Thursday, July 22, 2010

Sometimes, it's best to take a pass... (SEYE)

As investors, we only like to talk about the things that we did right. This is not going to be one of those posts... Despite the dent that it might put in people's perception, I think that it is important to talk, and more importantly, THINK about dumb things that you have done, why you did them, learn from it, and not repeat the screw up. If you have any of your own stories, email me. We can discuss them and if you want, I will even post your stories.

Feel privileged, this is about what is probably the most boneheaded capital allocation decision that I have made in the past 5 years. While it didn't hurt much financially, as far as errors of thought and logic go, it is right up there with me burning money on a bank that looked cheap a few years back...

This stock that I had at one point been building a position in, was Signature Eyewear. As the company had been making strides to reduce debt and raise cash, I was naturally quite impressed with the financial results of the company. Trading at a P/E of just under 5, there seemed little that could go wrong on, the face of things.

The company basically just designs and sells eyeglasses, under license agreements with brands such as Dakota, Bebe, and the like. It also has it's own value line that has generated pleasing results. Insiders own a ton of the company and are incentivised- another plus.

One thing that I noticed before starting to initiate my buy orders (in a series that lasted well into the new year), was that the company generated A TON of their sales from 1 product line (literally, around 1/2 of revenues): Bebe. Since the license agreement didn't expire for nearly 9 months, I figured that I could send emails in regard to the renewal process to management (with some other questions about the business), as I was buying, rather than before. "After all," I thought, "I don't want for this potential multi-bagger to fall through my fingers!" Mistake.

My communications with management? You ask? Not only did I not once receive an answer to my numerous emails (spaced out by a matter of weeks, just so I wouldn't get annoying), I didn't receive a single answer to any of the numerous phone messages that I left. What really made me angry, was that I was in a position to own a significant amount of the company, and couldn't get into a 5 minute conversation with a guy, who, by definition, works for me! Furthermore, I was trying to contact the person whose contact info was on their press releases for communications!

After deciding that I had enough, and after many weeks, I was finally able to get rid of my shares at a slight loss. Had it not been for some scheduling conflicts involving the VIC West, I would have gone to the annual meeting of shareholders for SEYE, just to try to get an answer to the reasonable questions that I had; it isn't like I was wanting insider information, just some general info about the business! But, I needn't digress.

As of today, literally, many months later, there has been no word on if the license has been renewed, though, there was a CT Order filed with the SEC. Lots of times, these sorts of orders are to protect trade secrets and such. Regardless, we presently have no idea what is going on with either the filing or the Bebe agreement. I guess that we are supposed to wait until the next 10Q to find anything out about this Material Contract. Maybe, the contract was renewed, and there was no need to report the contract... I honestly don't know. But what I do know is this, in virtually every other contract that they have renewed or begun, they announced it publicly. I also know that the whole situation makes me uncomfortable.

Personally I think that when management won't talk to the very people whose capital they are allocating, it is best to simply take a pass; unless of course, you plan on going activist, such as is/was the case with the Polonitza Group at ITEX, Carl Icahn at Motorola, or The Lion Fund at Friendy's or Steak 'n Shake. In the case of Signature, it is particularly disturbing, since generally, managers in small companies love to talk to you. Some of the most educational conversations that I have ever had, involved sitting down with the CEO of a nano-cap company (either in person or on the phone) and just asking questions.

While I admit that there is potentially a ton of upside for the stock of Signature, there are a lot of companies out there with a greater margin of safety, simply because they are more transparent.

Disclosure: I have no position in SEYE. This is not any sort of advice and is merely opinion. Do your own research when even so much as thinking about anything I talk or think about!

1 comment:

Robert Pio Molloy said...

Once again, a great post; thank you for sharing.

I think your decision to sell your shares was intelligent, and courageous. I can't help but feel that if management had been successful in extending the bebe contract, we would most certainly have heard about it. Infact, if we go through the SEC filings, history tells us that these sort of contracts are always announced and extended well in advance of their expiry - http://www.sec.gov/Archives/edgar/data/1036292/000107261307002004/form8-k_15399.txt

As it stands, the lack of communication from management speaks volumes.