Alan Brochstein's  Instablog

Here I am on a Friday afternoon in the summer, month-end no less, and a company I peripherally follow drops a bomb after the market closes.  Huron Consulting, which went  public in 2004 at 15.50, first traded at 18.50 and then closed at 18.99 before running up over the next 3 years to as high as 84 in late 2007 before closing today at 45 has totally round-tripped, trading as low as 18.55 in the after-hours session (with an hour to go as I type).

Long-story short, the company rooted out an internal fraud and will have to take a non-cash charge that reduces reported earnings over the past several years and even this past quarter.  The CEO resigned, the CFO too (though neither is leaving immediately), while the CAO, who is most likely the guilty party, exited immediately.  The company has already named a CEO and CFO and a new Chairman.  Most importantly, Adjusted EBITDA, which is the metric analysts use, is unchanged.  Equity, Assets and Liabilities are all unchanged as is cash. 

You can read the 8-k to get the details, which also include a softening of revenue expectations for the rest of the year and the implementation of a cost-reduction program.  Essentially, the senior manager who committed the fraud was taking kickbacks in relation to earn-out payments.

My take is that the stock should be at 28 not 18.  This is a fine company that is adequately capitalized and unlikely to suffer in the long-term despite this embarassing incident.  I suppose that anytime someone in charge of the books does something wrong it raises the question of what else, so clearly I could be underestimating the potential for more downside.  Still, I bought some between 18.85 and 20 and hope to sell it on Monday when saner minds prevail.

Disclosure:  Long HURN with the intention to sell short-term (note that this is not a published article and doesn't comply with the rules that govern me for those contributions).

I like Energy a lot right now as a sector despite my concerns that stocks are likely to retrace some of this recent rally.  I confess that despite spending the first 18 and most recent 15 years of my life in Houston, I am pretty ignorant about the oil & gas industry.  While I have a much easier time investing in technology or service companies in the sector, I recently added Contango (MCF) after one of my clients suggested that I look at it.  I also added it to my Top 20 Model Portfolio

Here is the quick and skinny:  We are investing in Ken Peak, who founded the company in 1999 and runs it with 5 other employees.  He pays himself a salary of just $150K and owns 20% of the company.  He has never sold a share and is in his mid-60s (apparently looking for an exit).  The company is now a pure play Gulf of Mexico E&P company like no other - almost purely virtual through joint ventures.  Kudos to Peak for divesting Fayetville Shale properties at the peak last year to XTO and Petrohawk as well as divesting Freeport LNG.

The stock has no research coverage despite its $700mm market cap.  It is important to know that its largest outside shareholder was Sellers Capital, a hedge fund that was liquidated and that distributed in late March remaining shares of MCF to its owners (which has no doubt put selling pressure this year on the stock).  What do you get for $700mm and no debt?   Tangible book value of $361mm, which includes cash of $77mm and predominantly proven reserves.  The company repurchased stock in 2008 and January just below $47 ($34mm) and described it at the time in their 10-Q as the equivalent of buying proven reserves $2.23 Mcf.

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This is my first "instablog".... I don't know if it will be published as an article later, but my intent is that it won't.  This is a quicker real-time way for me to share my thoughts.  I could tweet, I suppose, but then I would be restricted to a certain low number of characters.

Before going on, the standards of this type of submission are different than the typical article, but my standards, as always, will be consistent with my own desire to be as completely transparent as possible.  I added LDSH to my Top 20 model portfolio last week and made it a relatively large position in a fund that I manage for my family after riding a small amount down last year.  I had sold some shares yesterday near 9.60 but bought back some of them below 9 on the close.  I subsequently took the position to about 7% of the entire fund (which is 60% stocks and 40% bonds) near 8 this morning, so it amounts to about 11% of the part measured against stocks.  I also established a position for my children.  Despite the sharp drop today following disappointing earnings, the stock remains above my recent price of 7.90.  I believe that 7.60 should serve as support if it continues to weaken.

Ok, now that that is out of the way, allow me to quickly share my views.  Ladish is a great little company that is highly leveraged to aerospace.  We all know what a terrible industry that is now!  These guys compete with PCP for the most part, but they aren't as broad as them.  Over 1/2 the business is from engines, with about 1/3 from general aerospace and the remaining 16% last quarter from industrial.

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