Player Avatar vanamonde (99.97) Submitted: 8/20/2010 5:18:27 PM : Outperform Start Price: $3.13 HQSM Score: +6.54

I am giving this a green thumb and am long in my real portfolio at $3.07 average (had to average down to it, I admit), but the following could just as well be from a negative pitch. A few months back I watched with certain awe how badly CSR tanked after flawed financing decisions. Well, HQS makes CSR look like Dutch flatlands.

So here you have a company that makes good money, is growing, sits on a pile of cash and is already valued near or below book. Along comes the management - which is conveniently shielded from any rage by the common holder through voting rights - and does an offering at $3.61 (this includes the warrants) when the stock is at $4.50, effectively losing more than $30m in market cap to collect $10m in the offering.

Probably somewhat alarmed by the violent drop even far below the offering price, the company then put out an unusually vague press release about macro growth prospects in China. Thank you, thank you, thank you for a four page read which did not produce ANY relevant answers to questions such as:

1. Why have HQS receivables almost outpaced the revenues? Are they going to do something about it or will a kind smile still suffice for a truck of tilapia?
2. If the balance sheet is so clean, how come HQS could not secure a $10m loan and had to dilute all the common holders senseless?
3. Since they had to raise $10m at any cost, the $40m of cash on the books is clearly no longer there (sorry UltraLong). I understand that a flagship store and another big project are in the works, but especially since these were too risky projects for a loan, clarification on the rationale and deadlines simply HAD to be provided to calm the investors.

But we got none of this and so the share price will probably drift lower until the fellows at Ladenburg Thalmann will get excessively unhappy over the remaining pile of shares they are holding at $3.34 after the discounts and commissions. At that point I assume they will first upgrade the stock and then hopefully put a floor in place through open market purchases. Not a hard thing to do, since the volume at this point is only created by a few half-suicidal small investors who are down 70% this year on a profitable, growing company.

Having said all that, I think this company is a good buy at these levels. Normally valuations like these imply suspicions of fraud. If there is none, the management incompetence multiple is too high even for these guys.

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Member Avatar vanamonde (99.97) Submitted: 8/20/2010 5:50:42 PM
Recs: 0

Just checked it...Ladenburg already has a buy rating on HQS from July 1. The stock was at $5 then.

Member Avatar FleaBagger (28.14) Submitted: 10/9/2010 9:43:14 PM
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Here's the thing: the revenue and earnings are largely growth in receivables, even while reported earnings are dropping. I was about to green thumb this, until I saw their cash flow statement. This is a dog, perhaps even a dead dog. Red thumb.

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