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With over 20 years of professional experience, Mark Gomes has grown to become one of the world's most experienced technology stock analysts. He is also a Masters Track & Field world record holder and U.S. Gold medalist ( Currently, Mr. Gomes is... More
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  • Bearish Globalstar Article Finds Balance 15 comments
    Jan 15, 2014 11:36 AM | about stocks: GSAT

    On Friday, January 3, Globalstar (OTCQB:GSAT) was the subject of a bearish article which provided a review of the company's onerous capital structure. Anyone involved with GSAT can benefit from understanding the risks involved if the FCC fails to approve GSAT's spectrum for terrestrial use. However, the article was only a half-truth. It failed to present the upside…the potential reward, which offsets the risks inherent in GSAT's capital structure.

    I quickly drafted a rebuttal, which was sent exclusively to my subscribers at PTT Research.

    Those issues have since been corrected and the article was re-released. The response was quite bullish. After the original article sent the stock as low as $1.63, my rebuttal (and the corrected article) sent the stock up to $1.90 (as I type this) -- a 15% return in 7 trading days!

    In the end, it all went to prove two things:

    1) Always be aware of whose analysis you are reading. In this case, I believe the author in question has a promising career ahead of him. He demonstrated some good skill in analyzing GSAT's capital structure. However, his lack of experience and bravado proved to be a lesson in the young man's development. I have no doubt that he'll bounce back. His corrected article was very well done.

    2) In order to appropriately evaluate any stock, an analyst must research its risks and its rewards. This is exactly how my staff at PTT Research approached GSAT, just before I predicted the stock would triple.

    It took less than four months for that prediction to come true. I discussed this and my other picks to triple in a follow-up contribution to Seeking Alpha.

    The reason for my prediction was simple. After Amazon Tested GSAT's Satellite Network, our analysis determined that GSAT's business and spectrum assets might be worth approximately $4 per share if the FCC approves a measure to expand the ways its spectrum can be utilized to include terrestrial Wi-Fi. Our analysis was validated by the work of Seeking Alpha contributor Paulo Santos:

    "GSAT's spectrum will cover the entire U.S. and be equivalent to around 7 billion MHz-Pop. This will be high-quality spectrum presently free of interference and potentially requiring only firmware/software upgrades to be used by existing devices (if configured as an additional Wi-Fi channel) (Source: GSAT "Understanding the Terrestrial Low Power Service." presentation)

    If we value this spectrum at a multiple comparable to Clearwire's, $0.325 per MHz-Pop, this gives us an indicative value - just for the spectrum - of $2.275 billion. Removing the $668.3 million in net debt, means that GSAT's equity might be worth as much as $1.6 billion, or $3.24 per share, a 405% upside from its present quote."

    This was an excellent assessment by Santos. For investors, this represented GSAT's potential reward.

    Our analysis was further validated when institutional buyers piled into GSAT on the news that LightSquared attracted an offer from Harbinger Capital Partners to buy the company out of bankruptcy for $3.3 billion in cash and $1.7 billion in debt. In other words, the demand for wireless and public Wi-Fi bandwidth is at an all-time high, leading to higher valuations for spectrum assets.

    Friday's bearish article completely ignored this data, rendering the rest of his argument moot.

    The author also presented an outright falsehood by assuming that retail investors were the main reason that GSAT's market value had increased by $1 billion. A move of that magnitude can rarely occur without institutional support. At worst, institutional short-sellers would stymie the move. As a consultant to institutions with ownership in GSAT, I can personally confirm that the author's claims were false. If you have a relationship with any institutional traders, they might provide you with similar confirmation.

    As experienced stock analysts, Paulo and I both know that reward is only half of the equation. Accordingly, we both discussed GSAT's downside risk. Specific to my perspective, the core business (assuming failure to receive FCC approval) is worth a fraction of the potential value of its spectrum assets. That being said, that core business was (and still is) improving. 2014 estimates were creeping upward and its book value was $400 million.

    In my opinion, the risk was that the stock was only worth 89-cents, fairly close to the 68-cent estimate cited in the bearish article. In other words, I agree with the author…on half of the risk/reward assessment.

    However, the author's failure to discuss (or even acknowledge) the potential reward made it impossible for him (or investors) to determine the risk-weighted value of GSAT's shares. In this case, that potential reward was/is likely between $2-5. If we simply take the midpoint of that range we derive an upside target of $3.50. Then, if we use the bearish author's downside target of 68-cents, we can calculate a coin-flip valuation in excess of $2 (($3.50 + $0.68) / 2 = $2.09).

    This is why I correctly predicted GSAT's 200% move in late-August.

    In fact, the shares reached $2.06 last month (by no coincidence in my opinion). Rather, it was simple math -- a matter of weighing the risks and rewards.

    Based on my company's winning low-risk / high-reward methodology (we've picked 10 triples), GSAT has graduated from our model portfolio. However, investors are still free to play the stock based on its current and ever-changing risk/reward profile.

    Based on the calculations presented above, shares of GSAT are undervalued by about 20%. Because of this, I still hold a modest stake in the company, mindful that GSAT's ultimate valuation will be largely determined by the FCC in the coming months. Bad news on that front will justifiably trigger a sell-off in the shares, leaving it significantly below current levels. Similarly, good news from the FCC should spark a rally that could potentially lead to a $5 valuation, which would make it a triple from current levels.

    In short (no pun intended), the bear case presented on Friday made a critical error. By ignoring the potential reward, the author mistook a great short for a stock with a wide range of potential outcomes - high risk / high reward. A mistake like that can still pay off (if the coin lands on tails). However, half of the time, this won't be the case, leading to subpar investment results for investors who fail to examine both sides of the equation…the risks and the reward.

    Disclosure: I am long GSAT, .

    Stocks: GSAT
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Comments (15)
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  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » I'm glad we got that cleared up. The stock is responding nicely, now that investors have a balanced view of the risks and the potential rewards. Chalk another one up to the PTT Research team :^)

    15 Jan, 11:38 AM Reply Like
  • cnubern3
    , contributor
    Comment (1) | Send Message
    Is there any idea as to an approximate timeline for the FCC to decide on way or the other?
    17 Jan, 02:40 PM Reply Like
  • Ashraf Eassa
    , contributor
    Comments (8983) | Send Message
    As always, insightful and collected commentary. Many thanks, MG.
    15 Jan, 11:41 AM Reply Like
  • snakepitt1
    , contributor
    Comments (11) | Send Message
    Now this is the type of balanced analysis that should be presented to potential stockholders. I applaud you sir.
    15 Jan, 12:07 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » Many thanks for the kind words, gentlemen!
    15 Jan, 12:21 PM Reply Like
  • steelo27
    , contributor
    Comments (2) | Send Message
    MG, you are a stock scholar good sir.
    16 Jan, 05:18 PM Reply Like
  • tvu
    , contributor
    Comments (6) | Send Message


    Nice article. I learn new things everyday. Coin-flip valuation is interesting. I think it is good for starting point and guideline. But, we can't really assume that the probability is 50/50 for GSAT case. Risk/reward analysis requires to list out all pros and cons and weigh them accordingly. Right now, pros outweigh cons, thus increase chances to obtain the rewards. IMO, the probability is more like 20/80 rather than 50/50. As you mentioned, core business is improving, especially with 2G satellites, which will result in higher floor price. The reward mentioned was based on 7 billion Mhz-pops (US only). That is just the tip of the iceberg. The spectrum in discussion has total of 150 billion MHz-pops worldwide. TLPS has superior performance. If implemented in the US, the rest of the world most likely will follow.


    16 Jan, 08:16 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » TVU,


    Well done. Probabilities are always subjective, but your understanding of the concept is dead on: determine the win-reward and the lose-penalty, apply the probability of each, and presto...fair value.


    Of course, then you have to apply a discount factor to account for the time it will take before the win (or loss) is determined and, of course, the profit margin you require / desire.


    Thus, if you believe the upside of something is $25 with 80% probability and the downside is $5 with 20% probability, your fair value = ($25*.8)+($5*.2) = $21.


    Assuming the event is a year down the road and you require a 50% return on your investment, you should pay no more than $14 for the stock today, since you have to wait a year for that future fair value of $21.




    Mark G.
    17 Jan, 10:07 AM Reply Like
  • 12466231
    , contributor
    Comments (5) | Send Message
    Is there any known reason technically with the GSAT WiFi Spectrum that would be a basis for FCC denial? Light Squared was denied but wasn't that for technical reasons? I Would think FCC has a track record of being quite reasonable. Aren't we moving towards open use of electronic devices in flight? Don't they want to open up new capacity is there is no downside? Aren't the major players like GOOG and AMZN going to be pushing the FCC? Is it just the risk of the unknown that is in play here? The FDA seems far more political than FCC.
    21 Jan, 11:01 PM Reply Like
  • Kiran Pande
    , contributor
    Comments (229) | Send Message


    I appreciate the commentary and feedback. For anyone else who is unfamiliar, I am the author of the article in question. However, there are a few things you haven't mentioned here.


    First, the decision to overhaul the article was mine alone. The 2 factual errors were circumstantial and did not invalidate the thesis. The article could have been easily amended in the course of 5 minutes.


    Second, I have no doubt that you are insinuating that your prompt rebuttal was partially responsible for the article's scrutiny. This is not the case. Globalstar's VP of Finance contacted SA and myself. Together, we ascertained which points were factually incorrect, and I requested sufficient time to rewrite the article based on feedback I had received.


    Third, I am wondering why it is that none of the clearly questionable track record of dilution and alarming history of default never made it to your articles in any capacity. Of course, your articles are presumably not "half-truths," which was your accusation of mine. It seems my article was simply filling in the blanks left by your publications. When 9 out of 10 investors are long, a one-sided short article gets a lot of backlash, but a one-sided long article (or three in your case) squeezes by unquestioned.


    I appreciate your writing and I admire your athletic prowess (I have been ranked nationally in the 800m), but taking out of context a situation you cannot possibly understand to mislead your readers/subscribers at my expense seems quite irresponsible, or at the very least, unethical.


    - Kiran
    24 Jan, 02:31 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » Kiran,


    Great points. All well taken. For starters, I didn't mean to insinuate that I was the cause of the article's scrutiny (though I see how it could be construed as such). I never mistake my God-given abilities for a license to condescend or be conceited. Accordingly, I have edited that statement out.


    Similarly, I never seek to step on a fellow human for my own gain. I have gained enough in life without seeking more at anyone's expense. Indeed, I take no issue with views that counter my own. Views do not change the true value of a company. Time is the ultimate judge.


    Thus, my targeting of your original work was based on the fact that it didn't account for GSAT upside. Under that methodology, any research-stage biotech can be called a short because they are generally unprofitable and dilutive entities. However, when one accounts for the odds and magnitude of their collective potential, we can understand the valuation of the average company in that space. Indeed, GSAT would be worth far less if not for the pending FCC decision...and it will be worth far more if the decision is positive.


    As for GSAT's dilution, never let a company's past dictate your view of the future. Though the past can potentially be an indictment on management's qualifications, even that is not necessarily true since people evolve and learn. In other words, each forward-looking viewpoint should be viewed in a vacuum. GSAT's management team doesn't want dilution. If they can help it, it won't happen going forward. If the FCC provides good tidings, they should get their wish.


    Finally, you made a great point with regard to the level of disclosure in my writings. It's true that my disclosures are selective. This is designed to keep the story simple for the average investor. I also limit the size of my Seeking Alpha articles. However, my full internal write-ups are much longer. For example, my next pick to triple report is still in process, but already 15-pages unabridged.


    When I release it to PTT Research subscribers, it will be a fraction of that. That being said, ALL factors are taken into account in my analyses. In this case, I have made it clear that a negative FCC decision will result in a GSAT valuation that mirrors your view. However, a positive decision will result in a much higher valuation than the $2 price target I originally placed on the stock. Thus, you see, by only calling for GSAT to triple, I was accounting for the weighted average upside and downside scenarios. For my Wall Street clientele, I am always prepared to answer detailed questions.


    In closing, please don't take my antagonism as personal. In fact, it is my sincere opinion that your talent and skill exceed that which I exhibited at your age / experience level. You have star-level talent in my opinion. If you attack the reward side of each stock's equation with the proficiency with which you attacked the risk side of GSAT's equation, you will be formidable indeed.


    Kindest Regards,


    Mark G.


    p.s. I noticed your T&F accomplishments. Congrats! Funny coincidence -- we ran almost the exact same time within two months of each other back in 2011 (I ran 1:56.20 in mid-July of that year).
    24 Jan, 11:21 AM Reply Like
  • Bartleby
    , contributor
    Comments (28) | Send Message
    Mark, you wrote:


    "It's true that my disclosures are selective. This is designed to keep the story simple for the average investor."


    Why? Has any subscriber of yours ever told you that he prefers a "simple" version of your analysis? I don't know why you assume this of us. Besides, wouldn't the average investor benefit and gain knowledge over time by reading a more in-depth analysis? Even more puzzling is this notion that you can selectively edit out the bear case and claim it is for the benefit of the average investor. You lost me there.


    Anyway, other than this peculiar take on research editing, I do enjoy your service. Though it's becoming more clear to me that it's a little more faith-based than I'm used to. I just have to trust you I guess. Which I can do because your record speaks for itself. Keep up the good work, Mark! And you too, Kiran Pande.
    24 Jan, 08:21 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » Bartleby,


    There are two equally relevant answers:


    1) My company employs a freemium model. We provide some value here on Seeking Alpha for free. Under this model, I don't even get paid by Seeking Alpha. The PTT Newsletter provides additional depth and value for a modest fee. We also offer premium services for investors (mostly institutions who want every last detail). It's how we pay for our employees and overhead.


    I hope you can agree that our Seeking Alpha contributions provide tremendous value for a free offering. Thus, it's only right that we withhold a certain amount of value to pay the bills.


    2) You actually hit the nail on the head. As part of our pay services, we offer the opportunity to submit questions which are selected for our weekly Q&A section. For investors (like you) who seek more of the details (less faith-based investing) we deliver that. I understand that my free "keep it simple" articles are basic and incomplete, but my performance shows that the results have been no less spectacular for it.


    Thanks for your readership and the great question,


    Mark G.
    25 Jan, 01:42 PM Reply Like
  • Bartleby
    , contributor
    Comments (28) | Send Message
    Hi Mark, thanks for the reply. Just to clarify, I am already a paying subscriber to PTT research. I do think it is one of the best services out there for the retail investor, especially considering the price. In retetrospect, I can see how your initial write-up and recommendation of GSAT was appropriately edited for the freemium venue of Seeking Alpha. After all, that pick came out prior to the start of your PTT subscription service.


    Regarding the opportunity for paying subscribers to submit questions, this is certainly true. And you also have a policy that reserves the right not to answer any specific questions due to time constraints or relevancy. So far, I have asked three questions as a subscriber. One was answered publicly, one was answered privately (through email), and the other was not answered, even though I thought it was highly relevant to all subscribers. But two out of three ain't bad. When I see freeloaders hounding you with questions here on Seeking Alpha, I'm glad that you refer them to your PTT subscription service. That is where they should be.


    26 Jan, 04:51 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1922) | Send Message
    Author’s reply » B,


    You are 100% right. We carefully assess which questions should be answered and where. Maintaining a reputation with the general public is important, as is making sure our paying members get the premium value they are paying for (and more).


    Just a matter of striking the right balance. FYI, though we can't answer every question, most of the ones we don't answer have the same answer:


    "In my opinion, that's nothing to worry about. If anything changes, we will inform you and the rest of our subscribers right away via a special alert."


    Cheers B!


    Mark G.
    26 Jan, 10:08 AM Reply Like
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