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Regent Communications (RGCI) Executives Should be Fired!

You heard it here first, although if you have read the company’s SEC filings it would be obvious. First, I should state that I am not an impartial observer of the company and of the failings of its management. I have been a shareholder for a few months and I intend to remain a shareholder for some time. I bought into the company well aware of the management’s failings, but believing that the company would easily be worth 50% more than I paid should management suddenly get fired. That is not a strategy I recommend unless you are a hedge fund with the money to buy a large stake in a company. I have been burned once before with this strategy, with Career Education [[CECO]], which I bought during a shareholder’s proxy fight against management that he ultimately lost (and I lost money on that).

Regent Communications, trading around $3 currently, [[RGCI]] is a small radio company with radio stations in a number of ‘mid-market’ cities, such as Buffalo, New York. The company aims to have a number of stations in each of its markets so that it can spread out fixed costs over greater revenue. The company’s stations have eked out small increases in revenues over the last few years, despite the tough advertising market. The company increased its size last year by buying a number of stations from ABC radio. Regent Communications trades at a very modest P/CF (price to cash flow) ratio of 10.9 on a trailing twelve months basis.

RGCI 1-year chart

So what is wrong with Regent management? For starters, they are paid too much for what they do: $670k and $500k last year for the two top executives (see the 2006 proxy for details). While that does not seem like much, that includes substantial bonuses in a year in which the company’s stock price nose-dived by 40% and operational improvements were minor. Also, keep in mind that radio is not a business where the top executives need to do much–all they really do is decide on a few broad initiatives and allocate capital. The station managers could easily do their jobs autonomously.

Oh, and with regards to allocating capital, Regent is horrible. The company bought back loads of stock at much higher prices in 2005 and 2006. Then it took on loads of debt to buy new stations last fall. Even as the stock price was falling the company stopped buying back more stock. The company generates strong and stable cash flows, and is in a mature industry, yet it pays no dividend.

I am not the only one disappointed with Regent’s management. One hedge fund, Riley Investment Management (which holds or controls 7.4% of RGCI), tried to call a special meeting to elect new directors. The company blocked the move. So earlier this week, Riley filed suit against Regent because Regent would not provide it with a list of shareholders or allow it to call a special shareholders meeting for the purpose of electing new directors. You can see Riley’s original letter to Regent dated July 19, 2007. The company’s charter allows for 20% of shareholders to call a special meeting of shareholders, and Riley asserts that it and several other shareholders easily

Just yesterday (August 15, 2007), Regent Communications filed a lawsuit against the hedge funds that are suing it–Riley Investment Partners Master Fund, L.P. and Riley Investment Management LLC, (collectively “Riley”) and SMH Capital Inc. (“SMH Capital”). While I have no clue as to the legal validity of Regent’s claim, it is obvious that this is an attempt to prevent Riley from calling a special shareholder’s meeting and getting a list of all shareholders.

I hope that the directors suddenly remember their fiduciary duty to shareholders and fire management and then began a liquidation of the company. An orderly liquidation of the company could easily bring $4.50 or more per share to shareholders. This was first proposed by Riley back in April (see their letter at the end of their 13d filing), but the company ignored them. If Riley has to win in court to get their director nominees elected and to get the company sold or liquidated, the legal costs could erode some of Regent’s value.

Disclosure: I hold RGCI stock. My disclosure policy makes for good reading.

Of risk and microcaps: TSR, Inc. (TSRI)

There are those that say that microcaps are inherently risky. They are wrong. There are those that say that stocks with low prices (ie, below $5) are inherently risky. They are wrong. There are those that say that OTC BB, pink sheets, or unlisted stocks are inherently risky. They are wrong. (Although, to be fair, most unlisted stocks are not good investments; but that does not mean that being unlisted makes a stock a bad investment.)

For example, I am aware of a couple private companies based near my hometown that I would love to own (if the price were fair), even though they are private (for the record, both are closely held by only a couple people; one of them is Chemtool). As long as I don’t overpay, it doesn’t matter to me if the company is small, the stock is hard to sell, or the financials are not filed with the SEC. As long as I can get my hands on the financial statements and I can trust them, I have no problem owning tiny or illiquid companies. Neither should you.

Perhaps my favorite tiny company that you can buy is TSR, Inc. [[TSRI]], currently trading at just over $4.00. The company sports a book value of $3.05 per share, and most of that is in the form of cash, short-term treasury bills, and short-term receivables. I estimate that the company has a liquidation value of $13 million (compared to a $18.6 million market cap), meaning that in a worst-case scenario we would not expect to lose more than 31% of our investment. The company, currently going through tough times, remains profitable (even excluding interest on its investments). If the company were to utilize its excess cash to fund a special dividend or to buy back stock, while its operations improved modestly to historic norms, the stock could easily increase 50% or more in value. In the meantime, the stock’s nice 8% dividend yield is nice (although keep in mind that the payout yield is over 100%, so some of that dividend currently represents return of capital).

TSRI 1 year

TSR Inc. is a staffing company in New York for computer programmers and related professionals. A large chunk of the company is still owned by its founder, who has also recently bought stock on the open market at around $4 per share. I should note that the founder, Joseph Hughes, has previously been successful when trading TSR’s stock–he sold a large number of shares back in 2004 when TSR’s stock was much higher.

Disclosure: I own TSRI. If you follow my portfolios, you will notice that I sold off a large percentage of the shares I owned a couple weeks ago. This was for strategic reasons (allocating money to a better opportunity). I continue to own what for me is a normal-sized stake in TSRI. See my disclosure policy.

A self-congratulatory post

You should now address me as Master Michael. I successfully defended my master’s thesis this morning, “Memory Systems and Memory Consolidation During Sleep”. I will now be leaving my ‘day job’ of psychology research and I hope to find work in the wonderful world of finance.

This should give me some more time to write, now that I am not frantically working 60 hours a week on my thesis.

Is college worth it? An analysis

After reading a recent very bad blog post (here), saying that college was not worth it because of high upfront costs, I thought I would take the same data and analyze it the right way.

The average (median) college grad earns about $51,110 per year, while the average (median) high school graduate earns $29,337 per year. The average annual cost of a private university is $30,367 per year. I figure that college takes 5 years and the HS graduate will thus work five more years. So there will be 40 total years of work for the college graduate and 45 for the high school graduate. Using 7% as my interest rate, I calculate the net present value (at the end of high school) of the high school graduate’s earnings to be $399,145.19. For the college graduate I figure a net present value of future earnings of $681,384 at the end of college. Discounting that plus the payments for college back to the end of high school five years earlier gives us a net present value of ($485,817 – $124,511 = $361,306). So college appears to lose. Let’s make this a little more realistic and see what happens, though.

To be more realistic we give the HS graduate an annual 2% raise starting when he starts his job. We give the college graduate an annual 3% raise beginning at the same time (because the value of a college education will be increasing each year he is in college). We increase the cost of college by 5% a year. Discounting all future college costs and earnings at 7%, we find the net present value of the college graduate’s earnings to be $651,485, whereas the net present value of the high school graduate’s earnings are $504,266. So even taking a long time to finish college (5 years), not working at the time, and going to an expensive private school with no scholarships, the college graduate makes out like a bandit relative to the high school graduate.

The benefits to college are real and large. Because non-skilled jobs will probably continue to disappear, my estimation of 2% annual raises for the HS graduate are probably way overoptimistic and the benefit to a college education is even larger than my estimate.

Of babies and bathwater: International Shipholding (ISH)

Turmoil in the markets continues. Today getting slaughtered (down below $16) was International Shipholding Corporation [[ISH]]. The company reported no news and yet the stock dropped 20%. It is now trading at 2/3 book value. One nice thing about the shipping companies–they are generally worth around book value. So if you find one that is selling at a significant discount to that and there is nothing highly wrong with the company, it could very well be a good investment. One thing to note is that most shipping companies are not the best in terms of corporate governance.

ISH 1 year

Disclosure: I own ISH. My disclosure policy will never sink.

The Value of Sloth

Are you worried that you aren’t doing enough to increase your investment performance? Perhaps all you need to do is go on a 2.5 year vacation. According to Mark Hulbert, the best performing investment newsletter over the last 5 years has not been published in the last 2.5 years. So by doing absolutely nothing it has garnered great profits. Surprisingly, this is not an isolated instance–mutual funds and individual investors who trade less often make more money. Partly because they reduce their costs and commissions, but also because the urge to always do something often leads to stupid mistakes.

Another good example of the benefits of sloth comes from investing in the S&P 500. As shown by a recent research article, you would have done better holding the original 500 companies in the S&P 500 and doing NOTHING rather than investing in the actual S&P 500 index (which adds or drops about 20 stocks each year). So even a 50 year vacation can be beneficial! And remember that the less frequently you trade, the fewer taxes you pay (because you are compounding pre-tax money–if you sell each year you compound after-tax money).

Disclosure: it has been far too long since I took a vacation!

StockLemon v. Home Solutions (HSOA) Redux

Ahh, Andrew Left’s ‘conference call‘ today regarding  Home Solutions of America, Inc. [[HSOA]] was amusing. Andrew sounds very angry. His adversaries, the stupid traders who are long the stock, also sound angry. I did like the very British operator, and how she pronounced “Citron” (it sounded like ‘citrun’). That was very cute.

Me, I’m neither long nor short HSOA, and I am not angry. I think I’ll keep it that way!

My take on Andrew Left’s accusations against HSOA is that he brings up a lot of good points. The most damning evidence in my mind is the inability of the company to generate cash from their accounts receivables. There is no way I would go long HSOA.

Disclosure: I am not long or short HSOA and I have no affiliation with Andrew Left of StockLemon. I have a disclosure policy.