Fortran Corp (FRTN) stock has risen from $0.03 to $0.60 in the past few months. With all the drama there could be more room to run or it may crash to zero. This is a post to show you exactly why I buy the dying crap that I do.
This story involves shareholders successfully challenging a company to provide records in court. We have nanocap activism resulting in the ousting of a shady CEO. A fresh start and potentially bright future clouded by a bankruptcy petition...
This story involves shareholders successfully challenging a company to provide records in court. We have nanocap activism resulting in the ousting of a shady CEO. A fresh start and potentially bright future clouded by a bankruptcy petition...
Purchase of a Cheap Stock
Let's start with a chart and my purchase. I bought FRTN in the spring of 2018 for an average around $0.04. Let me tell you what I saw. The company does voice and data solutions. A cooling tower subsidiary accounts for most of their revenue. They were fully filing on otcmarkets. If you follow my blog then you know what I'm looking for: small, ugly, low on the chart, high potential. FRTN was right in my wheel house.
I always start with a chart and here's one from Mar 2018. I see a stock at a long term low. There is no resistance moving between the 0.10 and 0.60 ranges. It has risen sharply before so maybe it'll happen again.
The main question from that chart is what happened in Feb 2017 to cause that drop. I can find no reason and that's a reason to buy. A quarterly report was filed in Feb 2017 showing increased revenue. They had acquired TPI cooling tower business earlier in the year. A couple months later the annual report showed almost a doubling of share count with more than twice the revenue YOY. Still the company hovered around zero earnings and BV had just become positive.
When I bought in the spring of 2018 the most recent filing was an NT-10Q. They were late one quarterly but that's normal for this area of the market so I thought nothing of it.
The most recent annual filed in Sept 2017 showed the following:
Now let me show you the rest of the chart and tell you a story. Look at that rise. As I said earlier there's no resistance up to the 0.60 range and here we see it again. I'm up 1230% in a matter of months. This is why I buy at the bottom. FRTN is now my second largest position.
Shareholder Action in Court
Now on to the drama.
As I said they missed a quarterly in Feb 2018. They missed another in May. It's the end of Aug now and we haven't seen any numbers since their Sept 2017 Q. In this lack of filing the stock has shot through the roof. Why would that happen?
In Mar 2018 a group of shareholders owning over 30% of the common took FRTN to court. See the final decision here and an article here. The stock rise is either from people finding this filing or insiders buying because the company has never mentioned it.
The group of shareholders requested the right to inspect the following records:
Additionally the shareholders claim the CEO, Douglas Rink, has been super shady:
In July 2018 (only a few days after I talked about FRTN while recording the Intelligent Investing Podcast) FRTN put out a press release announcing the board and CEO have been replaced by the same group that had taken them to court. The old CFO remains. Looks like this PR drove the big volume increase.
Failure to Pay TCA Global
Now for the negativity and caution. Now for the reasons to avoid this stock.
Back in Mar 2014 FRTN secured a $4M revolving loan facility from TCA Global Credit Master Fund. The Mar 2015 10Q notes $1.65M in long term debt, up from $1M the year prior. Current debt is $350k.
My first question was "what is an involuntary bankruptcy petition"? For that answer I'll direct you to this page I found on the amazing internet. This is TCA Global trying to push FRTN into bankruptcy because they presumably think it'll be better for them to collect their due. But to get there they have to go through a court and it sounds like this singular entity type of filing is not straight forward. For a company to be bankrupt they must be generally not paying all debts rather than specifically ignoring one debt. So TCA has to prove FRTN isn't paying anyone which can be tough since how would they know.
To be clear I am not recommending this stock for purchase. It's up to you to do your own research but I wouldn't buy something that's come up as much as FRTN. This post is meant to show you what can happen when you buy tiny, cheap stocks.
That said I think there's opportunity here. This is my second largest position and I haven't sold anything in the 10x rise. The questions you have to ask are what is new management worth, what does an involuntary bankruptcy petition mean, and what do the buyers know? Someone has been buying up all this stock...
Here's my take. I am optimistic the new board and CEO will act in our interest and try pushing share price up towards it's true value. Given recent numbers I'd say the stock is around fair value but the potential is there for more. Revenue is $12M in the most recent annual but it used to be far above that. Market cap is still tiny after the recent rise.
I hope the bankruptcy petition will turn out alright. I think the company can argue the old CEO was responsible for not paying TCA and work something out. The annual report language on TCA doesn't give the impression FRTN should worry much. Business may be impacted if this "bankruptcy" label gets around to customers though and I hope it will be offset by the impact of new management. The people who just took over the company are common stock shareholders just like me so I think our interests are aligned. But I am no lawyer so don't take my opinion seriously.
Just look at this longer term chart to know what level may be possible:
--Dan
disclosure: long FRTN
I always start with a chart and here's one from Mar 2018. I see a stock at a long term low. There is no resistance moving between the 0.10 and 0.60 ranges. It has risen sharply before so maybe it'll happen again.
When I bought in the spring of 2018 the most recent filing was an NT-10Q. They were late one quarterly but that's normal for this area of the market so I thought nothing of it.
The most recent annual filed in Sept 2017 showed the following:
- BV $0.6M in 2017 vs 3.0M in 2016
- rev 12.7M vs 10.1
- EPS -0.01 vs 0.01
- 1M shares preferred
- 26.1M shares common
- for a share price of 0.03 we have a market cap of $0.8M
This was looking cheap and with a great chart so I bought. On the negative side they are late on filing, earn nothing, and have a decreasing book value. On the positive revenue is increasing and you are buying almost $13M in revenue for less than $1M. That's cheap. Combine that with with a dramatic stock drop for unknown reason and this is a major buy. Looking back, I only wish I would've bought more.
At this point I'd like to point out this is not so different from my other struggling tiny stock purchases. I might as well be telling you the story of GIGA, IOMT, WPCS/DCAR, HYDI, MICT. Here we have FRTN which happens to normally file reports but is a month late on the quarterly. In the end it's the same bet on survival as when I buy non-reporting stocks like QDLC, HAUP, PRAC. When the perception of a stock is at its lowest you get the maximum upside potential. This is why I buy at the long term low. This is why I may buy without seeing numbers. You have to weigh the information available then consider upside versus downside.
Now let me show you the rest of the chart and tell you a story. Look at that rise. As I said earlier there's no resistance up to the 0.60 range and here we see it again. I'm up 1230% in a matter of months. This is why I buy at the bottom. FRTN is now my second largest position.
Shareholder Action in Court
Now on to the drama.
As I said they missed a quarterly in Feb 2018. They missed another in May. It's the end of Aug now and we haven't seen any numbers since their Sept 2017 Q. In this lack of filing the stock has shot through the roof. Why would that happen?
In Mar 2018 a group of shareholders owning over 30% of the common took FRTN to court. See the final decision here and an article here. The stock rise is either from people finding this filing or insiders buying because the company has never mentioned it.
The group of shareholders requested the right to inspect the following records:
- Fortran’s current bylaws and articles of incorporation, including any amendments;
- All resolutions adopted by Fortran’s board of directors relating to theissuance of common and preferred stock;
- Minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past three years;
- All written communications to shareholders generally within the past three years and the financial statements required to be made available to the shareholders for the past three years;
- All records relating to any board action taken regarding the merger of New Telephone Company and Burke Mills into Fortran;
- All records relating to any board action regarding the acquisition of CCI Communications;
- All records relating to any board action regarding the acquisition of Wyncom;
- All records relating to any board action regarding the acquisition of Tower Performance Inc.;
- All records relating to any board action taken regarding the election of officers and directors at Fortran;
- All records relating to any board action regarding Fortran’s borrowing offunds, including but not limited to the borrowing of funds from TCA Global Fund (FL), Peoples Bank of Newton, NC, BB&T Bank, and James M. Templeton;
- All records relating to any board action regarding the issuance of new Fortran common and preferred stock, including but not limited to the issuance of preferred shares to Douglas W. Rink and Richard W. Wilson;
- All records relating to Douglas W. Rink’s use of Fortran’s funds or assetsfor his personal use or benefit;
- All accounting records and financial statements of Fortran, including but not limited to balance sheets, general ledgers, income/profit and loss statements and cash flow statements;
- All UCC filings related to Fortran, including documents and communications relating to those filings;
- A complete record or list of Fortran’s shareholders, showing the name andaddress of each such shareholder, and transfer sheets reflecting changes in the names and addresses of Fortran’s shareholders and/or changes inthe number of shares owned by each shareholder; and
- All records relating to the purchase, finance and ownership of the property located at 3210 16th Avenue SE, Conover, NC 28613.
Plaintiffs allege that Fortran’s chief executive officer and chairman, Douglas Rink (“Rink”), has engaged in “mismanaging Fortran and misappropriating, misapplying, and improperly using Fortran’s property and assets[.]” (Compl. ¶ 20.)Plaintiffs specifically claim, among other things, that Rink used Fortran’s funds or assets for his own benefit, issued common and preferred shares to himself withoutshareholder approval, failed to pay Fortran’s debts when they were due and owing, failed to conduct necessary audits, and failed to hold any board or shareholder meetings.
the Qualified Plaintiffs have supported their Requests with a certified transcript of a recorded telephone conversation in which Fortran’s CFO candidly discussed his view that Rink had potentially engaged in illegal activities as Fortran’s CEO and caused Fortran to engage in improper and potentially illegal transactions.
Based on the Court’s review of the record, the Court further concludes that the Qualified Plaintiffs have offered sufficient evidence to show that they have a good faith belief, supported by evidence, that CEO Rink has engaged in substantial wrongdoing, including self-dealing, corporate mismanagement, corporate waste, and other breaches of his fiduciary duties to Fortran.
Although the Qualified Plaintiffs clarified Request 12 in their brief in support of the Inspection Demand by identifying certain specific transactions—the purchase of property in Conover, North Carolina through the issuance of a Fortran debenture, the placement of Rink Media LLC vehicles on a B&L Telephone, LLC(“B&L”) insurance account, and the retention of proceeds of certain B&L vehicles after they were sold—our courts are clear that the Court’s assessment of “reasonable particularity” must focus on the Qualified Plaintiffs’ actual demand, not on any subsequent court filings.The court sided with the shareholders against the CEO. This gives me hope someone could take HAUP to court to get records. These shareholders won against FRTN and FRTN even had to pay their legal fees!
In July 2018 (only a few days after I talked about FRTN while recording the Intelligent Investing Podcast) FRTN put out a press release announcing the board and CEO have been replaced by the same group that had taken them to court. The old CFO remains. Looks like this PR drove the big volume increase.
On April 19, 2018, Fortran Corporation’s former President and CEO, Douglas Rink, resigned his positions as an officer and director of the Company. On May 17, 2018, Dayne Miller, Douglas Miller, Brett Bertolami and Glenn Withers were appointed as directors of the Company, to serve along with Richard Wilson. Mr. Withers was appointed as Chairman of the Board and on July 11th CEO of the Company.What an amazing turn of events. A dead stock saved by a group of shareholders. A new board, new CEO, and new beginning. A reason for the stock rise.
Failure to Pay TCA Global
Now for the negativity and caution. Now for the reasons to avoid this stock.
Back in Mar 2014 FRTN secured a $4M revolving loan facility from TCA Global Credit Master Fund. The Mar 2015 10Q notes $1.65M in long term debt, up from $1M the year prior. Current debt is $350k.
The increase in interest expense primarily related to the issuance of a TCA note in FYE 2014 to acquire the stock of target companies. The outstanding balance on the debt used to acquire targets is $700k as of March 31, 2015.In Apr 2015 TCA Global sued FRTN in Florida court (Broward County CACE15006582). As far as I can tell the deal with TCA is only a year old and FRTN owes less than $1M, but I'm not sure if there's more history to it. In any case the latest FRTN 2017 annual notes the case is ongoing and they don't seem to concerned:
The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position. The corporation’s details are below:
TCA Global Fund sued the Corporation for maturity of a debt in Florida. Case Pending.The bombshell dropped on Aug 16, 2018 with TCA Global filing an involuntary chapter 11 bankruptcy petition against FRTN (North Carolina #18-50532). DRAMA!
My first question was "what is an involuntary bankruptcy petition"? For that answer I'll direct you to this page I found on the amazing internet. This is TCA Global trying to push FRTN into bankruptcy because they presumably think it'll be better for them to collect their due. But to get there they have to go through a court and it sounds like this singular entity type of filing is not straight forward. For a company to be bankrupt they must be generally not paying all debts rather than specifically ignoring one debt. So TCA has to prove FRTN isn't paying anyone which can be tough since how would they know.
Whether a debtor is "generally not paying such debtor's debts as such debts become due" calls for the consideration of four factors: "(1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the non-payments; and (4) the debtor's overall conduct of its financial affairs."14 The failure to pay just one significant creditor can support a finding that the debtor is generally not paying its debts.15
An involuntary petition filed by a single qualified creditor draws greater scrutiny from the Bankruptcy Court out of concern that the courts will be used as "collection agencies."16 In those situations, alleged debtors can rely on additional defenses with varying degrees of success depending upon the jurisdiction.Conclusion
To be clear I am not recommending this stock for purchase. It's up to you to do your own research but I wouldn't buy something that's come up as much as FRTN. This post is meant to show you what can happen when you buy tiny, cheap stocks.
That said I think there's opportunity here. This is my second largest position and I haven't sold anything in the 10x rise. The questions you have to ask are what is new management worth, what does an involuntary bankruptcy petition mean, and what do the buyers know? Someone has been buying up all this stock...
Here's my take. I am optimistic the new board and CEO will act in our interest and try pushing share price up towards it's true value. Given recent numbers I'd say the stock is around fair value but the potential is there for more. Revenue is $12M in the most recent annual but it used to be far above that. Market cap is still tiny after the recent rise.
I hope the bankruptcy petition will turn out alright. I think the company can argue the old CEO was responsible for not paying TCA and work something out. The annual report language on TCA doesn't give the impression FRTN should worry much. Business may be impacted if this "bankruptcy" label gets around to customers though and I hope it will be offset by the impact of new management. The people who just took over the company are common stock shareholders just like me so I think our interests are aligned. But I am no lawyer so don't take my opinion seriously.
Just look at this longer term chart to know what level may be possible:
--Dan
disclosure: long FRTN
I love this kind of thing, but how much of this could you actually acquire? Even now like only $10,000 average daily volume, less when it was at its lows. How much do you have?
ReplyDeleteI'll never pass up a free dollar bill laying on the ground but this is just so small that it doesn't seem worth the effort.
I was able to get a good amount at 0.04. Look at a chart and the volume from earlier this year. It took me a few weeks to get filled
DeleteFor sure liquidity is an issue. I own too much to sell easily right now. So one reason to wait is for volume to increase
Man I love these posts
ReplyDelete"This is why I invest this way, here is my latest 20 bagger, could be 0 or become a 100 bagger"
amazing!!! Having said that this is 2nd largest hold, what is the 1st? Still HEMA?
ReplyDeleteI think that If I were you, I'd sell. You have to control the risk. Holding this junk that now has a high P/B is risky to your capital.
I still hold all that HEMA. It's around half my portfolio, so yeah...
DeleteI keep thinking about selling FRTN. One issue is liquidity makes it hard to sell. And then there's optimism in the back of my mind. What if they can improve things and what if...
I emailed the new CEO today. We'll see if I get a response
Dan,
ReplyDeleteWhy didn't you share this when you first bought it LOL!
But more importantly, I honestly don't understand how you invest. When you bought the market cap was $0.8M and book value $0.6M, so where is the margin of safety here, if you are a Deep value type investor? This isn't exactly a cigar butt or net net. Hell, book value had fallen 75%!!! That's crazy
Congrats on your trade, and your performance is 4x mine since you started. But I just don't understand how you pick your winners - it would be nice for you to share a blog post on this...
Moreover, how do you position size when you buy something like this. 1% of your account?
Thirdly, it would be nice to hear about a loser, You seem to win on every investment. And I can only conclude it's because you buy stock, then because you write a blog post, others now buy in and it goes up and you sell.
I think he is very transparent about what he does. He even mentioned this name on the podcast and doesn't hide his losers or anything.
DeleteThe "losers" just didn't play out so far.
Dan basically buys cheap, deep out of the money call options on sentiment with these stocks and is patient. So should everyone be.
I actually started my research to write a blog post but didn't finish. When I was buying I thought this was the cheapest thing around, then as I read more something made me think, "oh this isn't as cheap as I thought". Looking back I can't remember what that was. Maybe it was the BV drop you mention
DeleteIf you look at my Portfolio Performance page and posts you can see my position sizing. Yes I bought this one to something like a 1% position. I hold 50 or so stocks.
Much of the reason I bought on this one was the chart. It's numbers plus chart plus sentiment plus possibilities
If you want to see my losers check my Blog Performance page. You can see performance over time of everything I've written about. IEHC sat flat for years then recently took off. HEMA didn't move too much for almost a year and in fact I bought the vast majority of my position after posting. PEYE recently doubled, about 6 months after sitting flat after my post. GIGA, WPCS, SOFT have lost a ton after my posts. QDLC is back down almost to where I posted a few years ago.
The notion that I'm doing well at the expense of my readers is insulting. I do not sell into the volume that comes from people reading my posts. If you look at my Blog Performance page you can see the ones I've sold (in blue) and the ones I still hold (in white).
Also margin of safety comes from more than just BV. I was looking more at revenue for FRTN than BV. I generally value on the higher of 1x BV, 1x revenue, and 10x earnings. rule of thumb.
DeleteEvery one of my blogs posts is meant to explain what I'm thinking on that stock. I try to share why I think it might work out and what I think the risks are. I tried to explain a bit more in my recent PCYN post.
Hi, Dan. I don't get where you get your margin of safety from. Why should the intrinsic value be the maximum of 1x book value, 1x sales or 10x earnings? If, as German reader suggested, your philosophy is buying dark companies as OTM options, then you should value them as options; otherwise if you insist on a relative valuation at least look at peers' multiples.
DeleteI don't mean to be rude, but I have to admit I cannot understand on what basis you reach the conclusion that a stock is undervalued.
It would be great if you shed some light on that.
Thank you very much.
Hi Marcel.
DeleteI don't know anything about options and I don't look at peers' multiples. I look at the chart, the balance sheet, and the income statement then usually make my choice very quickly
I have spent over 3 years writing articles on this blog to explain my way of thinking. This blog contains my views of both the positive and negative. I don't know how much of my writing you have read. Maybe it'd help you to read more of what I have written here. I also added a books page to give people an idea of the books I think are helpful.
here's a reply I sent to a reader when asked why I think this 3 methods of valuation thing is right:
DeleteValuation is all about determining how much cash you can get out of the company over the course of its life or determining what a buyout price might be. Some people do DCFs, some use various ratios, some compare to other companies in the industry. If the company is in liquidation, or could be, then you might look at what'd be the value if the company closed up shop. People go crazy looking super in depth and if they have all that knowledge then that can be their edge. That is not my edge so I try to keep it simple. To me, once you get close then you're just splitting hairs so if I'm within 30% or so then that's fine. Whatever.
Having said all that it comes from experience and the more you read the more you'll develop your own opinion. The reason I choose between three methods is there are different types of company out there and every company is worth something.
The prevailing valuation method in the market is a multiple of earnings because people want profitable companies. On oldschoolvalue.com Jae has some articles about how he found something like an 8x multiple to be a good average for a non-growing company. For a sort of average company I think a PE multiple of maybe 10ish is fine. So that's what I use and I keep it simple. If a company is growing quickly then the right multiple is much higher than that because future earnings are expected to be higher, but I don't know how you can get exact.
But let's say a company is not earning anything. If you look through my stocks, probably most or at least a lot are not profitable. It's very common among tiny companies. They just sort of squeak along and stay in business but there's no profit if you annualize out. Sure they might make a profit once in a while but on average over maybe 5 or 10 years many many tiny companies earn nothing. But the company is still worth something because they provide jobs and salaries and services. We can't use an earnings multiple because earnings is zero so we have to use something else. Often times here I use book value because that's an approximation of liquidation value. It's not perfect and you have to look at what makes up the book value. If most of BV is old obsolete inventory then in a liquidation it wouldn't be worth book. But what if inventory is all cash (like WLKR)? Or what if the company owns real estate that has been completely depreciated (ADDC)? So I just sort of say 1x book is good enough. Usually people would say if margins are super low, like say a construction company with 5% GM (MRCR), then it's worth less than book whereas if margins are super high, like a software company at 70%, then it's worth more than book. I agree with that and so you have to think about each one, but I just use 1x book as a starting point and rule of thumb.
continued:
DeleteAnd then let's say we have a growing company moving into a new area. They're losing money because they haven't scaled up yet and they have to fund all the new R&D. BV is something so you can value based on that but revenue is growing like a weed so really a private buyer would pay more than book. Is this company worth zero because earnings are negative? Is this company worth book? In this type of situation it's usually a multiple of revenue that people use because what else do you have. Somehow you have to try to figure the addressable market and how much cash the company might make from now until forever. Also if you have some company priced at way below revenue then perhaps they should be bought out and replaced with new management that can get higher margins. Just imagine I own an ice cream shop with $1M in revenue annually and I will sell it to you for $200k. that's a deal, right?! I mean OK maybe it's losing money but you have that level of revenue just given to you and if you can operate more efficiently then you can turn a profit and the value shoots through the roof.
Now the "other stuff" is like extra things the company has. Take ADDC for example (you can read my blog posts). They own real estate in LA county which has been completely depreciated because they've owned it for decades. They also have a ton of extra cash and are profitable. So what I do in this case is say value is 10x earnings + the extra cash + real estate value in a sale. Extra cash is like how much cash could the company pay out and still be fine operating the business. Say a company has $10M in the bank and they only really need $2M to operate then I'd say $8M is extra cash. ADDC told me some time back their real estate go appraised at something like $15M so that is "other stuff" because it's value the company has that's not on the balance sheet.
So what I do is take the highest of these 3 methods but of course every stock is different. I choose the higher because the lower will always be too low and I think the higher is closer to what will happen in a buyout. This is just a quick starting point and in the end there is no right answer. I try to keep it simple and play the numbers game: buy a bunch of these and on average it'll work out
Looks like new management is getting right to work. Company's latest press release notes they have to restate the last couple years worth of financials due to incorrect handling of their Tower Performance acquisition in Oct 2015. Tower was consolidated but now will be treated as an investment.
ReplyDeletehttps://globenewswire.com/news-release/2018/08/31/1564270/0/en/Fortran-Corporation-Issues-Current-Report.html
I am now out of FRTN. The company started filing again at the beginning of Dec 2018 and that's when I started selling. Took me a bit over a month to get out at an avg sell price probably in the $0.60s. It took 32 transactions to get out over 5 weeks due to illiquidity. I bought in Jan/Feb 2018 at ~$0.04 so this has been an amazing ride.
ReplyDeleteThis whole time since it started rising I have been waiting for a large volume spike from some event but it never came. The numbers released in Dec were not good and neither is the most recent from Jan 2019. It's good they are current with otcmarkets but the numbers aren't good and they have a lot of lawsuits to clear up. This was my trigger to get out.
Well played!
DeleteHey Dan,
ReplyDeleteThanks for the write up in your comments section. Very informative.
Question/comment about you using past price as a guide:
I have gone this route before too because it seems intuitive. Upon further thought, this mostly seems relevant only if those factors that produced the past revenue are still relevant.
As an obvious example, a software company that just sold its main business and is now simply a cash box. In that case, past revenue cannot be used as a guide for future success.
Because of this, I've shifted to minimizing this as a standalone factor and have lumped it in with assessing future growth prospects.
Any thoughts on this?
All the best,
Evan
Charts are about more than just the fundamental performance of the business. Charting is the study of crowd behavior. It's human nature. It's how people thought about a stock in the past combined with what the stock is doing now plus how it may behave in the past.
DeleteFor example say someone buys a software company stock then that company sells off its main business. Now it's a cash box and fundamentally yes it's a different business. But that doesn't change the person's cost basis. That doesn't change how human beings behave when they gain or lose money.
Thanks Dan!
DeleteI appreciate the reply and am looking forward to your next post. Always great to have a beginner's mind.
Evan