eventually succeeds in solving a large business problem causing the stock to rocket up to, and often past, NCAV. A dead-cat-bounce, on the other hand, is purely news-driven. Despite the company's current problems some piece of good news surfaces causing the stock price to shoot skyward. Often expectations are so bleak causing the stock to be priced so low that any bit of good news can send the stock flying.
Steel Excel's partial purchase of iGo earlier this summer greatly reduced the chance investors had of a full-out tender offer. The company's 44% ownership stake was a large deterrent to other investors who otherwise would have looked at a full-scale acquisition. Not only would an acquiring company have to negotiate with iGo management, it would also have to negotiate with Steel Excel who would most likely have demanded a large premium for their shares as compensation for the time and effort they spent on iGo, not to mention derailing any plans they may have had. Any expected purchase would have likely had to be made well above NCAV.
On the other hand, Steel Excel's involvement with iGo would have added management experience and strong influence from a major activist investor which would have helped iGo to turn their operations around. I do think this is still the case.
With the announcement to delist, however, another avenue to profit is likely closed to investors. Because the company will now be listed on the Pink Sheets, I expect investor interest to drop by quite a lot. There is a certain amount of stigma that comes with being traded on the Pink Sheets. Companies that trade there don't have to meet the same level of compliance and regulations that they would otherwise have to on a larger exchange. This is the reason iGo Inc. gave for voluntarily delisting.
While I'm not expert on Pink Sheet investing, and you can definitely find large well respected firms like Nestle or Volkswagen being traded on the Pink Sheets, firms seem to also trade skint volume. While I may be wrong about this, to me that means that it is much less likely that the stock will rocket in price on good news. There just isn't the number of investors watching the stock, or enough outlets covering the company, that there would be if it were traded on a major exchange.
I am not saying that investors won't profit by investing in iGo at some price below NCAV. On the other hand, since my overall strategy is to select net net stocks that have the greatest risk reward profile (the companies that will yield the greatest annualized returns), and since iGo has disrupted two of the three ways net net investors can profit from a net net holding, I have to say goodbye to the stock. It's either that, or close my eyes and hope for the best.
Be Honest With Yourself
When it comes down to it, investors have to take as an objective look at their decisions as possible if they are to profit long-term through investing in stocks. The stark market is the perfect place for all sorts of strange human pitfalls to show themselves. While it can be tough retracting a decision made publicly, ultimately under the right conditions an investor is much better off for doing so.
Plus, there will always be other stocks.
The other catch, of course, is that great net net stock investment candidates can be tough to find. You can solve this problem by signing up for full Net Net Hunter membership. Not only do we have over 450 net net stocks to look at but we also dig through the listings to identify the best investment candidates. The money you could make off of even just one international net net stock would be enough to pay for full membership access for years.
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