On March 26th, 2010, I published my analysis of Belzberg Technologies Ltd. (BLZ.to). At the time, the company was trading at $0.53, and I found it to be undervalued by approximately half. Since then, BLZ has traded as high as $0.63 and as low as $0.30. As noted in the original analysis, a potential weakness was the negative earnings and cash flow, which were eating into the company’s cash hoard, diminishing its NCAV (the primary basis for investment).
As an investment based on NCAV, the investor’s biggest worry is that management fails to maintain the NCAV value or in some way diminishes it. With BLZ, NCAV has moved from $1.09 to $0.96 one quarter later, then to $0.94 the next quarter, and finally to $0.82 this most recent quarter (see press release here)!
With a $0.82 NCAV, this still represents a 54% premium to the original purchase price, or a 144% premium over today’s price. Although we have seen a dramatic decline in price (1/3!), this illustrates a common conundrum for value investors. More often than not, by buying unloved, undervalued companies, the stock will continue to decline after the original purchase (unless, of course, you have impeccable timing). The value potential appears to increase substantially, so the question becomes whether the investor should add to the position, which can be difficult psychologically when the investment has diminished by such a large amount.
The only way to make the decision is to check whether the original investment thesis holds true. If so, then the investor may add to the position, or choose to dig deeper into potential weaknesses. Additionally, the investor must investigate whether anything has happened since the original investment that may diminish the value opportunity.
For each investment I make, I keep a one page summary of the investment thesis, backed up by any excel models used to derive the numbers I rely upon. This allows me to reevaluate each investment and consider where I may have gone wrong. In the case of BLZ, we can go back to my original analysis (which is close to my one page summary) and check whether the original thesis has gone wrong. From a review of that analysis, we can see that management’s unwillingness to wind down the company in the face of continued losses was an identified risk. From my perspective (and I believe reinforced by the last two conference calls), management has no intention of winding down the company regardless of its performance going forward. Instead, the company continues to hire and redevelop its website without having provided investors with a realistic plan (actually, a plan whatsoever) for regaining profitability. In this situation, I’ve decided to hold the current position for another quarter (in the company’s defence, its performance was better in the last quarter than the quarter before). Although I tend to avoid quarter-by-quarter analysis in favour of longer-term investing, BLZ is a company in distress that could easily (in a matter of a few quarters) destroy the value opportunity initially identified.
All that to say, keeping a close record of your original thesis is an important element of reevaluating investments that have subsequently decreased in price, which is a common occurrence in the world of value investing. Leave your thoughts/experiences in the comments.