12/04/2016

Exploiting Investors Negligence:Support.com(SPRT)


SPRT begins trading on reverse split basis (1-for-3) on NASDAQ January 20, 2017 to avoid NASDAQ delisting.

The post (12/4/16) price is adjusted from $0.69 to $2.07.

Exploit investors negligence with counter intuitive financial attributes. Leverage the powerful overlooked mean reversion attributes with historically low quality, unprofitable and under performing but asset rich companies.


Projecting companies with a high ROIC (quality measure) to continue on average is a flawed expectation. If use a quality metrics (ROIC) coupled with a value measure such as EV/EBIT the quality measure detracts from future returns compared to only the value metric EV/EBIT.  The magic formula uses ROIC and EV/EBIT in combination for rankings. The ROIC qualitymeasure detracts from the magic formula’s future returns. 



Bottom line, studies show value (cheapness) is far more important than quality. Quality when ranked with value reduces future expected returns. Therefore when searching for value don’t include quality measures thinking you found a cheap stock with high quality. Focus on ugly cheap ideas. It’s discovering mispricing that generates outsized returns.These mispricings are found with ugly stocks.



Graham favored NCAV securities with positive earnings and a dividend. But, Oppenheimer research uncovered that NCAV stocks operating at a loss outperformed those with a dividend or positive earnings. 


"Oppenheimer's conclusion. NCAV ideas with positive earnings generated monthly returns of 1.96%. By contrast, firms with negative earnings generated monthly returns of 3.38%. Firms with positive earnings paying dividends in the preceding year provided monthly returns of 1.48%, a lower mean return than portfolios of firms with positive earnings with no dividend paid in the preceding year (2.42%), but did  have a lower systematic risk."
Ben Graham's Net Nets: Seventy-Five Years Old and Outperforming 
 

 Read more on the fascinating fully documented counterintuitive investment research in Deep Value. A must read and a personal favorite for deep value, contrarian investors.
Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations; by Carlisle, Tobias

Investment Idea Summary

Support.com (SPRT $.69) is a simple deep value story. It’s a provider of cloud-based software and services for technology support. Its solutions include a SaaS-based Nexus Service Platform, mobile and desktop apps, and a scalable workforce of technology specialists.

Support.com (SPRT) is a ben graham net-net, deep value, negative enterprise value with a catalyst.
Net Current Asset value ($1.03) is 49% greater than the current price of $.69. Net cash ($.83) is 20.28% greater than the current price. Further , note the extreme cheapness with a negative 15.671M enterprise value versus 10.973M in TTM gross profit, 62.764M TTM revenue, total current assets of 66.04M. A clean capital structure makes SPRT a strong candidate for aggressive activism or acquisition. No Debt with a non-dilutive relatively stable shares count.

Operationally SPRT has struggled for several years. The last positive EBITDA quarter was posted on September 2014. The last full year of positive EBITDA was fiscal year end December 2013 with .232 per share or EV/EBITDA = 10.38 or EV/EBIT of 12.05. Fiscal 2013 reported 11.05% revenue growth versus the TTM negative 25%. P/S TTM is .61 versus 2013 2.30.

Potential catalysts; 

Activist’s June 2016 presentation from VIEX Capital Advisors, http://bit.ly/2fXlZZe

06/24/16: VIEX Capital the largest stockholder of Support.com (NASDAQ: SPRT) owns ~ 14.9% of the outstanding shares. They announced stockholders voted to choose all five VIEX nominees – Richard Bloom, Brian Kelley, Bradley Radoff, Joshua Schechter and Eric Singer – to Support.com’s Board of Directors.

10/31/16: CEO Elizabeth M. Cholawsky stepped down after years of poor performance. 

10/31/16: Support.com names VIEX Capital’s board of director nomine Rick Bloom as the Interim President and CEO. I’m sure VIEX Capital will push for added share repurchase with shares selling below net cash value (NCV).


11/03/16: Q3 EPS of -$0.02 beats by $0.04, Revenue of $15.5M (-13.2% Y/Y) beats by $0.4M.
 
My investment interest in SPRT is driven by its deep discount to cash and current assets coupled with a realistic goal of reverting to profitability. Warning, I’m not near an expert on SPRT’s technical competitiveness.

The Q3 operations were not profitable as expected. During Q3 interim CEO Rick Bloom elected by the Board . There were several Q3 operational positives. Note the customer concentration risk. Q3 Comcast represented 60% of our total revenue and Office Depot represented 15%.

Two services wins launched as expected in Q3 2016.  First, Sears is a bundled offering with the Sears extended warranty to offer home hardware and tech support. This is a new offering to the marketplace, it will start small with subscriptions expected to grow. The second is target not named but announced on the July 2016 conference. Targets 'My Target Tech' transitioned to Support.com. Technology capabilities were an important differentiator in a competitive bid. SPRT offered deep retail ability and high quality service delivery. Two great retail names for the 2016 holiday season and potentially expanding programs in 2017.

The cloud product expects to exit 2016 with an annual recurring revenue run rate of between $1.1 million and $1.4 million. The total number of seats reported to-date has exceeded the high-end goal for 2016.

Long SPRT
 















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