You've got to be pretty hated to be that cheap.
For some back story on Paragon you can read my first writeup from a few years ago. They are a small industrial conglomerate with a couple of operating businesses, some Las Vegas real estate, and an investment portfolio. Sham Gad took over as Chairman in 2012 and this story is basically about him. He fancies himself a mini Buffett and has tried to make Paragon his own Berkshire. His annual letters read like BRK letters with the same tone and euphamisms. His press releases contain almost no information. He only releases reports on Friday after close. He wrote a book about value investing based on Buffett and had a value investing blog talking about Buffett. On the positive side there is almost no dilution with only 1.73m shares outstanding. Sham has generally treated minority shareholders well.
A quote from the most recent quarterly about their operating businesses:
Paragon Technologies, Inc. (Paragon) a diversified holding company, is composed of three business segments: Automation, Distribution, and Real Estate. In addition, Paragon may also invest its cash balance in marketable securities through a Board-approved program. The wholly-owned subsidiaries of Paragon are the following:Automation was there before Sham while the last three came from him. He bought SEDC out of bankruptcy. Ohana is Sham buying a few condos in Las Vegas under favorable loan terms.
• SI Systems, LLC (SI Systems), founded in 1968, is a recognized and innovative supply chain automation company that designs and installs specialized material handling automation systems that optimize our clients’ supply chains.
• SED International de Colombia, S.A.S. (SEDC) is one of the leading technology distribution companies in Colombia. SEDC distributes IT equipment, consumer electronics, and appliances to businesses, retailers, and e-tailers. Additionally, SEDC also provides business services such as printing, electronic document management, electronic invoicing, and storage solutions.
• Ohana Homes Services, LLC (Ohana) seeks to acquire, invest in and manage real estate assets.
• Paragon also invests in marketable securities under the Investment Management Policy approved by the Board and carried out by Mr. Hesham Gad, the Company’s Executive Chairman and Chief Executive Officer.
The problem is Sham's investment performance. Since 2012, Sham has piloted PGNT stock from ~$2.5 to $5.7 for an unimpressive 7.1% CAGR. But Sham should really be judged on his investment performance since capital allocation is his main responsibility. It'd hard to see clearly because they don't break things out that well in the reports so I've taken a few different angles. Each one looks bad:
- If we add up all of the realized and unrealized investment gains on PGNT’s income statement since Sham took over the sum is $360k over 12 years. He started with $1.27m giving about 2% CAGR versus 14% for the S&P 500.
- If we add up all of the purchases of investments and proceeds from sales of investments on the cashflow statement since Sham took over the sum is $-4.2m over 12 years which is horrible taken on its own.
- 12 years ago when Sham took over the company had $1.27m of marketable securities and now we have $1.6m in the most recent annual report. If we would have just invested in the S&P 500 that number would be $6.1m.
So that's why the stock is cheap. The final straw over the past year or two has been Sham's foolish pursuit of OPTT. I don't know exactly how much he spent but I think it was on the order of a couple/few million which is a lot for a $10m market cap company. Between July 2023 and April 2024 he put out 28 press releases begging OPTT shareholders to side with him. He only held a few percent of the stock and somehow thought this desperation campaign would convince minority shareholder to vote with him. It was a giant predictable failure. Sham has had some wins but overwhelmingly has lost to the market.
Rubicon (RBCN) was a PGNT stock holding which ended up as a good buy but not really thanks to Sham. He ran a campaign complaining in the public eye similar to with OPTT and eventually came out with a weird low-ball offer to buy out insiders for $10.10 per share. Predictably it went nowhere then Sham got saved when JANL put out a tender for RBCN at $20 soon after.
SEDC has been a home run which is great. But again Sham sort of fell into the situation. He bought up 30% of the public company SED International for $3m which went bankrupt. Luckily they split out SED Latin America in the bankruptcy proceedings and since there were no other bidders for this tiny Columbian biz listed in the US, Sham got it for $1.4m.
By now you can tell how I feel about Sham. In my first writeup on Paragon I said he was the biggest risk and that continues. He's just not good. He talks about alignment with minority shareholders and "eating his own cooking" but actions speak louder than words when he's wasting millions on OPTT while paying himself over $400k to be a bad investor.
In liquidation, PGNT is worth way more than $5.70. I think it'd be over $20 if Sham were gone and all they did with excess earnings was buy the S&P500 and Tbills. Look at the past 10 years:
Rubicon (RBCN) was a PGNT stock holding which ended up as a good buy but not really thanks to Sham. He ran a campaign complaining in the public eye similar to with OPTT and eventually came out with a weird low-ball offer to buy out insiders for $10.10 per share. Predictably it went nowhere then Sham got saved when JANL put out a tender for RBCN at $20 soon after.
SEDC has been a home run which is great. But again Sham sort of fell into the situation. He bought up 30% of the public company SED International for $3m which went bankrupt. Luckily they split out SED Latin America in the bankruptcy proceedings and since there were no other bidders for this tiny Columbian biz listed in the US, Sham got it for $1.4m.
By now you can tell how I feel about Sham. In my first writeup on Paragon I said he was the biggest risk and that continues. He's just not good. He talks about alignment with minority shareholders and "eating his own cooking" but actions speak louder than words when he's wasting millions on OPTT while paying himself over $400k to be a bad investor.
In liquidation, PGNT is worth way more than $5.70. I think it'd be over $20 if Sham were gone and all they did with excess earnings was buy the S&P500 and Tbills. Look at the past 10 years:
You might think it's strange for me to own a stock I badmouth. PGNT is one of my largest positions and this is life when you're shopping in the trash heap. I'm always looking for big moves and big wins. Buried treasure. Asymmetric value grows in the dark shadows no one wants to visit, not the bright sunlight of a popular path.
My prayers for change were answered in August 2024 when PGNT kicked Sham out of his Chairman role!
August 12, 2024/ --Paragon Technologies, Inc. (the Company) announced today on August 9, 2024, the Board of Directors of Paragon Technologies, Inc. (Paragon) appointed Samuel S. Weiser as Chairman of the Board and Chief Executive Officer of Paragon. Hesham M. Gad remains as the President of SI Systems, LLC, Ohana Home Services, LLC, and Ark Investments, LLC, which owns 80% of SED International de Colombia, S.A.S.
The Board of Directors of Paragon resolved on August 9, 2024 to terminate its shareholder campaign and related activities in relation to Ocean Power Technologies, Inc. (OPT). Paragon as of this date maintains an investment in the common stock of OPT.The other two board members, Sam Weiser and Jack Jacobs kicked him out! I was floored when I saw that. And so happy.
The big question, and what I still don't understand, is why. PGNT has had 3 directors (Sham, Weiser, Jacobs) since forever and only Sham owns any material amount of stock (28%) . Weiser and Jacobs each get paid around $70k to be directors and we really have never heard anything from them. Sham does all the talking at annual meetings and all the writing in letters and press releases. Weiser owns 0.2% and Jacobs 0.6%. Why do they even care? The only thing we learned from the press release is they are done with the OPTT campaign, so it's safe to say that was at least a contributing factor. I still can't believe it happened.
In Sept we got another update when PGNT announced a change to the bylaws. Now you can only call a special meeting, or take action at a special meeting, or remove the board with 75% of the vote. I can only speculate this change is related to Sham trying to get his throne back while the new board blocks him.
I had a call with the new Chairman Samuel Weiser after he took over. He was very nice and easy to get a hold of. A quick responder who encouraged me to tell other shareholders if they want to talk he is all ears (email me if you'd like). I was trying to get an idea of what happened, why, and what the future holds.
I think the board, Weiser and Jacobs, came to realize it's not a good idea to let one person have free rein over the whole company with no checks and balances. I believe OPTT was the final straw and they just got sick of it. I don't know if they were afraid of some fiduciary liability or what. I still don't understand what Weiser and Jacobs have to gain from this.
Weiser told me the change wasn't for any one specific reason but really more for long term planning. He wanted Sham to focus on the operating business while Weiser works with everyone on a strategic plan for the whole company because it can be a lot for one person to manage alone. Sham was still in charge of the investment portfolio but the reins have been tightened. That strategic plan is what excites me most. I asked about capital allocation changes, operating changes, etc and Weiser kept coming back to his strategic planning. Nothing immediate but he's working on a plan over ~6mo and then he said he'd let shareholders know.
Weiser told me the change wasn't for any one specific reason but really more for long term planning. He wanted Sham to focus on the operating business while Weiser works with everyone on a strategic plan for the whole company because it can be a lot for one person to manage alone. Sham was still in charge of the investment portfolio but the reins have been tightened. That strategic plan is what excites me most. I asked about capital allocation changes, operating changes, etc and Weiser kept coming back to his strategic planning. Nothing immediate but he's working on a plan over ~6mo and then he said he'd let shareholders know.
I took a few minutes to complain about how bad Sham's capital allocation has been. I went through all the points in this article. Weiser said they realize the net results have not been good on capital allocation and it's one reason they made this change.
I tried asking about liquidation and mergers. Tenders and dividends. Will they sell off parts of the company. Will they put in rules on capital allocation or split up duties differently. Will Sham get his mini wanna-be Buffett throne back. I stressed my opinion that Sham is the single main reason the stock is priced so low.
The board knows shareholders are not happy since their June 2024 proxy vote to approve a new equity incentive plan was shot down by shareholders. Maybe this vote was actually the last straw for Weiser. Sham and the board put forth a plan to authorize 125k new shares for themselves. Not a good look with the stock down 40% due to Sham's ridiculous OPTT campaign.
My two big questions now are why is the board doing this and what will happen. Sham could get his role back and continue making bad decisions with other people's money. Maybe a whole new board comes in. Maybe someone gifts themselves a lot of shares or maybe the company is split up and sold off. Who knows.
Now we wait. PGNT should put out another Q soon but the main thing I'm looking forward to is results from the new Chairman Weiser's review. Change is what unlocks value
--Dan
--Dan
Dan, this is interesting, thanks for writing it up. How did you come across it ? Also how do you see it playing out ? It would seem, at first glance at least, that it should be liquidated bit-part to return cash to shareholders.
ReplyDeleteI've held PGNT for maybe about 5 years. I think my mentor told me about them
DeleteI would love for PGNT to get liquidated and I don't know what will happen. I think Sham will fight to get his old post back and he's probably doing so already, based on the bylaws change. If he's able to do that he will not break it up. New board seems to at least want to make changes to how he's able to operate. Maybe we get a new board and sham's job is reduced while others also watch over him? I have no idea. but the value is there
On my to do list this week! Thanks Dan.
DeleteThank you for the update!
ReplyDeleteCrazy update today. I couldn’t believe they were keeping him around after removing him as ceo….i guess they were just going through the process of firing him completely. Not sure I agree with the market reaction so far, I think it is a short term headwind. Much better off in the long run though.
ReplyDeleteWOW! Sham is completely out and they are officially fighting
Deletehttps://www.otcmarkets.com/stock/PGNT/news/Paragon-News-Release?id=458022
Sham messed up here big time. I'm a small investor but it was always alarming to see PGNT progressively share less information. First they stopped posting recordings of the annual meeting. Then they ended the zoom calls all togeather. They also went through multiple CFO's, doesn't paint a pretty picture. Perhapse the most fundamental mistake on Shams part is not just doing a share repurchase and taking an easy win. Had he done that Sham would've grown his own equity position, the share holders woul've made a ton of money and sham would still be chairman.
ReplyDeleteWow! This is indeed a crazy thing. I would have bet that Sham was embedded pretty deep in PGNT.
ReplyDeleteIt has got to be embarrassing for him, he is OUT and the stock price goes UP! That can't be good for his book sales.
Thank you Dan for NoName Stocks. Back in the summer we talked about the OPTT debacle. As an OPTT shareholder I was digging up all I could on the well named Sham. I remember you being rather forgiving of Sham's past crimes. Those texts between Sham and Weiser made available in the court case last November showed Weiser's attitude to Sham's unethical attempt to take control of OPTT. He had to go. I threatened the news agency with putting out false information and defaming the OPTT management when it put out Sham's press releases over the spring. I doubt if that did anything but it is probable OPTT had words about it. Good time to buy OPTT.
ReplyDeletewhy is the net income has gone down from $4.7 to $1?
ReplyDeletea lot of that is Sham's wasted money on the OPTT situation
DeleteAnd SI is struggling. I wonder how neglected that business is? Look at the videos on their website. Looks like they were filmed on vhs. (For the youngsters out there, that’s old as shit).
DeleteIs Pgnt planning on running Si or milking cash until it’s dead?
one of the things new chairman complained about in the investor call on Nov 21 was how Sham was running SI. Basically said Sham wasn't investing in the biz and was not spending any time trying to run the biz and new chairman thinks there's paths to improvement that Sham was just ignoring.
DeleteAnything interesting on the investor call? I requested access to the recording but haven’t received it yet.
ReplyDeleteIt was the Festivus Airing of Greavances with new chairman just reading down a list of why he thinks Sham is horrible. kinda crazy
DeleteThat was a crazy call, it sure what their motivation to go down that path. I have to assume they are trying to get ahead of whatever Sham has planned.
ReplyDeleteI think it is pretty clear that they will sell the real estate, which should provide a good chunk of money. If they could use that to buy back Sham’s shares, that would be the best possible outcome…but I’m guessing it will get messy.