I don’t always buy shares in the companies I write nice things about. Only occasionally, in fact, because of limited resources, diversification, et cetera.
But one of the ones I did buy, in early December, was Poseidon Concepts Corp. Two days after I recommended it in The Globe, I bought 1,000 shares at $3.40 apiece. That has turned out to be both embarrassing and financially painful as the stock has cratered to a quarter a share. On a percentage basis, I’ve now lost more than the holders who had bought at the 52-week high in February, then sold when the company’s first bad news hit in November.
So, let’s look back at what went wrong.
Like many journalists, I have a value bias: I like underdogs, and I like getting things at a discount. I’ve been trying to shake that in the two years I’ve been writing the Vox column, particularly since a number of my worst calls are high-priced, high-quality companies that kept rising after I said they were too expensive.
But I’m still deeply susceptible to the idea that the market can overreact to an earnings miss. Those high fliers generate such lofty expectations, and disappointments send momentum investors rushing to the exits. Good companies can have bad stocks, in the short term.
It seemed plausible that Poseidon Concepts fit that bill. By nearly all accounts, its fracking-fluid storage tanks were a technological leap forward. Its third-quarter numbers, however, were deeply disappointing. The company blamed slowing activity among its gas-drilling customers; many of the analysts who followed it said its dividend – even at a 27-per-cent yield – was sustainable.
Of course, there was one underlying assumption behind all of this: That Poseidon’s financial statements were accurate. Which, we now know, were not.
Shortly after Christmas, the company announced a new CEO, suspended its dividend, and said it was forming a special committee of its board of directors to “address various issues arising from the recent write-off of certain accounts receivable.” Shares dropped to $1.48; I was now down by more than 50 per cent.
I have another value-investor bias – or perhaps it’s a stupid-investor bias. I immediately have the urge to double down when one of my holdings drops.
This time, though, I couldn’t pull the trigger. Special committees formed around accounting issues are bad news. It seemed like the market was pricing in the risk of a restatement. Or was it?
I didn’t buy more. But I didn’t sell, either.
The restatement we’re getting – 75 per cent of 2012’s revenue wiped out – was clearly worse than the market expected, because the shares traded as low as 19 cents last Thursday before trading was halted Friday at 27 cents.
So, again, what went wrong?
One, Poseidon’s products sounded good to me, but outside of knowing the company had at least one patent, I didn’t really have a good idea of the company’s sustainable competitive advantages. Which, we now know, weren’t particularly strong. Common sense should have suggested that the sky-high operating margins Poseidon garnered in its early days would have attracted competition, and then pricing problems (something short-sellers at the firm LDIC Inc. noted early on, to their credit and profit.)
Two, I should have been more skeptical of the energy-services experts I relied on – the sell-side analysts covering the company. With all due respect, they didn’t see the November earnings miss coming, even though the slowdown in gas-drilling activity in the company’s key markets was no particular secret. I wasn’t out in the fields, talking to Poseidon’s customers and competitors. But I’m not really sure who, besides LDIC, was.
And three, given those first two problems, I didn’t assess the downside probabilities properly. There’s always a non-zero risk of complete blowups, whether it’s a storied Wall Street investment bank, a European country, or a Canadian energy company. The chance that Poseidon Concepts would implode was higher than I realized – or, perhaps, wanted to admit.
Last Thursday, on Poseidon’s third day of disaster, ill with the news, I mulled pouring in just under $1,000 to really, really average down to just under $1 a share. Maybe I could salvage something from this trade.
But I still couldn’t do it; I didn’t even want to pay a quarter. And that’s something I’ll try to remember next time I’m holding a loser: It doesn’t matter what you bought it for; would you buy it for that price today? And if not, the answer is to sell.
Because this is how I now assess the probabilities: The chances of it going to zero are better than it ever getting back to $3.40. I only wish that if you, too, are a holder of Poseidon Concepts, you hold it in a taxable account; the greatest value the shares will likely have is providing their holders with capital losses.