I’m back from a two-week holiday in sunny British Columbia. I wanted to post today about a mistake I made in the past. I don’t follow this company anymore, so this information IS outdated.
Belzberg Technologies, BLZ.to, was hitting new 52 week lows. The company had fallen on hard times since the share price had gone from $6 to $1.50 in Q1 2009. I started researching the company…
- Lots of cash on the balance sheet
- Major insider ownership
- Management was confident about a turnaround
From their website,
“Belzberg Technologies Inc. is engaged in supplying tools and services to professional traders. The Company’s clients use Belzberg products and services for execution management, market connectivity and/or execution services in equities, options and futures for markets in Canada and the United States. The Belzberg Trading System provides a comprehensive solution to the needs of its customers to manage their orders from its inception to execution and confirmation. In addition to trading software, it provides network connectivity and the software to route and execute orders on exchanges, electronic communications networks (ECNs) and through market makers and third-party algorithms. In addition, its wholly owned United States broker-dealer offers execution services for equities and options. The Company’s trading software and its network provides its customers with direct access to the exchanges, allowing them to trade equities, options and futures on those exchanges.”
Q1 2009 BLZ was caught in a tough spot. Expenses were rising and they couldn’t pass on the cost to customers, and some key customers were lost. At first glance, the slowdown in revenue was economic related than company specific. They company started burning cash (and eating at my MOS). I bought a small position. My first mistake was not taking the appropriate time to assess what the chances were of a turnaround, “turnarounds seldom turn” a wise man once said. I took an average earnings and margins and came up with a $4+ target. More than a double from where I bought.
A couple of quarters went (Q3 2009) by and the share price drifted lower, down to $1.10. I reassessed the company. By then the recession had been around for a while, and took most of the blame for the lousy results. Cash was getting burnt at an increasing rate, but BLZ still had well over a year in cash on hand at current burn rate. I bought a little more under $1.00 in Q4 2009.
Another quarter went by and stock was lower still. It became apparent that the turnaround was a long way away, if ever. The CEO resigned and someone else was taking the helm. Remember all those insider shares, they had to be sold. This resulted in major downward pressure on the illiquid shares. I sold my shares in the 0.60-0.70 range. The inability to pass on costs and management asleep at the wheel is a bad combination.
The lesson here is do your research! There are 3 types of companies/plays: arbitrage, asset, and earnings power. I thought this was an earnings story, but should have focused on assets. Given my (lack of) knowledge of the industry, I should have used a liquidation value with a catalyst for fair value. Given the company’s position in the industry, there was little chance of a quick turn in the business.
Most of the time I use average earnings to value a company. But those “average” earnings must be attainable again. If it is a cyclical company with little industry change, then the economy is the catalyst. If the company is cheap to earnings but the industry will look quite different in 5 years, then you can’t be certain that those earnings are attainable. If the industry will look different, or may look different, then you won’t know where the company will be placed on an industry map and should probably stay away unless the shares are extremely cheap. Liquidation or asset value, with an additional margin of safety, is the measure of choice. Even at net cash, many companies are still risky if they are burning through your margin of safety. Remember that your knowledge and your margin of safety should be inversely related, less knowledge equals more margin of safety.
I haven’t followed the company since I sold, so I can’t offer any opinion on the shares now.