Photo:lyonzy, Creative Commons, Flickr
In my early days as a stockbroker, I worked for a small investment banking firm that participated in underwriting small speculative growth companies that mainly traded as pink sheet stocks. Nine out of ten companies in this arena never make it, but I was fortunate enough to embrace one that turned out to be my greatest lesson in what can happen to a long-term stock buy.
I also learned what can happen if I don't stay with my beliefs and bail on a stock too early, resulting in years of kicking myself and muttering of what I should have, could have, would have done.
The company I am referring to is my first stock pick from 1989, Comverse Technology (CMVT -OTC).
This company's storyline sounds like the trailer for the movie Gladiator where Commodus says to Maximus:
The general who became a slave. The slave who became a gladiator. The gladiator who defied an emperor. Striking story!
Comverse's storyline would go like this:
The company that began as a penny stock. The penny stock that graduated to a Nasdaq listing. The Nasdaq stock that became a SP-500 component. The SP-500 component that fell from grace back to the pink sheets. Striking story!
Unless you were a shareholder these last few years.
Even more intriguing was last year's worldwide manhunt for Kobi Alexander, Comverse's CEO for many years, who stepped down last year as a result of an improper options back dating probe that began and is still ongoing. Mr. Alexander made a lot of money for shareholders, but apparently greed took over and he made a fortune by illegally backdating options at low price. This was particularly unnecessary since he was doing what we, as average investors, expect a chief executive to do (increase shareholder value). He should have been remembered as the model of success, building a company up from obscurity into an institutional darling, but for some reason he chose to cheat rather than to stay the course and continue building a telecom technology powerhouse.
I was buying this stock for clients at $.18c per share in the latter part of 1989. Yes, I was recommending a speculative penny stock in my early days while building a client base. Why? Because the company at the time represented what every investor looks for when they research a company before investing in it. The company was on the technological forefront developing telecommunication systems that provided messaging services and voicemail solutions. They were signing up customers left and right and these customers were major telephone giants throughout the world. Their telecom systems were purchased by governments. The company was building a foundation for remarkable growth. Growth that took this stock from $.18c a share to north of $100 per share over a 10-year time frame.
Unfortunately, I went from the penny stock firm to Lehman Brothers and began buying stocks that were more mainstream, household names for the average investor. I stopped buying Comverse and, in fact, sold what I had for clients in early 1991. What a mistake that was. If I had held the shares for my first few clients in the early days, I would have been a multi-millionaire by now, with probably the greatest stock story anybody could tell. But I bailed early and watched the company woo Wall St. and begin its meteoric ride to SP-500 status. What a lesson. An $100 million dollar lesson considering how much stock I had for clients ($10,000 turned into $8 million in about 10 years and I had about $100,000 worth of the stock total for clients). But a lesson I hope all my readers will learn about long-term investing.
Today the stock trades on the pink sheets at around $16 per share and Wall St. is buzzing about a possible breakup of the company's divisions which analysts say is the best strategy that will represent good value to investors. There were even rumors of a takeover from Oracle that surfaced in September. Just in the last few months the company has announced several new telecom contracts and new product announcements that revived my memories of this active pace of new client deals 20 years ago. To this day Comverse provides major carriers like AT&T, Verizon and Sprint with their messaging technologies and continues to be a leader in this area, supplying companies in as much as 130 different countries. Even the new Apple iPhone success has implications for Comverse.
This is not a typical Pink Sheet penny stock fundamentally, with $1.43 Billion of cash on the balance sheet ($11.50 per share) and revenues north of $1 Billion. Institutions still own almost 20% and there are price targets by some analysts in the mid-twenties. So buying the stock at $16 seems like just as good a bargain as buying it 20 years ago at $18c.
Investors should be aware that the company still has delayed their audited financials, which has been the main cause of the Nasdaq delisting, but I am anticipating that it may be coming out of this two year scandal by early next year and new organizational changes will probably accelerate this process. Any potential takeover players may be waiting for these events to come to closure and the bad boys of the stock option scandal are now separated from the company. Earlier this year Comverse Technology also named a new chief executive, former AT&T Wireless executive Andre Dahan, who agreed to take the CEO job on April 30.
Whatever the end result turns out to be, I am going to make a bold prediction that the company will be bought out next year and buying the stock at these levels could reward investors handsomely. I never made a buyout prediction before so it seems even more appropriate to make one on the greatest stock story in my investment history. I have high hopes that the company can put the past behind and move forward at doing what it does best, providing integrated software, systems, and related services for multimedia communication and information processing applications.
Could this be the beginning of a new era for Comverse? Time will tell. But considering my history with the company, I am going to give them the benefit of the doubt. Certainly, playing the stock on the market's recent weakness and a possible year-end tech rally makes timing this stock now a prudent strategy.
Disclosure: I do not own the stock as of this post but will be adding it on the next down day for the stock and the market in general. I don't own a multi-million dollar voice messaging system.
Photo:Jungle Boy, Creative Commons, Flickr