Hi Paul,
Well, I can't exactly claim the returns I posted last week anymore. While most of my value-ish stocks lost less (TGX actually gained quite a bit) I was blind-sighted by one of my growth stocks, Tyco (TYC). I am sure that people here have heard the story by now especially since it involves a guy named Tice from the Prudent Bear Fund. I bring this up here because I feel that this is a case of market over-reaction which presents an opportunity to buy a rapidly growing company at a discounted price.
The story goes as follows. David Tice of the Prudent Bear Fund also publishes a newsletter called "Behind the Numbers". In it he printed a report written by a guy named Meyer(sp?) who made certain claims against Tyco's earnings statements. I have not read the report since Tice charges $10K for annual subscriptions but from what I have read in secondary sources they go like this: Tyco makes acquisitions and in some cases uses the pooling accounting method. By doing so Tyco has inflated earnings through the use of one-time charges taken during the restructuring. He provided numbers to back up his argument but that is basically all he said. He has since stated that he never accused them of fraud or any other illegal activity. I suspect that some posters here may have access to Behind the Numbers and, if so, I would greatly appreciate any information that could be added. I should also note that similar comments about this type of accounting was made here on this thread several years ago and has been repeated as a concern for the history of this company. Why does it scare people now?
Now back to the story. Once this report hit the street it was transformed into reports of accounting irregularities and fraud with comparisons to SOC, Cendant and the likes. To his credit, Tice has gone on record as saying that he never made those comparisons but the story had taken on a life of its own. The shareprice started a free fall at about 3pm Wednesday. Within 2.5 hours the management arranged for a conference call with the CEO, the CFO and some guy from investor relations for early the next morning. This call is available for replay but in it they vigorously denied any irregularities, stated that they would exceed analyst expectations and maintained that their 'organic' growth was still 11-12%. He defined it as growth from businesses held for a year (kinda like same-store-sales). The CEO said that their would be no restatements, and that their were no investigations and that their are no irregularities. Every firm covering the company listened to the call and reaffirmed their buy or strong buy recommendation some advising their clients to make aggresive use of this downturn to add to their positions.
The price finally firmed on Friday but if Mike Burry's observations of October Mondays is repeated hen it will likely correct with everything else. As for me, I realize the dangers in pooling accounting and have watched other companies founder and fail because of it. I am not an accountant so I won't even try to crunch numbers on this one. Tyco makes hundreds of acquisitions but the vast majority use purchase accounting. Cash flow from existing businesses looks strong. I am glad that there are guys like Tice out there but his record at BEARX doesn't help his credibility. Tyco management on the other hand has shown an uncanny knack for making and integrating acquisitions with great success. Tyco releases earnings next week and has arranged for a meeting with investors, CEO, CFO, and accountants to educate investors on how Tyco accounts for acquisitions. They just don't seem to be trying to hide anything.
Who is right? I don't know. But management has responded swiftly and appropriately IMHO. The loss of market cap may become a self-fulfilling prophecy however since their stock has been deflated as a currency to make acquisitions. For my part I have put in an order to increase my position should it trend lower with the market.
I realize this is a bit off-topic since even at these levels Tyco still does not qualify as a Graham-type value but if anybody is interested in a well-managed growth stock selling at a reduced price then this may be a stock to look into.
Comments welcome,
Terrapin |
