Some disquieting thoughts.
I've been really mystified by the recent price action in this stock. I began to wonder what could be causing such a buyers strike. After thinking of several hypotheses, I came back to these:
1. Recent insider sales has buyers sitting on the sidelines. Even though the volumes were small, and at higher prices than the stock trades currently, these sales unnerved investors, especially given what just happened with Nam Tai. There insider selling presaged a 50-60% decline in the stock price.
2. Deswell's HK customers may be getting hurt by recent market turmoil. I believe that Deswell's customers primarily operate in mainland China, and this fear is overblown.
3. Possible early conversion of the Deswell warrants. Given the current market turmoil in Asia, cash is now king there. I suspect there are a lot of good business opportunities for someone with cash. Deswell may be thinking of exercising the warrants early and raising some cash. If you look at a price chart over this year on the warrants, you can see the warrants have dropped below the price they traded at in early January. So most of the people who have bought warrants this year are now sitting on a loss. The drop in the last two days, after Deswell announced a special dividend on Monday, is interesting. The logical time to exercise the warrants is after the dividend is paid. In fact, given the time premium on the warrants, it is possible that people would sell the warrants short, and buy the stock, if they "knew" early conversion was coming. This is just some musings on my part; don't get too excited by it. If management is holding large numbers of warrants, then I wouldn't be concerned with early exercise. Also it seems funny to be paying out cash dividends, and then exercising the warrants to raise cash. I wonder if we can get info on how many warrants management holds? I'm just getting awfully suspicious of Asian managements. Maybe they sold all their warrants this summer and fall.
4. Increased competition- David Seltzer asked whether other companies had purchased and installed plastic extrusion equipment similar to Deswell's. I wonder how we could answer this question.
I still think that Deswell stock is an excellent buy at these prices; given the earnings looking forward, the stock is trading at only 7-8 times earnings. All the factors mentioned above, with the exception of 4, are short term factors and shouldn't impact the stock price long term. I'm considering shifting more assets into the stock; I remain leery of the warrants though.
Maybe this post will cool your ardor a bit, and we can keep appraising this investment with a more detached appraisal. But I must admit, this looks like a gimme at the current price.
Paul |
