The DEP Dialogue August 12, 1998February 6, 2017 Yesterday, I told you a little about a company called DEP. Today I want to show you, through excerpts, how a 120-message thread evolved from mid-January, when the stock was around 1¼, up until last month’s takeover announcement at 5¼. I tell you up front that what struck me about this thread, when I happened on it recently, was the level of … well, let’s just say there are more than a few players in the game today who lack a great deal of experience (one worries for them), not to mention a handful who are incredibly rude. The thread appears on the Yahoo! Message Board. It’s a place to trade thoughts about any stock. Near the beginning of the DEP thread was this sensible January 19 posting, from Bill, 47, from Florida: “I am playing this company as a turn around play. They once made about a buck a share, and they probably will do so sometime in the future. When they do, this stock will be worth about $15. Which gives us a reward/risk ratio of about 10 to 1. Odds I like and will play all day. In the meantime, we’ll just have to wait for it to be discovered as earnings continue rising.” These were my thoughts exactly. Bill, who seems to be “my kind of investor,” only better at it than me, went on to say: “I bought Chrysler in their bankruptcy phase too, actually the preferred stock for $4 which had $15 in interest arrears. And Ford in ’83 when Templeton indicated on Wall Street Week that they could make $20 a share in a good year. The stock was selling for $20. I put everything in. Three months later it was selling for $15 so I mortgaged the house. Sold at $80 in a few years. I do not mean to imply that DEPCC is as solid as Ford was, but when you play these stocks, patience is a mandatory requirement as is the ability to lose your money. Remember, it is a gamble with the odds highly in your favor.” Mortgaging the house — even for Ford — is a little scary, but you can see there are profits to be made from Bill’s style of investing. Around the same time, Tom asked: “Anyone know why the volume is so low? I realize this stock is coming out of bankruptcy and not well known, but the other day the volume was 0. Is there any other reason for this?” To which Oldflyboy replied: “It would seem reasonable people have no interest in this company and that those who do have shares are desperately hoping the price will go up so they can sell. In reality, though, the price goes down. Does anyone really think this company has a future?” OK. This is what makes horse races. Here is a man who probably uses no bright blue gook in his hair. But his comment is perfectly civil — and he could have been right, although if he’s basing his opinion on any research or financial analysis, he doesn’t tip his hand. RedCrownYankee chimed in: “There are four of us following this stock and that is the problem. Time and positive earnings reports will turn this stock around. Until then, BE PATIENT!!!” Orion: “There are more of us following DEPC [DEPCC] than you may think. I know of at least two others. I’ve been following this stock since September and have bought and sold it once since then. I am waiting to see if it dips below 1½ before buying again.” Even a stock with only 7 million shares outstanding needs more than six guys on Yahoo betting on it to make it go up. And judging from his message, Orion seemed really to be betting, not investing. Trading in and out means fun! But it also means commissions (albeit very small ones), spreads (between the bid and the asked, which with DEPCC amounted to at least 3% coming and going), and taxes (in case you had a gain). Better with stocks like DEPCC and most others to buy and hold (and hope and pray). Fast forward to late March. LT_Georgia has chimed in: “Does anyone know when the next earnings come out? My research showed that 17% of their sales come from Wal-Mart. Wal-Mart earnings are up, so I am expecting the same for DEP. Hope I am correct.” I’m not sure there’d be too close a link between Wal-Mart success and the success of any particular one of its few thousand smallest suppliers, but I admire LT_Georgia for doing a little research and trying to find a straw in the wind. Now it’s June, DEPCC is up in the low two’s, the company has reported earnings of a few cents a share, and someone named MARKET_2000 is providing a somewhat broader overview: “Dep should finish the year with $11.5 million in EBITDA. If you put a 10 multiple on this you get a $115 million enterprise value. The company currently has about $48 million in debt. Thus, the implied equity value is $67 million. “The company has 7 million shares outstanding. Thus, the implied equity value per share is at least $9 a share. Any way you cut it, Dep Corporation is extremely inexpensive. “Does anybody care?” EBITDA (rhymes with KEY-bit-dah) is earnings before interest, taxes, depreciation, and amortization. I’ve always been a little puzzled by it, because interest is something you really do have to pay (taxes often you do not, and depreciation and amortization are accounting charges that can be ignored with greater or lesser peril depending on the nature of the business). Still, and especially with hindsight, his analysis seemed plausible. Another way of looking at something like this is as a multiple of sales, if you think a reasonable profit margin can one day be earned on sales. It varies greatly from industry to industry (because industries have different average profit margins and growth prospects), but a company valued at “one times sales” is not ordinarily a company grossly overvalued unless it’s headed for the dumpster. DEP had sales of about $120 million — not at all far from the $115 million valuation MARKET_2000 had come up with. (Is he “MARKET_2000” because he has his eye on the year 2000, I wonder, or is he an incredible bear?) It is now July 4 and, while there have been some thoughtful messages with additional information about the company’s turnaround, skeptics are surfacing. NAFART writes in response to one of the bulls on the stock: “Guys like you talk it up and are selling out as guys like us that you sucker in buy. This will be a penny stock in the next year.” Someone called Dreckola (42/M/Biloxi,MS) agrees with NAFART: “I agree. Start shorting this bowser. One way to go: S O U T H.” Needless to say, July 4th would have been a bad time to start shorting this stock, still in the high two’s. The next day, someone named vontzen (32/M/Wicjhita) provides this message: “This stock has peaked unless big shareholders keep promoting new people to buy in, which is making shareholders who bought in at a 1½ a lot of money. Eventually there won’t be new money and it will be back to a buck and a half. There ought to be a law against investors buying at the lows and hyping it on every message board they can find. This puppy is going south.” Presumably vontzen was basing this opinion on something. My guess is: bitter experience. But it was about to get more bitter if he shorted DEP, because just a few days later the takeover at 5¼ would be announced. And I suppose this was when it began to get … ugly, because someone calling himself TommyLeeJo replied to vontzen: “Now we know where the kids from special ed are hanging out!!! The market is obviously too complex/simple minded for you morons!!!” Much gentler was MARKET_2000, replying to NAFART: “This company is turning around and if you are short, you are going to get smashed. Be careful.” On July 6, Bill — with whose message I began this sampling — was obviously in a breezy mood when he responded: “I don’t think there was any hype on this board. As a long whose average cost is less than a buck, I am only accumulating. Nice day today, up 3/8 on heavy volume. Somebody is buying a lot. Regards.” Throughout history, there have been longs and shorts, bulls and bears, winners and losers. This day, Bill was long, and winning. “To All Bears On DEPCC” read the heading of a message July 7 from “Bluepointer” – “What fundamentals will cause this stock to go down? Last year the company earned 32 cents in the fourth quarter. What makes you think that this year will be any different? If you are going to sell this stock you should do it after October when the big numbers have already moved the price. If you want to lose money, go ahead and do it now. My prediction is that you’ll get squeezed good and hard.” Vontzen, the 32-year-old from “Wicjhita,” did not take all this lying down: “This special ed kid has more money in his pocket than you have if you list all of your belongings and your mamas. See ya, TommyLeJoMamaLOOOOSER” It is my experience that when people begin bringing “your mama” into a discussion, the civil underpinnings of that discussion begin to totter. TommyLeeJo — in a message he headlined “Greaseball” July 8 — fired back: “Then why are you hangin’ on a two dollar stock bulletin board??? Did you sell all of your shares of Microsoft and have nothing else to do??? GET A LIFE!!!” NAFART fired back: “TommyLeeJoMamaLoser — These boards aren’t bad until pompous asses like you treat them like your personal chat rooms with stupid inflammatory posts.” “Put your money where your mouth is and short the stock!!! Loooooooser!!!!” suggested TommyLeeJo later that day in a riposte he titled “Greaseball II.” “The only money you act with is the two nickels you have,” NAFART offered TommyLeeJoMamaLoser the following day, July 9. “Your big time investing is with Monopoly Money. Grease up your hair with Dep, looooooooser!” It was about this time I began to think that talk of a speculative bubble, with too many unsophisticated “investors” in the market for the first time, might have some validity to it. “So, [expletive deleted]-for-brains,” shot back TommyLeeJo the same day, “short the stock and let everybody get on with their life ….” A new voice chimes in July 11. HSCORE writes: “You are all losers and liars!!! If you are long, good luck, this company is going nowhere fast!! If you say you are short, yah right!!! At the end of June, total short interest in the stock was a whopping 386 shares!!!! Looks like we have a bunch of liars here ….” July 12: TommyLeeJo addresses “NAFART, HSCORE, etc.” — “Do you ever get the feeling that the bus stopped in front of the loony bin just as there was a group escape? Why don’t all of you idiots go back to the institution and let the rest of us move on with our lives!!!” Next day, Dreckola from Biloxi chimes back in, addressed to “TommyLeeJoMamaLoser-NeedstoGetaLifeBesidesThisBoard” — “Sell this [expletive deleted] short, especially if it hits 3. Couldn’t be an easier way to make money. To [sic] bad you [expletive phrase deleted].” You can just see this sort of dialog going back and forth between analysts with opposing views at Smith Barney and Merrill Lynch, say, only neither one, to my knowledge, had an analyst covering DEP. TommyLeeJo, July 13, 9:41AM EDT, to Dreckola: “Sell the stock short and you will get squeezed!!!! Or maybe you don’t understand that move, MORON!!!!” Later that day, DEP hit 3. July 13, 1:31PM EDT NAFART addresses TommyLeeJoMamaLoserKnowsAllAbout-SqueezesFromMaMa: “Watch and learn TommyBoy” Minutes later, Dreckola piled on with something truly unprintable. The next day, the stock doubled as a takeover was announced at 5¼ a share. My ship had come in, as had Bill’s and TommyLeeJo’s and Bluepoint’s, whoever they are. If Wall Street was once the exclusive province of the straight-laced, white shoe, well-heeled (or any other footwear superlatives), I think the Internet has pretty well ended that era.