Investors can be like fishermen who wistfully moan about the big one that got away.
Those who have spent a lot of time with a pole in the water know it's inevitable that good investments will be missed; memories of lost opportunities need to be balanced with the appealing prospects that were wisely avoided.
We dodged a bullet with SR Telecom Inc., which Contra the Heard had been watching for a few years. The Montreal-based company had several attributes that made it a potentially attractive candidate. Its specialty is wireless microwave systems to link remote areas, which gave it a shot at a largely untapped international market. The small-capitalization company was very successful in this field in the mid-1990s, reaching a split-adjusted price of more than $150.
When the telecoms cratered in 2001, SR Telecom started to look interesting. It had a reasonable balance sheet, including a healthy cash balance somewhat offset by substantial debt. Its stock traded below book value, and if it could get rid of the drain of its Chilean operation, it appeared poised for a turnaround. But nobody wanted to buy the debt-laden Chilean unit.
SR Telecom acquired broadband wireless equipment maker Netro Corp., of San Jose, Calif., in March, 2003. We didn't like the terms of the deal; Netro stockholders got a $100-million (U.S.) dividend and 43 per cent of the merged firm.
Another turnoff was SR Telecom's announcement in late 2003, of a planned reverse stock split. A key reason was to get the stock price high enough to qualify for listing on the Nasdaq Stock Market. That desire for an increased profile in the United States made sense, but we know that companies that undergo stock consolidations usually trade for less a year later.
After the one-for-10 consolidation, the stock traded at $7.80, fell, then rallied when some Chilean debt payments were deferred. In February, 2004, $50-million (Canadian) worth of new shares were sold at $7. By May, the stock had fallen to less than $4 as the company scrambled to cut costs.
We did not bite. Partly it was the dreadful debt situation, with $75-million coming due in April, 2005, partly the revenue implosion, as major contracts were completed. But those obstacles can be surmounted in the right hands, which is where management's credibility came in.
SR Telecom's resplendent 2000 annual report contained this nugget, "It is expected that the uncertainty in the telecommunications industry will subside during the second half of 2001." But things got much worse. Others made the same mistake, but each successive annual report from SR Telecom indicated the same disconnect with the reality of the marketplace. That did not inspire confidence.
Its stock now trades at 43 cents. Debenture holders have the firm by the throat and are dictating terms that will skin shareholders. A rule of fishing when seeking the "big one": Don't capsize the boat.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.
- Report on Business Company Snapshot is available for:
- STAR RESOURCES CORP.