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Fools fooled by Five-star Fish

Recs

26

September 12, 2010 – Comments (8) | RELATED TICKERS: HQSM.DL

About a month ago, I responded to a request for blogs related to investing with an observation on a 5-star stock with nearly all the green thumb picks underwater.  Low and behold, HQ Sustainable Maritime (HQS) popped up again as my Friday "Stock of the Day" suggestion.

Interestingly, the CAPS rating disconnect has gotten even more bizzare.  HQS sports a 5-star CAPS rating, but every one of the 401 active green thumb picks are in the hole and all 14 active red thumbs are ahead.  A perfect rating mismatch for a 5-star stock.

The fundamentals on this thing look incredibly cheap.  The company had $43 million of cash on the books at the end of its last reported quarter.  It's since raise $11 million in a share offering.  With the share offering, there are a little under 18 mllion shares out.  That's about $3 a share in cash for a profitable company with no debt trading at $2.75.  The business concept is unexciting, but sound - farm raised tilapia and processed seafood nutritional products.

Trailing pe is 5, forward pe est is 3.  There are some red flags, ttm cash flow is negative - that appears to be related to a receivable adjustment last year.  Receivables are very high, nearly two quarters worth of revenue.  It's also a little tough to understand why a company with $43 mil of cash on the books felt it necesary to float a dilutive share offering.  Fellow Fool guiganol did a nice job of running it down here with some good info provided by others in the replies.

Sorry there's no investable intelligence here.  I'm not even brave enough to weigh in with a CAPS pick on HQS.  The valuation says 'buy, buy, buy' then back up the truck and buy some more.  But, the stock's performance screams 'run away, run away' louder than the knights from Monty Python and the Holy Grail.

Fool on!

Russ

8 Comments – Post Your Own

#1) On September 12, 2010 at 6:22 PM, devoish (96.53) wrote:

I do not buy Tilapia, eat Tilapia at home or order it from a restaurant. It is very likely that coming regulation and/or a coming reluctance to buy tilapia is being priced in.

http://www.nytimes.com/2007/12/15/world/asia/15fish.html?_r=1&em&ex=1198040400&en=c8d29e61c4deffe0&ei=5087%0A

Nice use of an investing website.

regards,

Steven

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#2) On September 12, 2010 at 7:34 PM, amassafortune (29.53) wrote:

Something's fishy with this one. The top 5 execs take about $1.5 million, or 1.86% of '09 revenue. That's about 17% of the $8.73 million available to shareholders last year. Executive compensation signals that the company is not being managed with the best interests of shareholders in mind.

The net receivables total is the biggest red flag. $58.2 million on revenue of $72.3 million at the end of 2009. Instead of raising another $11 million with a share offering, how about just collecting 18% of receivables. Days of sales outstanding = 294. If DSO were cut in half, it would still look like the company is being run for the benefit of customers and not shareholders. I would do some deep due diligence to see if the relationship between HQS execs and non-paying customers is consistent with arm's-length transaction standards and the exec's fiduciary responsibility to shareholders. 

Quarterly revenue growth is outstripping quarterly earnings growth by 7%. Selling and administrative expense grew by 28% last year. That expense may have helped produce the recent 29% revenue growth, but once again, there is no great payback for shareholders, even with the 22% quarterly earnings growth.

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#3) On September 12, 2010 at 11:37 PM, alberta911 (68.59) wrote:

Russ

I would be one of those guys that does not care about my score and I apologize for giving you the impression my green thumb was meant as a buy.  My green thumb sometimes means Kudos to corrupt management or I just closed my short position.  In this case incest green.  You have a brother sister and sisters husband stating they are raising money to franchise beauty store via a hong kong ipo.You have a Hong Kong exchange requirement of three independent non-executive directors.  These clowns all live under the same roof hardly "independent"

 

My favourite green comment is not bullish at all and compares this stock to a family reunion

 

 

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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Recs

0 alberta911 (79.62) Submitted: 8/20/2010 10:35:24 AM : Start Price: $3.21 HQS Score: -13.99

incest is illegal..............

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Recs

1 rwebankrupt (88.27) Submitted: 8/16/2010 4:39:42 PM : Start Price: $3.11 HQS Score: -13.67 Is this a public company or a family reunion?
Forgot to tell shareholders their plans and direction on the conference call
Need to move the family from Seattle to California because it will help their business grow in China
It cost them 45 million to raise 10 million.
They think they need 95 million to sell franchises
They think samples and gifts are accounts receivables.
Went from over $9 to under $3 in less than one years time
Went from raising fish to selling fish to making fish feed to selling fish feed to making health food products to selling health food products to selling franchises but giving that to do an IPO in Hong Kong cause Hong Kong better understands their business.

 

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#4) On September 13, 2010 at 4:31 AM, ikkyu2 (99.22) wrote:

Tilapia is hideous stuff.  I saw a documentary on tilapia farming.  You can do it in your basement: set up an 80 degree tank, dump in some fertilized tilapia eggs, and when the little buggers hatch, dump in everything that would have previously gone into your compost pile.  Pretty soon you'll have a vat full of wriggling protein; harvest, repeat.

Tilapia are minimally processed garbage. They don't taste very good and are not even fit for incorporation into surimi.  I would stay far away from anything that had to do with them just on general principle. 

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#5) On September 13, 2010 at 4:38 AM, ikkyu2 (99.22) wrote:

My goodness, devoish.  Those Fuqing fish!

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#6) On September 13, 2010 at 12:05 PM, dragonLZ (99.36) wrote:

I know of at least one Fool who didn't get fooled by this fish... (see comment# 3 in your original post).

If any Fools are looking to catch a real nice fish-y stock, they need to take a look at OME (rated by only 24 All Star Fools):

http://caps.fool.com/Pitch/OME/4814286/ome-fits-my-three-ten-criteria.aspx

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#7) On September 14, 2010 at 1:10 AM, ralphmachio (27.63) wrote:

Tilapia are the best species for aquaponics, and the flavor is determined by population density, or how much crap they swim around in.  Doing anything on the commercial level is detrimental to product quality, and tilapia is no exception.  Removing the need for chemical fertilizer is beneficial for many reasons, and the fish work great for supplying nutrients to leafy vegetables.

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#8) On September 15, 2010 at 3:33 AM, ikkyu2 (99.22) wrote:

Russ, be curious what you thought of my pitch for CLCT, it's my latest blog entry.  If you have a minute, that is.

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