Total Telcom was one of the first stocks I bought after adopting Benjamin Graham’s famous net net stock strategy.
Looking back, my series of decisions leading to the purchase of Total Telcom is a bit hazy — but a couple key thoughts are clear as day. This post analysis has helped me refine my own NCAV investment scorecard, a critical checklist I use to select net net stocks or to send them out to people who signed up to receive free net net stock ideas.
Total Telcom and Benjamin Graham: a Stock Story
I slid back down onto a large leather chair in my parent’s study, folded up a used copy of Barron’s, and placed it into the desk drawer beside me. I had just finished combing through hundreds of stocks that were close to meeting Benjamin Graham’s definition of a net net stock without much luck. None of the companies I looked at fit, and I was beginning to lose hope that that last spot in my portfolio would ever be filled.
I woke the computer from its slumber then took another glance at the list in front of me. For some reason, 3/4 of the way down the list one name stuck out at me. Total Telcom. It was trading well below book value so I thought I would take a deeper look.
Total Telcom was a Canadian telecommunications business that seemed to have had a major business disruption. The company’s revenue had eroded by 90% but the firm had a lot of liquid assets and no debt. I took a look at the stock chart and noticed something interesting — the firm had distributed half of its cash to shareholders as a special dividend. I was convinced that management would continue down this road and distribute the rest of its cash to shareholders, as well.
I bought the stock. How could I not? It seemed like a spectacular opportunity. All I would have to do was keep the stock in my brokerage account and let management dish out the rest of the cash. Looking at the size of the company’s bank account, I bet that the distribution would be enough to cover my entire purchase price.
A month later nothing had happened. I wasn’t worried, however. Nothing said that the dividend would be immediate. 6 months later there was still no news on a possible payout, but I hadn’t given up hope. A year passed and then a brief story came out explaining how the company had won a proxy fight against an activist shareholder who aimed to have the firm’s remaining cash paid out as a dividend, as well. Apparently he had been thinking along the same lines as I had nearly 12 months earlier.
Things were not looking good. Rather than abandon the shares, though, I decided to stick with the investment. Cash was a high quality asset, after all, and the firm was in great financial condition.
Two years passed. The stock slowly trended downwards. After 30 months I was thoroughly disillusioned. I decided to hang on until my 3 year cutoff — the maximum length of time that I hold a stock no matter how it has performed or what’s in development. Unfortunately for me, when the 3 year mark hit the stock had eroded by 50% in price and I was left swallowing a massive loss.
Be the Change You Want to See In Your Portfolio
Nobody has a perfect track-record. I don’t care who you are — if you’ve been a common stock investor for any length of time then you’ve suffered a large loss at some point or another. Even Warren Buffett, Benjamin Graham’s legendary student, suffered one or two large losses.
Investment losses provide a good opportunity to learn from past mistakes and failing to re-examine your own blunders means wasting opportunities that can help you improve as an investor. By examining your thought process and how later events unfolded you can uncover errors in your own assumptions and fine-tune your investment process.
I’ve been gradually shaping my own classic Benjamin Graham net net strategy since the turmoil of 2009. before stumbling upon Total Telcom, I had already read Benjamin Graham’s Security Analysis but apparently failed to internalize one critical piece of advice that would have saved me.
Total Telcom: A Promising Benjamin Graham Net Net?
Total Telcom is a Canadian stock engaged in the telecom industry. I use “engaged” loosely here. Despite having a mountain of cash, the company had marginal operations when I picked it up for 6 cents a share in 2010. It was also tiny. At 6 cents per share, the entire company was selling for just over $1.4 million Canadian dollars on the Toronto Venture Exchange — Canada’s small and micro cap market.
At the time of purchase, I had ran the company down an older version of my NCAV investment checklist before okaying the purchase. Since then my checklist has gone through a lot of refinement in an attempt to screen out as many unpromising Benjamin Graham net net stocks as possible. For a full explanation of each item on my current NCAV investment scorecard, click this link here.
Let’s look at how the investment would have stacked up using my current scorecard:
Not Chinese – Pass – This company wasn’t Chinese in the lease.
Low Price-to-NCAV – Pass– The company had a NCAV of $2.67M which meant it was trading at just 56% of NCAV.
Low Debt-to-Equity – Pass – The company had virtually no debt to speak of.
Adequate Past Earnings or Catalyst – Fail – The company hadn’t been profitable for the previous 5 years. At the time, this wasn’t that big of a deal to me. In fact, I hadn’t yet considered it as an investment criteria. While losses aren’t enough to screen out a stock from being a candidate for investment, a history of losses are. I don’t care if the company is currently losing money since losses in the current or previous year haven’t been shown to impact investment returns, but a long string of unprofitable years could hit at a problem that management either can’t or won’t fix.
The company had previously distributed 8 cents per share to shareholders, cutting the company’s cash pile in half. I expected that management would continue to distribute this cash to investors but couldn’t say for sure whether that would happen or not. Ironically, an activist investor picked a proxy fight with management to get them to distribute the rest of their cash pile but ended up losing the battle. Since I didn’t know this was in the works at the time, it wouldn’t have played a role in my selection and was probably not certain enough to bet on, either. For a catalyst, I want to see something that’s more or less definite.
Past Price Above NCAV – Pass – It didn’t look like the company had any problems here.
Existing Operations or Liquidation – Fail – The company really had no operations to speak of. While the company was earning some revenue, it’s main business had been gutted and, while management claimed to be developing new revenue streams, there was little evidence for this actually happening.
Not Selling Shares – Pass – The company’s share count was rock solid.
Key Quantitative Criteria:
Large Current Ratio – Pass – This company’s