Wednesday, May 23, 2012

Facebook IPO/Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95/Bought 50 RRD at $10-ROTH IRA/Bought 80 TINY at $3.3-LT Category

SandRidge Energy, a LT selection, completed its $1.2 billion acquisition of Dynamic Offshore Resources. The consideration consisted of $680 million in cash plus 73,961,554 SD shares. Form 8-K The stock has dived, along with most energy stocks, since I purchased 40 shares at $7.68. Bought 40 SD at $7.68-LT Category (3/9/12 Post)

There was a media and investor frenzy before the Facebook IPO. That phenomenon, reminiscent of the Nasdaq 1999 bubble, is primarily relevant to those interested in behavioral finance and to those who unfortunately bought into the story being peddled to them. After the IPO, the media has started to examine in more detail problems with the Facebook business model and other issues that may have impacted the decisions made by individual investors, if disclosed by the mass media before the IPO, to buy into Wall Street's hype machine.

Some of those articles have focused on the lack of an adequate strategy for mobile advertising and other issues relating to mobile apps. WSJ Yesterday, Reuters disclosed that analysts for the main underwriters, Goldman Sachs and Morgan Stanley, had lowered financial projections for Facebook shortly before the IPO and only made their respective downgrades available to a select number of institutional investors. (see also similar articles at the WSJ and Barrons) When reading those stories, I can not help but think of the statement made by Leona Helmsley about the "little people".

For those individuals participating in the Facebook IPO at $38 per share, I suspect many of them did not question the valuation of a 100+ billion market capitalization company at close to a 100 P/E, when the company just disclosed a sequential slowdown in revenue growth (ForbesReuters), acknowledged issues with its mobile strategy, and suffered a loss of a major advertising client due to a lack of results shortly before the IPO. 

1. Bought 50 RRD at $10.00 Last Thursday--Roth IRA (see Disclaimer): Just prior to making a decision to buy back RRD, I read the Fitch report which reaffirmed its rating on RRD debt. TEXT-Fitch This report gave me some comfort that RRD would be able to maintain its generous dividend while reducing gradually its leverage. As noted in this report, there is no "tolerance" for a dividend increase.

I recently flipped RRD common after holding the stock just long enough to collect one quarterly dividend. Sold 100 RRD at $12.24-Bought 100 RRD at $11.6.

After buying and selling RRD bonds, I own only 2 RRD senior bond at the present time. One of those bonds was bought last August. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 (August 2011). The other was bought last Friday and is discussed in Item # 2 below.

RRD "anticipates" keeping the annual dividend rate at $1.04 per share. RR Donnelley - Dividends That remains an open question for the future of course. At that annual rate, the yield at a total cost of $10 would be slightly over 10%, a higher current yield than than the RRD bonds maturing prior to 2022. In the ROTH IRA, that dividend yield becomes tax free.

The current consensus estimate is for an E.P.S. of $1.81 in 2012 and $1.84 in 2013. At a $10 price, the forward P/E on the 2012 estimate is about 5.52 with a 10% dividend yield. To justify those numbers, the sellers of RRD stock must believe, with a high level of certainty, that the earnings will collapse and take the dividend with it. While I would view that outcome as a possible scenario, it is not a rational one based on currently available information.

A more optimistic spin on RRD appeared in a Barrons' article published last February.  

Since I do not share others optimism about RRD's long term prospects, I will keep my overall exposure, both bonds and the stock, relatively low. I doubt that I would buy more than 100 shares of the stock or own more than 3 thousand in face amount of the senior unsecured bonds. And, I will likely continue trading those positions regularly, moving my overall allocation from zero to a maximum limit of $4,000.

A long term chart looks awful after 1998: RRD Interactive Chart The stock was doing fine from around 1985 to 1998, topping out at over $43 per share in June 1998. A double top was formed in 2007, with the shares trading over $43 per share again before collapsing to below $8 by February 2009. Since 2/2009, the stock has been on a roller coaster ride to over $20 in what appears to be the latest double top, at less than 1/2 of the price of the former double top, before falling to the current level. In other words, no encouragement for a long term investor, just looking at the chart since 1998. RRD stock would have been a good long term investment from 1985 to 1999.

SEC Form 10-Q for the Q/E 3/2012: Form 10-Q

2011 Annual Report: Form 10-K

Profile Page at Reuters

I would be satisfied to receive a 10% annualized return on this stock purchase. Assuming the dividend is kept at the current level, that goal could be reached simply by selling the stock at break-even. My stock commission rate is $7 per trade at Vanguard. (the bond commission rate for Voyager customers is $2 per bond)

On the day of my purchase, the stock hit a new 52 week low, breaking $10 per share shortly after my day limit order at $10 was filled.

RRD has some issues. As noted earlier, the RRD pension plan is underfunded by about $700 million. The company operates in a industry that is in secular decline. And, the leverage is high, with $3.4085 billion in long term debt as of 3/31/12. Form 10-Q Most of the debt will come due before July 2020, see page 21. In March 2012, the company issued  $450 million of 8.25% senior notes maturing in 2020.

Yesterday, RR Donnelley announced an agreement to acquire Edgar Online (EDGR) in a deal valued at approximately $70.5 million. (Profile of EDGR)

R.R. Donnelley & Sons Co (RRD) fell 12 cents in trading yesterday to close at $10.32. 

2. Bought Back 1 R.R. Donnelley 8.875% Senior Unsecured Bond Maturing in 2021 at $96.95 Last Friday (Junk Bond Ladder Strategy)(see Disclaimer): I have previously bought and sold this bond: Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69 (2/13/12 Post)-Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100 (4/11/12 Post). This purchase brings me up to two RRD bonds ($3,000 in principal amount is my maximum permissible allotment)

According to FINRA, this bond is currently rated Ba1 by Moody's and BB+ by S & P.

My confirmation shows the same ratings.

My confirmation states that the current yield at my cost is 9.079% and the YTM is 9.248%.

3. Bought 80 Harris & Harris (TINY) at $3.3 Last Friday (Lottery Ticket Basket Strategy)(see Disclaimer): I probably lost money on this stock a few years ago. With the price scraping near a five year low, I decided to try again. TINY Interactive Chart TINY is a BDC.

The author of an article at Seeking Alpha argues that Harris & Harris is undervalued, and it is selling below its net asset value per share. As of 3/31/12, the net asset value per share was $4.89, up from $4.7 on 12/31/11 (page 2 Form 10-Q). I would add that a number of those firms are private, so there could be valuation issues. A list of TINY's investments can be found starting at page 9 of the 10-Q and at TINY's website.

However, this company invests largely in the high risk area of nanotechnology startups which is reason for caution. The firm has had a few of those companies go public. In 2011, two of those companies, Solazyme (SZYM) and NeoPhotonics (NPTN), completed IPOs. TINY had investments in three other companies that were acquired last year (Biovex, Crystal IS, and Innovalight).

NeoPhotonics highlights a problem. The company did have an IPO. Yet, in the 10-Q at page 9, TINY notes that the cost of its investment is $7,299,590 while the value was $2,132,790 as of 3/31/12.

Solazyme is the polar opposite, where the shares are valued at $33.8+ million, as of 3/31/12, with a cost at $5.44+ million. Since the shares are publicly traded the value will change. The Solazyme share price has declined from the $14.63 close on 3/31/12 to $9.71 yesterday. SZYM Historical Prices TINY owned 2,304,149 shares at the end of the first quarter, page 9 Form 10-Q.

SZYM is interesting, though not yet profitable. Quarterly Report on Form 10-Q The company is discussed in this Seeking Alpha article. SZYM did trade briefly over $26 last July, SZYM Interactive Chart, and then started to slide, closing as low as $8.29 by October 2011. (TINY was trading near $5.5 per share last July before sliding to $3.3 by October 2011, TINY Interactive Chart). The IPO was at $18. Prospectus

The NeoPhotonics' shares are close to unchanged since 3/31/12. NPTN Historical Prices

Harris & Harris issued a press release on May 17th noting that it had generated approximately $910,000 from selling call options on Solazyme and NeoPhotonics this year. In that press release, the company also discussed recent developments at three of its portfolio companies (Bridgelux, Laser Light Engines, and Metabolon)

TINY did realize a profit on the three companies acquired during 2011, but not enough to impress me given the risk and the fees paid to TINY's employees. In 2011, the company received $13,992,952 in upfront payments. The total cost of those investments was $11,383,299 in those three companies. I would not call that result a success, particularly when the investor factors into the equation operating costs. 

Another $953,480 was received for the BioVex investment in March 2012, after that sum was released from escrow. BioVex was acquired by Amgen, and TINY may receive some milestone payments from Amgen. TINY could receive up to $9,526,393 million in future payments. The value now placed on that possibility is $3,352.886 (page 60).

TINY has not paid a dividend in over a decade. The last dividend was $.02 a share paid in 2010. Harris & Harris Dividends It may be the only BDC that has that ignominious distinction. As noted previously, a BDC has to pay out at least 90% of its net income to maintain its tax status. The lack of dividends paid by BDC, therefore, is a clear manifestation of a lack of past success. That is another reason to classify the purchase of shares in this BDC as a Lottery Ticket.

Website: Harris and Harris Group

Harris & Harris Group fell 7.29%, or 24 cents, yesterday to close at $3.05, a new 52 week low.

Some of yesterday's weakness in the shares may be due to the potential blowback in the IPO market from the Facebook fiasco. TINY will monetize some of its investments through the IPO process.  

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