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XPRT - Tilson lost millions in span of 2 months


hyten1
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folks check this out

 

http://www.sec.gov/Archives/edgar/data/1192305/000139834411000471/fp0002618_sc13da.htm

 

tilson starting buying this around dec 2010 around $1.5 and continue to buy until 2/23/2011 at around $0.60 and then sold everything few days later at around $0.18

 

anyone know what is going on? I did some minor research, looks like they are selling off the company, but at a price which leaves equity holders with nothing.

 

man how did tilson get this so wrong, in a span of 2 months.

 

hy

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tilson starting buying this around dec 2010 around $1.5 and continue to buy until 2/23/2011 at around $0.60 and then sold everything few days later at around $0.18

 

anyone know what is going on? I did some minor research, looks like they are selling off the company, but at a price which leaves equity holders with nothing.

 

As far as I remember some refinancing did not go through at the last minute. There was insider buying with reassurances that financing was OK before. Investing is always risky, but if you are right more times than you are wrong ... things work out.

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It looks like a typical distressed company bet.  They seemed to have adequate assets on hand, but their losses kept compounding.  T2 was betting that the bleeding could be stemmed and they would recover more than their cost.  I think they paid too much at $1.50 back in December considering the company's position at the time, yet I could see why they were buying at much lower prices at later dates.  Looks like the company's finances were so stressed in early 2011, that the board felt that they had no option but to transition their teams to other buyers, and then pay off their creditors.  That's part of investing...you make calculated bets, buy with a margin of safety, and it is still possible that you will be wrong.  Cheers!  

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T2 are not exactly gullible, but they do put a lot of faith in the people they tag along with.  When these deals start to sour, the leaders of the parade whistle in the dark as they find themselves walking through a graveyard.  They pretend everything is fine as scary things start popping up.  Then, they cut and run when the big goblin jumps out at them, leaving those in the rear to face the beast alone.

 

I wouldn't want to be in a lifeboat with any of them.  Contrast their behavior with WEB's.  For example, how he rescued USG not once, but twice.

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From the horse's mouth:

 

It was a historic day for us on the last day of February – but not in the way we like: one of our positions declined by 80% in a single day. You might think that such a decline is, ipso facto, proof of a mistake, but we’re not so sure (and that’s not just because we had a good day and month). Allow us to explain...

 

LECG is a specialized consulting firm that “conducts economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory and business decision makers.” Our investment was based on the belief that LECG could successfully integrate recent acquisitions into a profitable business structure. Given the company's market capitalization of approximately $40 million, we felt that we had a reasonable margin of safety imbedded in the company's $109 million in Accounts Receivable, offset by $26 million of net debt.

 

The company's distressed stock price, under $1, was due to a default on the existing debt. Given the quantity and quality of the receivables, we believed that the default was a short-term issue and that LECG would be able to refinance debt on a secured basis, supported by the Accounts Receivable, in which case the stock could easily be a multi-bagger.

 

Much to our surprise and dismay, however, LECG instead announced what is effectively a plan of liquidation. We don’t know why the company pursued this path, though it is possible that this route preserved compensation agreements for employees at the expense of existing shareholders. Given the rapid execution of the liquidation, we believe the equity will end up being worthless so we sold our entire position.

 

In light of this permanent loss of capital, why aren’t we certain that this was a mistake, as Netflix clearly was? Because it’s possible that we made a high-expected-value bet, but just got unlucky. Investing is a probabilistic business so it does not necessarily follow that every time you lose money, you made a mistake (and, conversely, every time you make money, you made a good investment). This is very simple and, to us, obvious, but is very poorly understood.

 

 

Read more: http://www.businessinsider.com/whitney-tilson-february-letter-2011-3#ixzz1GKo1xrDB

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From the horse's mouth:

 

It was a historic day for us on the last day of February – but not in the way we like: one of our positions declined by 80% in a single day. You might think that such a decline is, ipso facto, proof of a mistake, but we’re not so sure (and that’s not just because we had a good day and month). Allow us to explain...

 

LECG is a specialized consulting firm that “conducts economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory and business decision makers.” Our investment was based on the belief that LECG could successfully integrate recent acquisitions into a profitable business structure. Given the company's market capitalization of approximately $40 million, we felt that we had a reasonable margin of safety imbedded in the company's $109 million in Accounts Receivable, offset by $26 million of net debt.

 

The company's distressed stock price, under $1, was due to a default on the existing debt. Given the quantity and quality of the receivables, we believed that the default was a short-term issue and that LECG would be able to refinance debt on a secured basis, supported by the Accounts Receivable, in which case the stock could easily be a multi-bagger.

 

Much to our surprise and dismay, however, LECG instead announced what is effectively a plan of liquidation. We don’t know why the company pursued this path, though it is possible that this route preserved compensation agreements for employees at the expense of existing shareholders. Given the rapid execution of the liquidation, we believe the equity will end up being worthless so we sold our entire position.

 

In light of this permanent loss of capital, why aren’t we certain that this was a mistake, as Netflix clearly was? Because it’s possible that we made a high-expected-value bet, but just got unlucky. Investing is a probabilistic business so it does not necessarily follow that every time you lose money, you made a mistake (and, conversely, every time you make money, you made a good investment). This is very simple and, to us, obvious, but is very poorly understood.

 

 

Read more: http://www.businessinsider.com/whitney-tilson-february-letter-2011-3#ixzz1GKo1xrDB

 

 

That's a good excuse if one is looking for an excuse.  However, if one is looking for a way to improve, read The Predictioneer's Game.

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From the horse's mouth:

 

LECG is a specialized consulting firm that “conducts economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory and business decision makers.” Our investment was based on the belief that LECG could successfully integrate recent acquisitions into a profitable business structure. Given the company's market capitalization of approximately $40 million, we felt that we had a reasonable margin of safety imbedded in the company's $109 million in Accounts Receivable, offset by $26 million of net debt.

 

The company's distressed stock price, under $1, was due to a default on the existing debt. Given the quantity and quality of the receivables, we believed that the default was a short-term issue and that LECG would be able to refinance debt on a secured basis, supported by the Accounts Receivable, in which case the stock could easily be a multi-bagger.

 

 

    I like Tilson generally, but his explanation here falls short.  How can $109mm in AR offset buy $26mm in net debt produce a goose egg for shareholders?  Look into the details and you will find that the $109mm has a $42mm accrued compensation liability attached to it, and then there is $25mm in preferred stock ahead of common.  Include GW and intangibles and you will see TBV was, at best, only $0.90 per share at 9/30/2010 and they bought as high as $1.88 (times 38mm shares is $71mm market cap, not $40mm)  in December 2010. And this is for a company bleeding cash.  I don't see how he can come anywhere close to calling this an investment with 'reasonable margin of safety'.  I'm not critical of his making a mistake here, I just don't like the way he portrays the thesis to his investors.

 

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I didn't find the Netflix explanation to be particularly soothing either. None of the issues he mentioned represented new factors. He would have been more concise and accurate in his self-assessment if he simply said, "We posited a strong fundamental case against Netflix. Certain issues we raised, namely content costs, are currently playing out. We attempted to catalyze market reaction by publishing our opinions, but near-term positive results overwhelmed the response."

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