One of the challenging aspects of investing in unlisted securities is the lack of good, timely information from companies regarding their business prospects and developments. Many of the smallest, insider-controlled companies are content to communicate with the outside world via occasional one or two page press releases, never bothering with investor conference calls or presentations.
Of course, the very opacity and silence that keeps most investors away is what can create such great opportunities for investors who do the work necessary to discover and track these same companies!
I wrote about Abatix Corp. back in May, highlighting the company’s modest valuation, propensity for repurchasing stock and unique “disaster insurance” business model. Today, Abatix announced a reverse stock split that will cash out minority investors at $14.75 per share, a 39.2% premium to the previous closing price. Abatix gave investors no indication that it was considering any sort of going-private transaction. The only indications were the company’s shrinking share count and shareholder list.
While the end of the line for Abatix as a public company is close, a look at the company’s story over the last five years shows that good things can happen to investors who buy obscure but profitable companies with strong balance sheets. Abatix deregistered its stock in September, 2007, moving to the pink sheets. At the time, shares of Abatix traded for around $7. Over the next five years Abatix ticked along making consistent profits and paying off all debt. With this going private transaction, an investor who bought in September 2007 will have made about 111%, or 16.1% annualized. Over the same time period, the S&P 500 index had negative return.
That’s not to say I think the cash-out price is a home run for minority investors. $14.75 is just 96% of book value per share, and only 9 times average earnings for the last five years. The company is overcapitalized, making the effective price paid for the shares a little lower still. That said, $14.75 probably qualifies as “fair” for such a small, illiquid company.
With the stock trading at $14.60, investors should take their gains and look for the next opportunity. There are dozens and dozens of other tiny gems on the OTCBB and pink sheets registries, and I have several write-ups in the pipeline. As always, thanks for reading!