more on rick koe from april 97 RH....BOARDROOM BUTTINSKY
Astoria Capital's Rick Koe sets fires under low-valued stocks.
By Jonathan Burke
The Red Herring magazine
April 1997
Despite his youthful appearance and normally pacific demeanor, Rick Koe is known to be startlingly confrontational with managers of potential investments. Mr. Koe is a hedge fund manager at Astoria Capital Management in San Francisco. He explains that by needling managers, he can discover their characters. All too often, he says, he finds managers who ought to be handed their hats. "Many weak stocks have valuable assets that are wasted because managers without operational skills get entrenched," he says.
Specializing in stocks that have long been written off and occasionally short-selling, Astoria makes only a handful of investments each year. That gives Mr. Koe time to coax boards and senior executives to sharpen their focus on profits. The aim is to invest before the stock market discovers the turnaround, and Mr. Koe has consistently succeeded. In 1996 the value of Astoria's small-cap fund rose 70 percent to $50 million, and the year before it was up 67 percent.
Mr. Koe's short-selling of Sensormatic suggests his thoroughness in researching company management. In September 1995 he told The Herring that because of mismanagement the company "could face a huge accounting restatement" (see "Value Investors in a World of Priceless Stocks"). Sure enough, Sensormatic is undergoing a Federal Communications Commission investigation, its shareholders have filed a class action suit, and its stock has sunk from $36 to $16.
Western swing
This year Mr. Koe expects to get a boost from Western Micro Technologies, whose new management, he says, has made all the right decisions. Western is a midrange computer distributor that has quickly become one of International Business Machines' top sellers because of that company's increased outsourcing of sales. "You have IBM essentially paying for Western's sales force," Mr. Koe comments. As a result, Western's earnings per share could rise from $0.60 to $1-plus, he suggests. Furthermore, he believes that the company will be acquired soon. With Western, Mr. Koe is hoping for a repeat performance of his biggest gainer last year, the distributor Inmac, which soared as the result of its acquisition by Microwarehouse.
Lingering in the distribution arena, Mr. Koe also goes for Intelligent Electronics. For every share of this stock, stockholders get half a share of its spin-off, XLConnect Solutions, whose Internet service business is growing at 100 percent annually. Recently, Wall Street whaled on these stocks after lower-than-expected earnings, dropping XLConnect from $32 to $6. Nevertheless, Mr. Koe retains faith in Intelligent Electronics' and XLConnect's management and doubled his holdings during their devaluation. He foresees 150 percent appreciation.
Mr. Koe holds rare appreciation for Concurrent Computers, a developer of real-time operating systems. Its software is used for satellite management, war games, flight simulation, and financial services. At one time, Concurrent was a Wall Street darling, says Mr. Koe, but because of mismanagement the stock dropped to $1; its founders were engineers who spent too much on research and development and lost sight of profitability. This caught the attention of Harris Computer, which acquired Concurrent in a reverse takeover. According to Mr. Koe, Harris's CEO, Courtney Siegel, has a track record of applying defense electronics technology to a broader commercial setting. Thus far, the fruit of Mr. Siegel's labor has been an operating system for video on demand. "This is the most sophisticated product in its market," says Mr. Koe.
Like Concurrent, Digital Sound has the leading technology in a murky market. This company develops voice-compression digital signal processors that the major telcos buy and integrate into voice-messaging products. Last year Digital Sound's revenues grew by 50 percent to $20 million, and Mr. Koe thinks revenues may double again this year. "It has had to spend a lot of money on R&D over the years, so it doesn't have the margins, but it's almost there and should be cash-flow positive by the second quarter of this year," he says.
Tumbrel pusher
Astoria's latest investment is in Blyth Software, which has had a disastrous record in the flourishing client/server arena. Mr. Koe says that in the recent past, Blyth's management had blamed the industry, but its business model had been erratic, toggling back and forth between focuses on the Macintosh and Windows markets. Furthermore, he says, "while it has an incredible client base, management has never been able to leverage it to get bigger sales." He first appreciates the stock because it trades at $1 despite the company's $50 per share in cash. The product remains high quality, and now management is turning over. The company has a new CEO and two new vice presidents, and a former vice chairman of Citicorp has joined the board. "It just takes a few heads to roll," says Mr. Koe, "to double the value of a cheap stock.
redherring.com
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