Parlux Fragrances Roller Coaster Making Me Nauseous

You know that nauseous feeling you get in the pit of your stomach after an intense roller coaster? I have that feeling right now after taking in Parlux Fragrances (PARL) for too long. Not being a huge fan of roller coasters to begin with (or for that matter perfume), I badly want off the crazy ride that Parlux Fragrances has given me.

Parlux Fragrances has become a serious concern for the Special Situations Real Money Portfolio. Let me detail the time line of how the Special Situations Real Money Portfolio got involved with Parlux Fragrances and what has happened since.

* June 13, 2006 - A member of Fat Pitch Financials Contributor’s Corner posted a message in our Special Situation Discoveries Forum (membership required) regarding PF Acquisition’s intent to take Parlux Fragrances private by acquiring all outstanding shares for $29.00 per share. The shares closed that day at $18.74. I saw huge profit potential, so with greed in my eyes I put in a limit order that night.
* June 14, 2006 opening bell - My order was filled first thing in the morning for 200 shares at $21.73. I expected the price to continue to climb up.
* June 14, 2006 mid-morning - I discovered Herb Greenberg just wrote a negative article on the Parlux deal. From that article, I discoved that Bill Mann of the Motley Fool also wrote up a warning about Parlux Fragrances and its CEO Ilia Lekach back in 2003. At first I was worried about Herb Greenberg’s article but there seemed to be some question regarding his journalism. However, Bill Mann’s comments should have caused me to act, since I’ve met Bill Mann and trust his research and opinion. I do remember checking to see if Bill would also write about this latest Parlux event but he didn’t. I really wish he had. It might have knocked some sense into me.
* June 15, 2006 - Members of Contributor’s Corner point out some concerns with this deal. The Miami Herald and MarketWatch both issue negative articles. In the Miami Herald article, I noted analyst Paul Kaump’s comment, ‘’For [Ilia Lekach] to not follow through on this would be catastrophic to the company’s value and management’s credibility.” Given Mr. Lekach’s past failed attempts, I figured he would have to follow through on his offer. I was so naive.
* June 20, 2006 - I head off to the hospital with my wife whose water has broken. Thoughts of the stock market leave my mind as I wait for my daughter to be born.
* June 29, 2006 - Parlux Fragrances delay filing their 10-K.
* July 5, 2006 - Nasdaq sends Parlux a delisting notice.
* July 12, 2006 - Ilia Lekach withdraws the buyout offer. PF Acquisition indicates that they called off the deal because they have received several offers from third parties for some of Parlux Fragrances brands.
* July 24, 2006 - The 10-K is finally filed.
* August 10, 2006 - Herb Greenberg disses Parlux's results, notes the company is blaming its woes on short-sellers, and that the 10-Q filing will also be late. Ugh! I start looking for an exit.
* August 16, 2006 - Parlux Fragrances announces it is going to sell Perry Ellis rights for a total of $140 million to Victory International (USA) LLC. I look for a big jump in stock price but apparently no one believes this deal is for real at this point.
* August 17, 2006 - The 10-Q is delayed again and on cue the ambulance chasers (i.e., lawyers) announce shareholder lawsuits.
* August 23, 2006 - The NASDAQ once again gets a delisting notice and a Form 4 announces that Ilia Lekach sold 62,720 shares to satisfy a margin requirement. This reminds me of some other insider activity I wrote about in June.

My only hope is that this Parlux roll coaster doesn’t suddenly drop into the abyss. I made several mistakes here and there are some obvious lessons here for others to learn. Here are some of the lessons:

* Always google the CEO, even for short-term investments in special situations. (I thought I had already learned this one.)
* Never swim with the sharks or you’ll end up as shark bait. When short-sellers outnumber everyone else, run for safety.
* When the reason you purchased something is no longer valid, SELL!. (I have discovered I really have a problem with my serious bias against selling my losers. I definitely need more practice with this one.)
* Listen to the warnings of trusted and seasoned financial writers. These are few and far in between but valuable.

PARL 1-yr chart:

I’m expecting many of you will have fun commenting on this post. It’s taken me forever to write this one because of the pain it is causing me, but I guess no pain, no gain. There are a lot of other things I want to write about but this post on Parlux seems to be holding everything up. At the least, I hope you appreciate my openness and honesty with this post.

I’m equipping my armor ahead of time so fire at will. Lean forward from my backseat and take a good look at my rear view mirror. Share what you would have done and what you would do now if you were me.

[Full Disclosure: I still own shares of Parlux Fragrances. Don’t ask me why.]

Comments

[Amit Chokshi]

All excellent comments. Doing due diligence not only on the company but also on management is critical before initiating an investment. For special situations like take privates it's also important to consider the viability of a proposed deal in terms of financing. The CEO wanted to take the co private at $29 per share when I believe it was trading at $18 or so? Lenders, even in a strong credit market, would probably have said they could lend to support the deal but that the CEO would have to put in a big chunk of equity to support such a high price.

I would sell PARL immediately if I were you, I have no position in the stock but that's just $x grand typing up your capital. Understanding the power of compounding is the key aspect, you lose 1/3 of your investment and you'll need a bit over 50% to make up for it so if you're down 60+%, just dump it. It's mentally draining to just have that bagel in your account too, especially if you have no conviction in the position or didn't buy it as a core investment. It doesn't sound like you have any conviction in the company and you bought it as a special situation. I'd suggest putting in a stop loss on situations like this going forward too if you don't really want to own the company.

This only comes from my own experience on riding down big losers, you're not only wasting time trying to recover your cost basis but you're going against inflation too. In today's market the hurdle is 5% you can get in an online bank account so what's the point in hanging around waiting for PARL to quadruple, that stuff rarely happens to companies with problems like PARL has because the accounting issues it currently faces always take longer to resolve than initiallty anticipated and worse news basically continues to follow basically bleeding your long positions dry.