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Alan Brochstein, CFA
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Alan Brochstein, CFA has worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment... More
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  • HURN Dives Hard - Short-term Buy Opportunity 3 comments
    Jul 31, 2009 7:07 PM | about stocks: HURN
    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).
    Themes: Small-Cap Stocks: HURN
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  • Alan Brochstein, CFA
    , contributor
    Comments (7521) | Send Message
     
    Author’s reply » Boy was that a bad call. I was able to buy some as low as 10 in pre-market. With the close below 13, I am still a bit underwater on what is now a position that is twice as big (after some sales as high as 14.75). Everyone and their brother is concerned about client and employee defections. The good news is that it appears that the accounting problem was the result of actions conducted way down in the chain of command, suggesting that there aren't more shoes to drop. I was clearly to optimistic, at least for now. Frankly, I will be very happy if it just works its way back towards 20 over the next few days or weeks.
    3 Aug 2009, 06:15 PM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Ouch. Better luck next time. I hope your position was very small.

     

    I had a similar experience with Krispy Kreme a couple years back - I bought also on news of a restatement of financials after a 60% dip...it promptly fell 50% more from my buy price before I punched out. From there it's fallen another 70% minimum. What's funny about that trade is that I actually saw the accounting irregularity in its 10Ks before buying the stock, and thought it was baked into the price (large amounts of intangibles, I believe they called them franchise rights). Boy was I wrong. The story got worse and worse, until the CEO was ousted amidst calls of nepotism. Those franchise rights turned out to be deals involving relatives of the execs who bought the rights to develop KKD in certain areas for, say $5 mil, and sold them back to the corp for $50 mil.

     

    That stock has yet to recover even up to half my sell price, so I should be very thankful I punched out when I did. Luckily that was a very small position, although it was a very large headache. That was clearly me falling for a value trap.

     

    I don't know what's surrounding this company, but if there were even half the problems surrounding KKD with what they're restating, I'd strongly consider punching out ASAP.

     

    BTW, thanks again for sharing, I really appreciate your candor on your trades.
    4 Aug 2009, 12:00 AM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7521) | Send Message
     
    Author’s reply » "Frankly, I will be very happy if it just works its way back towards 20 over the next few days or weeks"

     

    Mission accomplished...

     

    On Aug 03 06:15 PM Alan Brochstein wrote:

     

    > Boy was that a bad call. I was able to buy some as low as 10 in pre-market.
    > With the close below 13, I am still a bit underwater on what is now
    > a position that is twice as big (after some sales as high as 14.75).
    > Everyone and their brother is concerned about client and employee
    > defections. The good news is that it appears that the accounting
    > problem was the result of actions conducted way down in the chain
    > of command, suggesting that there aren't more shoes to drop. I was
    > clearly to optimistic, at least for now. Frankly, I will be very
    > happy if it just works its way back towards 20 over the next few
    > days or weeks.
    22 Aug 2009, 08:12 AM Reply Like
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