"How one simple phone call is caused me to sell a stock in my real portfolio" - Part 2 aka The mystery company is...
The following is a reprint of a post that I made back in April followed by an update that includes the name of this mystery company.
"Last night was fairly hectic in my household. It was already past both of my sons' bed times and I had just gotten back from the drug store picking up medicine for the younger one's ear infections. In the midst of getting my two little ones ready for bed the phone rang. My wife answered it and said "Honey, its those investment people again. You'd better take it." Apparently this is the third time over the past several days that the caller had tried to get in touch with me.
Assuming it was some sort of cold call from a broker or something equally annoying, I took the call. To my surprise it was a representative of a company that I actually do own in my wife's IRA. So I listened to what she had to say.
The woman on the line sounded as though she was from some sort of Indian call center. She has been harassing my wife trying to get her to vote our shares of the company that she represents in line with the Board of Directors' recommendations.
This was a new one for me. While I have heard that companies that are trying to push through acquisitions do occasionally call shareholders to urge them to vote in favor of the deal, in all my years of investing I have never encountered this sort of thing. The caller was extremely aggressive in trying to get me to vote with the board. Saying things like, "We've already postponed the vote twice by waiting you're wasting the company's and your money" and "The vote is tomorrow so you need to tell me right now if you agree with the board of directors' recommendations for what is best for the company.", etc...
The aggressiveness of the caller really turned me off. It was almost as if she thought that I was stupid and that she could trick me into saying, "Yeah, yeah, I'll do whatever the board of directors wants." This went on for a couple of minutes when I finally said, "Look, I'm not just going to give you my OK to vote my shares for something when I don't even know what I am voting for."
I'm not even sure how this company got my phone number. I certainly didn't give it to them. They must have gotten it from Charles Schwab. This whole thing is sending up some major red flags in my book.
After digging around I found a filing stating that the company is allowed to place this sort of phone call, but technically they are only supposed to "remind" shareholders that there is a vote today, not attempt to persuade them to vote in line with the Board of Directors, the chairman of which also conveniently happens to be the company's CEO.
My quick initial research also uncovered that the main issue here is that the company wants the ability to issue more shares at less than its stated NAV. This theoretically is dilutive to existing shareholders because XYZ Corp. is currently trading at a 25% discount to its "stated" NAV. After sniffing around I have some serious doubts about how accurate that number is. I have a sneaky suspicion that the NAV is currently way overstated and that the company is trying to issue more shares ASAP before it has to take additional significant writedowns...if it ever even admits the drop in value.
This desperation to issue more shares leads me to believe that this company is having liquidity problems. This vote has already been postponed twice before when it became apparent that the board's requested actions might not pass.
Paying someone to harass shareholders on the telephone when they have never even given the company their telephone number seems to be a TREMENDOUS waste of company funds to me. This company harassed the wrong person. After looking into it a little more deeply I am now uncomfortable with its management and plan on selling all of my shares in about five minutes.
In fact, after some of the dirt that I have been able to dig up after looking around for only a few minutes I am seriously considering a complete 180 and shorting this company. This is why it will remain nameless for now. After my waiting period is over I will share the name of the company and what I have been able to find out about it.
Note, it's 9:30 and the shares are gone. I will wait on shorting it for now, it might be more fun to write about it.
I have missed my share of macro calls in the past two years, but my radar is usually pretty good at picking out companies that have problems. There are so many apparently squeaky clean companies out there that are trading at great valuations right now that there's no need for me to stick with a company that I'm getting a bad vibe about."
Now that my blackout period has long since ended I can reveal the name of the mystery company that annoyed me to no end...Prospect Capital (PSEC). These guys are a bunch of idiots. My spider sense sure was right about them being extremely desperate for cash. Since the harassing phone calls that I described above, the company has issued stock below its "stated" NAV (which is likely a work of complete fiction even after the recent rally in the energy sector) three times in the past two months. Good grief talk about dilution out the ying yang. It sure looks to me as though these guys are having some serious trouble with their credit line.
Me thinks that a dividend cut may be in store for Prospect. Time will tell. Either way, something really rubs me the wrong way with most BDCs, particularly this one. No BDCs for me. If I remember I'll post another follow-up on PSEC in a couple of months.
Here's a chart that illustrates the growing disconnect between the price of oil and Prospect Capital's share price:
I'll post a larger, easier to read version of this chart in the comments section below.
Is anyone out there familiar with Prospect Capital? If so, I'd love to hear your thoughts.