Co-written by Patrick Kirts
Sometimes you need to take some risk. That means different things to people, but at our firm it means going long a stock that you plan on holding for a while. Investors take the ultimate risk: they buy and hope the investment gods shine on them.
In looking for a long-term opportunity, there are a few things we want. First, an illiquidity premium is a must since you are not looking to sell tomorrow. Second, find something with hidden assets, maybe something the average stock screener won’t identify. Third, make sure there are the typical Buffett things like a moat, good management, and a cheap valuation. After that you are alone in the dark.
So, let’s get into our housing comeback play. Like many of our positions, this one is indirect (internet marketing of homes), has some problems, and some hidden features that could give it an edge over the long haul.
Move, Inc. (NYSE: MOVE) owns and operates the leading network of search websites related to all aspects of real estate, the most well known being Realtor.com, and attracts over 8.1 million consumers per month to its sites in 2008. The company has had only three profitable years since it was founded in 1993, 2005-2007, with a loss of $27.6M in 2008.
In the first quarter of 2009 (see conference call transcript), losses were even more egregious: $10.6M, although management claims it would have had a net income of $1.1M if not for one-time restructuring and stock base charges. Cash flows from operating activities (as opposed to short term borrowings) improved in the first quarter after dismal 2008 numbers.
MOVE also has a new CEO, Steve Birkowitz, who has a very optimistic view about the company’s growth potential and its ability to capitalize ‘a significant share of the billions of dollars that we spent in our market over the next decade’ (Q109 conference call). Remember with these types of losses from the past, much of their future income will be sheltered, if they can ever make a profit!
The company’s balance sheet does look good. With a current ratio of 1.2, they have $111M in cash and no long-term debt, only a $65 million one-year credit line secured by $112M in FFELP student loan auction rate securities (ARS). It is these securities which are the black mark on the balance sheet.
The securities, which were bought as a short-term investment to take advantage of interest rate movements between auctions, are now illiquid, and under new accounting rules, MOVE can evaluate them itself. Management intends to hold the securities to maturity, further than two decades away, or until markets improve. They have been reclassified as long-term investments, with an unrealized loss of $17.6M. Management believes it has the ability to maintain these securities as long-term investments indefinitely, but FINRA arbitration against Citigroup (C), which advised MOVE on the ARS investment, is set for August, and could result in the recovery of all or part of its losses and funds spent in connection with the investment. If they get their money back, they will have a huge one-time gain that could give the stock some lift.
Selling advertising and software services to promote real estate professionals and connect their services to consumers provide MOVE’s primary revenue base. This revenue is currently declining as the advertising industry contracts, but there are strong indications that online advertising will marginally improve with respect to other, more traditional forms, such as print media. MOVE’s privileged place should particularly benefit it and create a higher barrier to entry for its competition.
CEO Birkowitz believes that the company’s greater assets with respect to its competition have not been fully utilized, and that it is set to expand its leadership position through improving its infrastructure and the synergy between its different websites, by continuing to aggregate more data on the real estate market and present it to both consumers and professionals, and develop a broader business model to expand its reach up and down the ‘value chain’ in the real estate market.
In particular, the company will be developing software that will meet the entire range of consumer and professional information needs. In the coming quarters Birkowitz intends to make clear what specific, measurable goals will be set for the company as it prepares for the continuing evolution of the information marketplace.
The most significant risk involved with investing in MOVE is that the company has lost money most of the time it has been in operation, so one would not be investing in a proven track record, but in a hunch about the long term viability of a particular business model. The stock is around two bucks, up from November lows of $0.64, but less than half of summer 2007 highs.
However, it has the largest organization in its industry, one of the most experienced teams, and a new CEO who inspires confidence. If the first quarter’s one-time charges truly are one-time events, we could see a return to profitability this year, or at least profitable quarters, despite the downturn in real estate advertising.
And if it really does revolutionize the way people get information in the real estate market, it could be a long-term hold.
Disclosure: Long MOVE at time of writing.