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A Pittsburgh Diamond

|Includes: Mastech Holdings, Inc (MHH)

Saturday, October 10, 2009

Some of you may have listened to my radio interviews on The American Entrepreneur on September 12 and October 10. If you wish to and were not able to, you can listen to them by clicking on the links below.

I became acquainted with the host, Ron Morris, while researching a small company called Mastech (NYSEMKT:MHH). I called him to ask a question, and after speaking with him, he invited me to do an interview on his show.

Background of Mastech

Mastech is a provider of IT and brokerage operations staffing, and consulting services to Fortune 500 companies. In the most basic terms, the company pays an IT specialist $50,000 a year and contracts him or her for $250,000 to major companies who need IT services. With today's technological complexities, who doesn't need IT help?

Mastech has been in business for more than 20 years but was formerly part of a parent company called iGate. Credit Suisse advised iGate's management to split the two companies so that each one would have a higher value in the marketplace. In September 2008, they spun off Mastech from iGate at around $10 per share. Within several days, the stock went down to about $1 per share. Why did this happen? The shares of Mastech were given to shareholders of iGate upon the spin-off. iGate shareholders were not interested in Mastech because they had purchased iGate's shares for the purpose of owning iGate, not Mastech, so when they received shares of Mastech, it was easier for them to sell the stock because they lacked an understanding of its underlying business.

While researching the company, I learned that when Mastech was part of iGate, it had earnings per share of $0.98, $1.51, $1.92, $1.60, and $1.76 in Years 2008, 2007, 2006, 2005, and 2004, respectively. I did a double take when I saw this because it meant that the average earnings per share were $1.55 - higher than the stock price of $1 per share. Conservatively, using a P/E ratio of 10, the stock of Mastech should be trading at approximately $15 per share. In contrast, Mastech had a P/E ratio of less than 1. Unfortunately, the $1 per share price didn't last long because the management began buying the stock for their personal portfolios, bidding the price substantially higher.

When I discovered this company, the price was already at $3.50 per share, which is over 200% higher than what I would have paid had I purchased it at $1 per share. But, it was still an incredible deal. However, one event really bothered me - the CEO, Steve Shangold, resigned during the first quarter of 2009. He was with the company for over 15 years. I needed to find out why he left. In doing my research, I ran across a radio interview between Steve Shangold and Ron Morris of The American Entrepreneur, and it seemed like Ron and Steve knew each other. So I called Ron to ask if he knew why Steve left and was pleased to learn that his reasons for leaving had nothing to do with the company or its performance. In addition, I also learned that Ron was one of the founders of Mastech and had actually hired Steve Shangold himself.

Currently, the price of Mastech's stock is slightly below $5.00 per share. I was fortunate enough to purchase shares for myself and my clients for prices between $3.60 and $4.80 per share. I still think that the stock is a steal, but it will take some time for the market to realize the true potential of Mastech. Because Mastech is a staffing company, its business doesn't perform very well when the unemployment rate is high. Mastech provides temporary employment services, and when companies are laying employees off, they start with temporary employees. But, when the economy starts recovering, companies are likely to hire temporary employees before permanent ones. So, Mastech will be one of the first to benefit from the recovery.

Disclosure: Long MHH