Discovery Group has had enough, and seems to be washing its hands of TESSCO technologies (TESS). After TESS reported record revenue for fiscal year 2011 and a solid 4th quarter on April 27, 2011, Discovery Group has been aggressively selling off its position.
On April 27, 2011 Discovery had owned about 14% of TESS, or 1.04 million shares. Since April 28, the company has sold about 190,000 shares, and has over 800,000 shares left. It's safe to say that whenever the stock has a run up, Discovery will take that as an opportunity to sell more shares. This greatly affects the share price as TESS is a small cap with a market cap of under $100 million. Although in my opinion TESS is a great long term value buy, the stock will probably stay confined to the $10.5 to $13.5 range for most of this year, at least until Discovery unloads a big portion of its holdings. I've taken advantage of Discovery's selloff to nab some extra shares myself.
Effective since February 11, 2008, TESS issued a shareholder rights plan that allowed current shareholders to buy a certain amount of stock at half price if anyone tries to obtain 20% of the business. Discovery had been trying to acquire the company or get it acquired, but this "poison pill" plan makes it much more expensive to do so.
Last year, Discovery said that if TESS changed hands, its shares could be worth between $30-$36 (Note that was before TESSCO's 3 to 2 stock split, so that would be equivalent to $20-$24 a share today).
Discovery published a report in April 2010 that explained all the problems it sees with TESSCO and says the company is very undervalued. During that time TESSCO's market cap was over $100 million. Now its market cap is only about $85 million so it's even more undervalued now. To summarize the report:
- Management being overpaid in salary and stock compensation and consistent insider selling.
- Mr. Barnhill hired his wife and son for executive positions, which is bad business practice.
- A weak board that fails to punish management for inferior performance. In 2005 Mr. Barnhill had a plan to double earnings every year. The 2005 earnings was $0.92 per share and 2009 was $1.26 per share.
- Continual rebuffs of potential suitors.
However, TESSCO may not be as bad as Discovery makes it out to be.
- Discovery mentioned quotes from RiskMetrics Group regarding how a company's board should conduct itself and how TESS isn't following those guidelines. However, the RiskMetrics Governance Risk Indicator for TESS on Yahoo finance says as of May 1, 2011, TESS only has a medium risk related to employee compensation, board, and shareholder rights. This means RiskMetrics concluded that the company's governance structure isn't out of line, otherwise the risk would be labeled "high" for at least one of these three measures.
- Reading TESSCO employee reviews on Glassdoor.com here, it seems to be a well run organization. Great training, the CEO seems well liked, a cult-like environment, and fierce pressure to perform.
- Mr. Barnhill owns 1.8 million shares, or 24% of the company worth over $20 million. So he's much more interested in a higher share price than quibbling over a high salary.
TESS has an advantage over its competitors as it's bigger than most of them, except for Brightpoint (CELL). This gives it an economy of scale advantage and less risk because of so many customer relationships. I go into more detail about TESSCO's advantages and expected earnings growth in my previous article here.
Bottom line, one can look at the Discovery selloff as a positive or a negative. The negative is that they don't see much hope for big growth from TESSCO and they might be right.
Some positives aspects include:
- The selloff makes TESS shares artificially cheaper, so one can grab some more.
- Discovery is "voting with their feet" and might help to light a fire under Mr. Barnhill to make his company succeed and prove his detractors wrong.
Disclosure: I am long TESS.