The Microcap Speculator

This month’s Institutional Investor magazine has an interesting article on Matt Feshbach. Now head of MLF Investments, Feshbach is known for co-founding Feshbach Brothers, an aggressive trading firm that was synonymous with short-selling in the 1980s.

Feshbach is now playing the long side, mostly in microcaps. According to the article, he manages about $200 million. MLF is only currently invested in three companies — microcaps Delia’s (DLIA) and Sirva (SIR), and smallcap La-Z-Boy (LZB). His fund employs a strategy he calls “ownership investing,” taking a 5% to 20% position in each company, and working with management in a gentle sort of activism.

Over the past five years, MLF has posted average annual returns of 34.5%. This year might not be so great, looking at the charts of his three identified holdings:

DISCLOSURE: I have no position in any of the stocks mentioned. Not a recommendation to buy or sell any security. For informational and educational purposes only.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

You can tell a lot about an institutional buyer’s conviction based on how they accumulate shares. If they buy as the price dips, they are often just averaging down a bad trade. But large purchases following a price increase show that the institution expects great things from the company.

Take a look at Highland Capital Management’s purchases of American Homepatient (AHOM.OB). At the end of 2006, Highland (through its Crusader fund and Strand Advisors) had accumulated a position of almost 2.161M shares. As shares broke out of their slump in late March, Highland began buying more. At first, it started with small purchases in late March and the first few days of April. Then, on April 10, it unleashed all of its buying fury, purchasing a whopping 5,286,982 shares! That amounts to roughly 30% of the outstanding shares, per the latest 10-Q, all bought in a single day.

Its not hard to see the appeal. Even after its recent rise, American Homepatient sports a market cap. of only $47.27M, compared to annual sales of $352.98M (ttm). The company does, however, have substantial debt. Therefore, its EV/S ratio is much closer to 1, although still reasonable. More importantly for me, AHOM appears to have turned the corner operationally. Last quarter it made money. On a GAAP basis, American Homepatient posted net income of $1,073,000, or $0.06/share, on revenues of $76,933,000.

The involvement of Highland Capital is a net positive and a huge vote of confidence, but it does come at a price. According to the most recent proxy statement, Highland’s position constitutes a change in control and triggers a fat payout for the CEO:

Have any change of control rights been triggered in any of the executive officer’s employment agreements?

Yes. On April 12, 2007, Highland Capital Management, L.P., the company’s largest stockholder, reported its acquisition of additional shares in the company, which gave Highland more than 35% per cent of the company’s shares. This constitutes a change of control under Mr. Furlong’s employment agreement, which gives him the right to self-terminate within one year and receive a lump sum change of control payment that is currently estimated to be $3,300,000 plus any tax gross-up that Mr. Furlong may be entitled to if this payment constitutes an excess parachute payment under section 280G of the Internal Revenue Code.

I hate these golden parachutes, especially at companies that have chronically underperformed. In my opinion, board members breach their fiduciary duties to shareholders when they sign off on those kind of compensation commitments.

At this point, though, Furlong’s unduly plush contract had already been established and there is nothing that can be done about it. Shareholders need to incorporate it into their investment analysis, but in my opinion its a relatively small negative that is more than outweighed by the benefits of this level of institutional involvement. I bought shares for my own account at around today’s levels.

DISCLOSURE: I am long AHOM.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

Advocat (AVCA) and Todd Robinson, who is waging a proxy contest for three seats on Advocat’s board, each tried to garner public support today. The company suggested that Robinson’s goal is to push through a related-party transaction:

Advocat Inc. (NASDAQ OTC: AVCA - News) urges its shareholders to vote their shares of stock at the Company’s annual meeting and not to allow Mr. Todd P. Robinson and Mr. Essel W. Bailey, Jr. to disrupt the meeting… The preliminary proxy notes that Mr. Robinson, Mr. Bailey and the third individual do not own any stock in Advocat as of the record date…. William R. Council, III, Advocat’s CEO, commented, “We believe that Mr. Robinson and Mr. Bailey are trying to take control of the Advocat board of directors for their personal gain and if elected will not represent the interests of the Company’s current shareholders.” The Company was initially approached by Mr. Robinson in November 2005. Mr. Robinson indicated that he represented a group of entities and investors that own nursing homes located generally in the southeast United States who were interested in selling those homes to Advocat in exchange for shares of common stock…. Management and the board believe that Mr. Robinson and Mr. Bailey are attempting to disrupt the upcoming shareholders meeting for the sole reason of attempting to force a related party transaction.

Robinson responded in an SEC filing:

In early 2006, I signed a confidentiality agreement provided to me by William Council, the Company’s CEO, on the premise that Advocat would be sharing non-public information to determine how the transaction might be structured and valued. In anticipation of receiving this information, I was advised not to purchase shares of Advocat stock due to the insider trading rules. Ultimately, no such proprietary information was given to me, but I never acquired Company stock on the hopes that our transaction would proceed as discussed. Recently, I acquired 100 shares of the Company’s common stock. Mr. Bailey and Mr. Cash do not own any Advocat stock at this time. If we were elected to the Board, I can assure you that we would collectively acquire a worthwhile stake in the Company, either via a cash or asset investment, to prove our commitment to its success and to further align our financial interests with those of other shareholders.
I was amazed when I read the Company’s proxy statement this year which disclosed that, when you back out the Chairman’s stock ownership and the stock options the Board members awarded to themselves, the four remaining Board members (including the CEO) collectively own only 22,900 shares of Company stock, which is less than 0.4% of all of the outstanding shares. The two existing Board members whose terms are expiring at this year’s annual meeting own only 1000 and 0 shares, respectively…. In a press release dated May 3, 2007, Advocat’s CEO indicated that a principal reason that a transaction was not pursued by the Company was due to the low stock price at the time of negotiations, and if stock were paid in exchange for the assets acquired, the transaction would be too “expensive.” This doesn’t accurately reflect the proposals which were discussed. The proposed transaction was to be valued based on the relative cash flows of all assets (both Advocat’s existing assets and the assets to be acquired), subject to certain adjustments. By looking at cash flow multiples, we would be able to determine the value of everyone’s business relative to one another. The percentage of equity ownership of the participating parties would be determined by these relative values, and the trading price for Advocat’s stock would be a non-factor…. Recently, it has come to my attention that I am not alone in my frustration with the Company’s management team and their apparent inaction to move the Company forward. Over the past couple of weeks, I have been contacted by several large shareholders who have expressed a similar frustration.

In a telephone call earlier today, Todd Robinson pointed out the obvious — if he was a director, it would be more difficult for him to push through a related party transaction, not easier. Under Delaware law, such a transaction would have to be approved by a majority of disinterested directors. Today’s back-and-forth doesn’t change my opinion. The company should have undertaken a formal bid solicitation and auction process last year. A new board would help push that effort forward, and maximize shareholder value.

DISCLOSURE: I have no position in AVCA. Not a recommendation to buy or sell any security. For informational and educational purposees only.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us

Investors’ struggle to maximize shareholder value at Advocat, Inc. (AVCA) just got a little more interesting. Today investors Todd Robinson and Essel Bailey, Jr. filed a definitive preliminary proxy seeking three board seats (for the two of them plus Terry Cash). Robinson was formerly CEO of Omega Wordlwide, parent of Omega Healthcare Investors, which owns many of the facilities leased to Advocat. With his background, I believe Robinson probably has a very good idea what Advocat’s facilties are worth and what kind of cash flow they can generate. The resumes for Robinson, Bailey and Cash are all attached to the proxy.

The letter included in the proxy explains:

Dear Shareholders of Advocat Inc.:

My name is Todd Robinson, and I am an experienced healthcare investor.

I am writing to you because I do not believe that the current board of directors and senior management of Advocat Inc. (“Advocat” or the “Company”) are acting in your best interests.

Over the past couple of years I have had discussions with Wally Olson, Chairman of the Advocat Board of Directors (the “Board”), on behalf of myself and others in the nursing home industry about opportunities which we believe could have a positive impact on Advocat. Despite initial interest, and without any explanation, Advocat stopped responding to us. After realizing that some Advocat shareholders appear to be frustrated by the direction of the Company and the inaction of current Board, I had hoped to be nominated for election onto the Board, but Advocat’s acceleration of this year’s annual meeting date from June to mid-May helped make this impossible.

The Company’s annual meeting of shareholders (the “Meeting”) is to be held at Advocat’s offices, 1621 Galleria Boulevard, Brentwood, Tennessee 37027 on May 17, 2007, at 9:00 a.m. (Central Daylight Time), for the following purposes:

A majority of Advocat’s outstanding shares as of the record date (a quorum) must be present at the Meeting in order for the Company to hold the Meeting and conduct business. Shares are counted as present at the Meeting if: (a) a shareholder is present and votes in person at the Meeting; (b) a shareholder has properly submitted a proxy form, even if the shareholder marks abstentions on the proxy form or withholds his vote(s) for some or all of the Board nominees; or (c) a broker or nominee has properly submitted a proxy form, even if the broker does not vote because the beneficial owner of the shares has not given the broker or nominee specific voting instructions, and the broker or nominee does not have voting discretion. Thus, a share, once represented for any purpose at the Meeting, is deemed present for purposes of determining a quorum for the Meeting (unless the Meeting is adjourned and a new record date is set for the adjourned Meeting.

I am seeking your support to STOP Advocat from holding the Meeting, and thereby forcing the Company to adjourn the Meeting to a later date, unless the Board first appoints Essel W. Bailey, Jr., Terry L. Cash and myself to the Board. Our resumes are attached to the back of this Proxy Statement. If we are appointed to the Board, we intend to attend the Meeting and vote the shares for which we receive a proxy, as directed by the applicable shareholder. In order to accomplish this proposal, we request that you sign, date and return today the enclosed BLUE Proxy Card and RED Notice of Revocation. This Proxy Statement, BLUE Proxy Card, RED Notice of Revocation and resumes for Mr. Bailey, Mr. Cash and me (together the “Proxy Documents”) are first being furnished to the shareholders on or about May 11, 2007.

Based upon experience, it would not surprise me if Advocat responds to this Proxy Statement by announcing the hiring of a financial advisor. Such a move will not change our plans or our conclusion that the action proposed in the Proxy Statement is absolutely necessary.

If you have already sent proxy cards furnished by Advocat management to Advocat, you have every right to revoke your proxy by signing, dating and returning the enclosed RED Notice of Revocation and BLUE Proxy Card to me, at the address below.

Thank you for your support,

/s/ Todd P. Robinson

Todd P. Robinson

I don’t currently own shares in Advocat, but if I did I would vote them for the activist slate.

DISCLOSURE: I have no position in AVCA. Not a recommendation to buy or sell any security. For informational and educational purposes only.

Like this? Subscribe to RSS | Comment | Bookmark on del.icio.us