And now . . . (drum roll, please) . . .
Did you notice Calton — CN — first suggested here in August 13, 1998, at 60 cents a share? At that price it was a somewhat dicey but, I thought, interesting speculation. And what fun to be able to buy, say, 10,000 shares of a stock! (You might want to check with your broker before making trades like that. A discounter like Fidelity charges $200; one like Ameritrade charges $13.)
A few weeks later — to my amazement (great minds think alike?) — Calton was acquired at $1.70 a share . . . sort of. That is, all its assets and liabilities were taken over, leaving just the public shell (itself of some modest value to someone looking to “go public” without having to go through all the effort and expense), and $1.70 or so a share in actual cash.
You might think this would be one of the easier stocks to analyze: No assets, no liabilities, no business — just $1.70 a share in cash.
(The company did have about $1.3 million in annual expenses for four employees and its office space. But that was matched by a four-year $1.3-million-a-year “consulting contract” with the acquiring company.)
What might shares of such a stock be worth?
If you guessed . . . “about $1.70?” . . . you would show your extraordinary naivete. Who wants actual cash money, an all but archaic concept, when you can have stock in an exciting money-losing company?
And it wasn’t really cash, as I say, because you didn’t get your $1.70 a share directly — the company said you would have to wait 18 months before they distributed it to you, and that in the meantime, if opportunities arose, they might invest some or all of it and maybe not distribute it.
My own theory was that, sure it was worth $1.70, give or take, because the cash was there, mostly in Treasury securities, earning interest, and the guy running the company had 11 million reasons not to blow it. That’s how many of the then roughly 28 million outstanding shares he owned (last I looked, more like 14 million).
But this is called “value investing,” or some variation on value investing, and who wants that? So the market valued CN at 95 cents after announcement of this $1.70 deal, and I wrote about it again. Now, it seemed to me, though still not a sure thing (what ever is?), it was a seemingly low-risk way to make a very fat return within 18 months.
And for the longest time, even after the deal closed, the stock was barely over a dollar.
No one wanted it. Who wants to pay $1.10 for $1.70 in cash? Boring! Old-fashioned!
Then the company quietly blew a bit of its cash on some money-losing Internet developer — with all due respect to the 62-year-old founder/CEO of Calton, he was a homebuilder, what did he know about the Internet? — and the few people following this stock on the Yahoo! message board were consumed with disgust. He was blowing our cash on stupid speculations! So the stock remained well under the value of its cash.
But now the company has made a few more very modest Internet-related investments — a few hundred thousand dollars — and put an “e” in front of its name — eCalton. And maybe now, one thing and another, it still has $1.70 or so per share in cash (what with the interest it’s earned in Treasuries, plus purchasing some shares itself at less than $1.70 each, thus enhancing the value of the rest).
The message boards have exploded, at least relative to what they were before, and people who seem to have no idea of any of this background are talking about “an Internet incubator” and “the next CMGI” — all this because this one-time homebuilder put a few million dollars into a couple of dot-com ventures.
When a $45 million pot of cash was valued at $27 million, no one was interested. When it reached a valuation in excess of $45 million, it began to attract the attention of today’s savvy investor.
Two days ago it closed at $3.50 a share, almost double the value of the cash. Yesterday, it jumped a further 34%, to 4-11/16 on volume of more than 2 million shares (nearly 10% of all the shares). I have no clue what it will do today, but especially if it goes up, I will continue to sell.
(Let me hasten to advise newcomers to this column and remind veterans: the list of my investment failures is long and loathsome. I am not for a moment suggesting that my success with CN is typical. And of course, if I’m so smart, why didn’t I buy even more at 95 cents? And why did I begin selling at $1.75?)
Two things are going on here, and I have no idea how to weight their relative importance.
The first is that the winds of this crazy market have happened to blow our way, and, like a candy wrapper in the gutter, CN has suddenly got caught up in the draft. The people on the message boards are cheering for the stock like bettors around a craps table cheering on a lucky player. (I’ve never quite figured out how craps is played, but we’ve all seen the movie.)
So, heck! Four is a small number. If the stock can be four, why can’t it be 10? Or 30! That’s still a small number compared to some. And splits! Don’t forget splits!
The second thing going on is that you have a smart, capable guy who has $40 million or so to play with and a plan to build an Internet company of some kind, or at least to satisfy the market’s craving for such things — and who’s to say he won’t succeed? Maybe the $5 million or so he’s bet on a few Internet ventures has suddenly added $60 million to the company’s value. And maybe this is just the wee beginning.
(I say the CEO is smart and capable. I’ve never met or spoken with him. But this seems a reasonable assumption based on his having built a successful American Stock Exchange homebuilder, which only tanked after he sold it to someone else; then came out of retirement to bring it back from the dead, which in fairly short order he did.)
But can it be this easy? Back a few Internet start-ups, issue a few press releases, and add $60 million in value in a few short months, much of it yesterday?
I hope so!
I was buying my $1.70 wallets for 95 cents (why was anyone selling?); and I have been selling at prices ranging from $1.75 to $4 (why is anyone buying?). But I still have quite a few left, because through a combination of the market’s madness and Calton’s business savvy, who knows? These days, I guess anything is possible.
(Executive summary: Do not buy this stock. But feel free to follow the drama — and to try to dope out what it may tell us, or not tell us, about the tenor of the times.)
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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