The Billionaire & His Bluefly
August 8, 2003
George Soros is one of the richest men on planet earth. To be more specific, in the Forbes 2003 listing of the world's richest people, Mr. Soros placed 38th. His wealth is estimated to be approximately $7 billion although some think this number is more on the conservative side. Known for his bold investing style, Soros made $1 billion on the British pound in 1992 but also lost $2 billion during Russian crisis 1998. Despite the volatility, Soros' benchmark Quantum hedge fund has averaged returns of 31% in its 30 year history.
We have the utmost respect for this gentleman who is a self-made billionaire. Born in Budapest, Hungary on August 12, 1930 Soros survived the Nazi occupation of Budapest and left communist Hungary in 1947 for England, where he graduated from the London School of Economics (LSE). In 1956, Soros moved to the United States, where he began to accumulate a large fortune through an international investment fund he founded and managed. Today he is chairman of Soros Fund Management LLC.
The question all of us are probably asking is why would this billionaire invest in an online retailer like Bluefly.com (BFLY). During the internet boom of the nineties it's understandable that the aura of this sector attracted capital from big names. What's surprising is that Soros has continually injected more money into this company despite its inability to turn a profit.
Why is the SmallCap MarketWatch focusing on Bluefly? We took a look at the stock's chart and noticed that shares of the company spiked every few months in the past year. What was the cause? Well...it seems that every time Bluefly announced that Soros put in more money the stock would have a nice short term spike. Take a look at the press releases and the corresponding figures below:
July 17, 2003 SOROS MAKES ADDITIONAL BLUEFLY INVESTMENT
May 22, 2003 SOROS MAKES ADDITIONAL BLUEFLY INVESTMENT
March 14, 2003 SOROS MAKES ADDITIONAL BLUEFLY INVESTMENT - Bluefly Receives $2 Million, Eliminates $3 Million of Debt, and Gets Commitment For Another $1 Million
The average return for the stock on these three financing announcements has been 46.07% but this figure is based off of the stock's high for the day. The bottom line is that people who owned shares of Bluefly when the Soros funding announcements have been made reaped small fortunes.
The Dilution Factor
The Soros and Bluefly relationship intrigued us so our next step was to dig into the company's SEC filings. What we found was quite interesting. To date, Soros has invested about $53 million in the company and holds 89.9% of Bluefly's outstanding equity. Including all options and warrants held by employees and others, Soros owns about 76.5% of the equity.
Bluefly closed Thursday at $1.05 per share giving the company a market capitalization of $11.6 million based on 11 million shares outstanding. That is actually a very low valuation given that the company has $0.23 cents per share in cash and $30 million in sales for 2002. This is where most investors will make their mistake.
The $53 million Soros has put into Bluefly may give the impression that the company is cheap but people may not realize that the billionaire financier owns preferred stock that can convert into common stock. There are currently only 11 million shares outstanding but there are five rounds (A-E) of preferred stock that can convert into 43,323,430 common shares.
What's The Company Really Worth
The Series A-E convertible stock plus the current 11 million outstanding would be a grand total of 54,323,430 shares. $1.05 per share would equate to a market cap of approximately $57 million dollars. However, if you take the current market capitalization of $11.6 million and divide by the total number of potential shares then the price is more like $0.22 cents per share.
What's the company really worth? The number is somewhere in between but let's compare Bluefly to Amazon.com (AMZN). Bluefly is not profitable so we'll take a look at the price to sales ratio, which is widely used for internet companies. Amazon currently has a market cap of $15.5 billion, which is 3.47 times its trailing twelve months revenue. Bluefly has $31.2 million in trailing twelve months revenue and based off of the convertible diluted scenario the company would be trading at 1.82 times sales. Before you think Bluefly is undervalued keep in mind that Amazon is the dominant e-commerce player with billions in sales and also has profits.
Soros is undoubtedly a genius when it comes to finance so is he onto something or just making a bad decision with Bluefly?
How To Play This
Looking at this company from a long term perspective its clear that Soros is the lifeline. He can choose not give Bluefly any more money but if this were the case he probably would have cut them off a long time ago. This is still a significant risk because the end result would be bankruptcy. However, knowing that Soros owns all this preferred stock makes it less likely that he would choose not to fund the company in the future.
If we look at Bluefly from a short term trading perspective the last three financing announcements have created spikes in the stock that have averaged 46.07%. Its impossible predict the exact date when the next round of financing will be announced but based off of the last three we should be a month to two months away.
The stock's 200 day moving average (DMA) is at a $1.00 and there is significant support for the stock there. Keep in mind Bluefly needs to maintain a buck or risk being delisted.
We chose to write about Bluefly because it represents a stock that you could potentially trade three or four times per year for some nice gains. We'll be monitoring this company in the future and we suggest readers do as well. The key to short term trading is to accumulate enough of these ideas so that there are opportunities arising on a constant basis.
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