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guiganol (62.22)

HQS: Reading Between the Lines (Part 1)

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August 16, 2010 – Comments (19) | RELATED TICKERS: HQSM.DL

I really must be a glutton for punishment to speak ill of a position I currently own but... well, luckily, I'm still young enough to ride out most of the storms that others wouldn't have the stomach to. I'm still holding on to my HQS stock for reasons I'll maybe go into some other time, but why mention them now when this stock has turned into such a mess in just the past couple of weeks. Anyway, on the menu today is Management.

First off, some background: I was a math whiz, turned Psych. Major, turned Theatre professional, and strangely, these have all helped me along my modest way. So I can crunch numbers, find sentiment, and spot bad or convoluted dialogue a mile away. If Buffet goes straight for the numbers, I go straight to the conference call audio (Of course, the numbers follow).

If there's any moral to this story, it's: Listen to the calls! You'll find a wealth of information that won't be on SEC filings or company prospectuses. And more often than not, you'll find it not in 'what' is said, but 'how' it's said.

Anyway, won't bore you too much with all that, so let's get to it if you're thinking of investing in HQS (really, I have to write this as an amendment to all the praise I've thrown this company's way).

On Receivables:

Let's go to the call (and keep in mind the notice on forward-looking statements).

Caller: On your account's receivable, I see that you've reduced them by about 6.6 [can't make this out---'million'?] which is good… Where can I model in the future? Where do you think they will settle out in the future? So I can update my business models on it.
G.H.: Daniel, hi, it's Gene Hill.
Caller: Hi.
G.H.: Um… you know I think the way to model that is that… you know, going forward, we're…we're trying to bring back in the… um…so that the D.S.O. would be somewhere between 180 days to 220 days.
Caller: O.k.
G.H.: That's kind of how I would back into it.
Caller: Just doing…just doing--using your quarterly figures annualized, I'm coming up with about 224 days for D.S.O.'s. So is this about the level you guys are looking at now?
G.H.: Um… I think we're going to try to push it as much as we can down to the 180, but given the seasonality of businesses, I think that range will be in that 180 to---you know---240- 230-ish.

Alright... first off, if you mention HQS to any investor that knows anything about the company, the first question that comes to mind is receivables. How on earth could management not have prepared what to say on this matter? Sure, we all probably say 'um' a lot, but it's like management is coming across this question for the first time. And nice trip-up by the caller! HQS is looking to improve but according to current figures that could just mean an improvement of 4 days. And then, why give an estimate then raise that estimate two sentences later? Red flag.

But anyway... there's your rough number: 180-220...er...240 days. Use this to decide yourself if that kind of wait for payment is reasonable in this line of business. As for me, I'm still on the fence on this, but management has to do a better job of helping us understand this kind of risk. Why? Well, we'll get into this later, but I'm slowly coming to the realization that as well as this management knows their business, I truly have to question whether they understand how the stock market works.

And to hurt myself more, let's keep on with the receivables and what not to do as a manager of a publicly traded company:

Caller: What's causing those receivables to age more than they had in the past?
N.S.: Generally speaking, the economy…uh…is down. People are…uh…uh…squeezing everywhere. We deal a lot with various retail chains and…uh…the…uh…uh…the…uh…expression of the reduced economy is felt by producers, manufacturers such as ourselves… uh… in people taking more time to pay. We have no doubt that we will collect. Unfortunately, the economic situation allows them to use that excuse too… to drag it out… to drag out payments. 

Now, the only statement there said with any conviction is that "We have no doubt that we will collect." Why not focus on that? But the telling word there is the use of 'excuse' on the part of their customers. Actually, everyone should probably listen to the call themselves. You'll find this exchange at around the 47:36 mark. And a transcription does no justice to 'how' these things are said. But oh boy, "drag it out"?!

Alright... well, I think I've lost enough money for myself today. But I wouldn't do it if I didn't really believe in what this company could do. And I'm sick of the fact that no real news agency is following this company and the only information an investor can get is from company statements on marketwire. So maybe this Fool community can start a nice dialogue and share what they got. Then, instead, of investors writing the company personally, HQS can get a feel for the sentiment surrounding all these moves they're making. Dilution, in particular. And that will be on the menu for next time---Jiahua and that sad attempt at selling us something we've apparently already bought.

 

19 Comments – Post Your Own

#1) On August 17, 2010 at 12:46 AM, ChrisGraley (29.75) wrote:

I was actually looking to buy this stock and saw the same flaw as far as what they didn't say, but noticed different omissions. The most glaring omission was a lack of talking about tilapia. They played up Chinese nutra-ceutical regulation and the gains that they would get in their shark based products, but barely mentioned what is supposed to be their bread and butter. Also, they showed weakness when they confirmed that they can fall victim to an "excuse" without putting pressure on their debtors. I'm not real happy with 180 days let alone 240 days. Add to the fact that tilapia is a fairly cheap protein source in a country starving for protein and a government that has a big incentive for them to succeed and I'm wondering what I'm missing.

The conference call is supposed to help me understand and I still don't understand.

Never buy what you don't understand.

Chris.. 

 

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#2) On August 17, 2010 at 1:30 AM, TMFUltraLong (99.95) wrote:

Profitable, growing revenues, and $3.05 net cash after dilutive offering. Let them make Mickey Mouse hats for all I care...

UltraLong

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#3) On August 17, 2010 at 2:11 AM, Valyooo (99.41) wrote:

If they are not paying a dividend, they could be making $1 trillion dollars per share in earnings each year, and if the stockholders don't like the way they are being treated, the stock won't move.

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#4) On August 17, 2010 at 2:13 AM, TMFUltraLong (99.95) wrote:

Predominantly owned by institutional investors... they don't care what the little people think and they will eventually move this higher.

UltraLong

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#5) On August 17, 2010 at 2:22 AM, Valyooo (99.41) wrote:

How are they going to move it higher by constantly diluting it?

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#6) On August 17, 2010 at 2:59 AM, ChrisGraley (29.75) wrote:

UL I'm looking at the same balance sheet and have the same enthusiasm, but I can't help but feel I'm not getting the whole story. I still might buy them, but only when I feel more confident in management.

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#7) On August 17, 2010 at 3:09 AM, Valyooo (99.41) wrote:

Chris, that is what I am saying.  UL I couldn't agree more with you that they are making ridiculous amounts of money compared to their market cap.  As a company, they are doing big things, and it looks fantastic.  And you always do a really great job of evaluationg companies...but what I notice a lot of top fools do sometimes (especially when they all agree on certain stocks) is to assume the stock will follow the company.  If a company is making tons of cash but screwing shareholders, you gotta remember, share price is ONLY determined by supply and demand, so if the demand is low the price will remain low.

Obviously you two know much more than me, especially in regards to HQS...just something I noticed that I want to point out. Prime example is PCYC. Both of you guys redthumbed it due to the company not producing a profit, but if the stock doesn't represent the company so much, then you gotta cut the loss. Some companies and their respective ticker move the same direction (this is the expected situaiton) but some don't.

Please don't think I am criticizing either of you, because I respect damn near everything you guys say and read almost all of your blogs, and you guys are 100x better at this than I am, again just something I have noticed every once in a while.

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#8) On August 17, 2010 at 3:11 AM, guiganol (62.22) wrote:

Wanted to talk about this later... but... well, the magic number is 200,000,000. Those are the shares authorized (gonna have to add this to stuff I look at in the future). So about 17 1/2 million out now and management is sitting on all those authorized shares that they can "cash in" whenever they see fit. And normally, that huge difference in authorized and issued shares could be normal, but this company's record shows they're not shy to dilute the float whenever they want (and with quite a disregard for their current investors). Plus, it just boggles the mind how they're going about it. It's like these aren't shares but just extra shots of cash they can pull out of thin air. I don't think the institutional investors are too happy about it either.

And they won't have to seek shareholder approval until they somehow clean out that 200,000,000. Won't get to that point though (but that's not due to corporate kindness).

And let's not even talk about the 10,000,000 authorized shares of preferred stock (100,000 outstanding). No, management has to realize there's no such thing as a free lunch and this money is coming out of stockholder equity.

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#9) On August 17, 2010 at 3:11 AM, TMFUltraLong (99.95) wrote:

My $3.05 net cash figure is how much cash they'll have AFTER their dilutive offering. Investors would be stupid to ignore those figures over the next few months so I'm not worried.

As for Pharmacyclics, that thing is going to plummett back below $2 as soon as their drug trial ends in disaster. 

UltraLong

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#10) On August 17, 2010 at 3:23 AM, Valyooo (99.41) wrote:

Investors would be stupid to ignore those figures, but investors are stupid very often.

Plus this is all assuming that the company is fradulent.

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#11) On August 17, 2010 at 3:27 AM, Valyooo (99.41) wrote:

is not*

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#12) On August 17, 2010 at 3:38 AM, ChrisGraley (29.75) wrote:

Don't put me in the same class as UL when it comes to investing. He is a much better investor than I am. 

I'm just a squirrel trying to find a nut. 

His opinions do influence me like a lot of top fools, but I have to believe in my investments by my own damn self.

I haven't found a reason to believe in HQS yet. He'll keep plugging the stock, if he's like me, because quite frankly, when I believe in something, I can't see why everyone in the world doesn't follow me.

The facts never change, only the discovery of the facts and the perception of the facts change.

Two men enter. One man leaves.

 

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#13) On August 17, 2010 at 3:45 AM, TMFUltraLong (99.95) wrote:

Let them make Mickey Mouse hats I say! =)

UltraLong

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#14) On August 17, 2010 at 3:50 AM, guiganol (62.22) wrote:

And I can second UltraLong's assessment. Heck, my money is already in. But this stock will take another hit when their health segment offering comes out. And that 'update' they just released was to serve no purpose but to soften the blow.

But I still see no movement until management addresses the dilution issue. That next earnings call is gonna be a fun one. 'Though probably not for me because there's no way they can match their earnings per share with all these extra pieces of paper out there.

The only movement I see coming about short term will be from some institutional interest and whole lot of daytrading. And if we don't get any good answers from management, I can see the short-sellers circling around $4-5.

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#15) On August 17, 2010 at 5:03 AM, throwerw (29.38) wrote:

They raised money below net current asset value, near an all time low for the stock price.  I wouldn't buy this POS for .50.  Management is either extremely incompetent, fraudulent, or both.

good luck everybody 

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#16) On August 17, 2010 at 5:44 AM, guiganol (62.22) wrote:

throwerw,

Funny, I was going to quote you down the line on that very same remark you made on Ultralong's pitch. Couldn't agree more and that's the one thing that still really digs at me. My guess is either a: they desperately needed the money; b: they did a backroom deal to somebody else's benefit or c: they're morons (think you put it best: "what kind of management in their right minds would raise money below net current asset value"). I think it's kind of a mix of the three.

But should it surprise management that even though a lot of people value this company higher, when they value it so low, the price adjusts to that value? Makes no sense.

Still, I still have to give them the benefit of the doubt and assume that they're a fine business that doesn't quite know what it means to open their books and be traded publicly. Not too much of a defense, but hopefully, they can turn that around.

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#17) On August 17, 2010 at 7:43 AM, degaston (99.56) wrote:

No corp management is perfect. But they know their problem and will certainly work on resolving it. In the meantime they are well-positioned to earn $1/share next year and increase earnings 10-20% per year. Thus a $30 target within 5 years is very reasonable. Their ten-bagger potential will attract plenty of buyers.

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#18) On September 08, 2010 at 12:33 AM, 1277507302 wrote:

Guiganol,

d) mental

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#19) On September 30, 2010 at 12:41 AM, Monkeylochs (< 20) wrote:

Good commentary all.  I am like Shulz from Hogan's Heroes...I know nothing!

But, after being into them at $5.70, I loaded up more at $3.70 and am hoping patience pays off.  You just hope all of their numbers are real as far as cash, debt, and book value.  I did check amazon and they really do sell Lillians Gourmet.  That settled my fraudulence worry ....slightly.

Monkeylochs

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