Follow-up (2) Technical Communications Corporation (NASDAQ:TCCO)

As you might remember, I sold my TCCO position a few weeks back after some sloppy research (link to that post). The day after I managed to correct my misstake when the share price of the company for some reason plummeted back to former levels. See link to post for that re-purchase: checklist-analysis.

Yesterday a fellow net-net investor alerted me on Twitter saying that something again was going on with TCCO with the shares skyrocketing +25%. This time I conducted a proper research investigation but found no news or indications validating the big share price increase. I therefore concluded that TCCO again was exposed to a pump and dump scheme by traders and that the safety vale for a follow-up was valid. The follow-up resulted in a sale of my position at a price of 2,95 USD since the company was then trading at P/NCAV>1. In relation to my purchase price of 2,40 USD that translated into a return of 22,6 % (net of currency effect and brokerage fees).

Today the shares of TCCO, as many times before, plummeted back to former levels and I managed to re-purchase my position at a price of 2,35 USD. Since no new Q-report has been published since my last checklist-analysis I will refer to this post for validating my re-purchase: checklist-analysis Q3 2016 TCCO.

Disclosure: The author is long NASDAQ:TCCO when this analysis is published.

 

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Technical Communications Corporation (NASDAQ:TCCO)

Q3 2016 – 2,40 USD

Technical Communications Corporation (TCCO) is engaged in the design, development, manufacture, distribution, marketing and sale of communications security devices, systems and services. The Company’s products consist of electronic devices that enable users to transmit information in an encrypted format and permit recipients to reconstitute the information in a deciphered format if the recipient possesses the right decryption key. The Company’s products consist primarily of voice, data and facsimile encryptors. Its products can be used to protect confidentiality in communications between radios, telephones, mobile phones, facsimile machines and data network equipment over wires, fiber optic cables, radio waves, and microwave and satellite links. The principal markets for the Company’s products are foreign and domestic governmental agencies, law enforcement and military agencies, financial institutions, and multinational companies requiring protection of mission-critical information. – Google Finance

1. Adequate margin of safety (criterion a) or b) must be met): 

a)

• P/NCAV < 1x
  • 0,85x ✓

&

• EV/Operating earnings(5y&10y) < 3x
  • 5y =  0,5x ✓
  • 10y = 0,4x ✓

b)

• P/NCAV < 0,76x
  • 0,85x X
• NCAV-burn rate  > -25 % for Qx – Qx-4 and Qx – Qx-1
  • Qx – Qx-4 = -27 % X
  • Qx – Qx-1 = -11 % ✓

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):

a)

• Debt/Equity < 25 %
  • 0 % ✓

b)

• Z-score ≥ 3
  • 5,8 ✓

&

• Debt/Equity < 50 %
  • 0 % ✓

2.2 The company’s business model is not totally unprofitable (criterion a) or b) must be met):

a)

• Positive retained earnings:
  • 1,467 ($000) ✓

b)

• Positive aggregate operating income for the last ten years:
  •  32,600 ($000) ✓

3. The risk of share dilution is low (criterion a) or b) must be met):

a)

• Share dilution < 2 % for Qx – Qx-4 and Qx – Qx-1
  • Qx – Qx-4 = 0 % ✓
  • Qx – Qx-1 = 0 % ✓

b)

• The company has net repurchased shares during the last ten years:
  • TCCO has net issued shares during the last ten years. Last issuance of new shares was in 2012. X

4. The risk of fraud is low (overall assessment on the basis of the answers below):

• Today’s management has not historically been linked to fraud:
  • I have not found any historical indications of fraud from TCCO’s current management.  ✓
• The company is not mainly Chinese (business and/or majority shareholder):
  •  American company and shareholders. ✓
• Company data exist for the last ten years:
  • Yes. ✓
• The company has repeatedly allocated capital to shareholders (dividends and/or share buybacks):
  • TCCO paid a dividend during year 2013-2010 (range 0,40-0,10 USD per share). ✓
• The CEO and/or insiders have ownership incentives (worth of shareholding / salary + bonus > 3x):
  • CEO = 3x ✓
  • Insiders as a group = 2x X

Other notes:

• 8-K report
  • TCCO received an order valued 2,4 MUSD this October.
• The CEO (Carl H. Guild, Jr.) owns 18 % of the shares outstanding.
  • Insiders together own 25 % of the shares outstanding.
• TCCO is a nano-cap stock: 4,2 MUSD in market capitalization. The trading is very illiquid.
• My old posts of the company:
  • Q2 2016 analysis 
  • Follow-up

Disclosure: The author is long NASDAQ:TCCO when this analysis is published.

Follow-up: Technical Communications Corporation (NASDAQ:TCCO)

Background

Back in July there was a big pump and dump scheme in Technical Communications Corporation (NASDAQ:TCCO). On no new fundamental information the share price jumped from about 2,90 USD to 5,10 USD in one day of trading. After a few days the share price went south and we were back at the starting point.

Back then my rule was than under no circumstances should I revaluate my net-net holdings in relation to the checklist until thirteen months after the initial purchase date. So basically, I missed out on a +100% return. After a few weeks of thinking I decided to put in three safety vales to the standard thirteen-month rule. See my old post about the updated checklist and portfolio rules (in Swedish).

• A follow-up is done on each net-net holding after thirteen months, or directly:
  • if there is a buyout/tender-offer for the company’s shares.
  • if the company is going to be delisted.
  • if there is a pump and dump scheme (i.e. the share price has risen drastically on no new fundamental information).

Follow-up on TCCO (a mistake)

Earlier today I got a notification on my phone saying TCCO was up over 40 % in today’s trading. Here we go again a thought to myself. After a check on Google Finance I saw the same pattern as I had observed the last time. A huge spike in shares traded and no link to any new fundamental information. Together with a quick search on Twitter, were I found a bunch of traders bragging about their morning return in TCCO, I decided to apply the follow-up safety value of “pump and dump scheme”. Although sitting on the train, I managed with my phone and the last Q-statement to figure out that TCCO was now selling for P/NCAV = 1,15x. With that conclusion the company no longer had in accordance to my net-net checklist an “adequate margin of safety”. I therefor decided to sell my position at 3,20 USD. In relation to my entry price that translated into a total return of 28 %.

So here this post should end, right? Unfortunately, no. I made a mistake. As it turned out I did a sloppy job of researching the “no new fundamental information” part. When I came home I found a new link via Google Finance that took me to this following statement (published yesterday): https://www.sec.gov/Archives/edgar/data/96699/000114420416128504/v450710_8k.htm Had I only checked all the company’s fillings in Edgar I would have come to a different conclusion regarding the relevance of the safety vale. That in turn would have meant that I had not sold the TCCO position.

This is a perfect example where of a good outcome is not the result of a good decision. I guess we all make mistakes. Luckily this was not one that resulted in a permanent loss of capital for me. But take my word, I will learn from this!

Disclosure: The author doesn’t own any shares of NASDAQ:TCCO when this is published. 

Technical Communications Corporation (TCCO)

Q2 2016 – 2,50 USD – NASDAQ:TCCO

Technical Communications Corporation (TCC) is engaged in the design, development, manufacture, distribution, marketing and sale of communications security devices, systems and services. The Company’s products consist of electronic devices that enable users to transmit information in an encrypted format and permit recipients to reconstitute the information in a deciphered format if the recipient possesses the right decryption key. The Company’s products consist primarily of voice, data and facsimile encryptors. Its products can be used to protect confidentiality in communications between radios, telephones, mobile phones, facsimile machines and data network equipment over wires, fiber optic cables, radio waves, and microwave and satellite links. The principal markets for the Company’s products are foreign and domestic governmental agencies, law enforcement and military agencies, financial institutions, and multinational companies requiring protection of mission-critical information.- Google Finance

1. Tillräcklig säkerhetsmarginal (kriterium a) eller b) måste uppfyllas):

a)

• P/NCAV < 0,86x
  • = 0,79x

&

• EV/EBIT10 < 5x
  • = 0,6x

b)

• P/NCAV < 0,66x
  • = 0,79x

2. Risken för permanent förlust är låg:

2.1 Konkursrisk i bolaget är låg (kriterium a) eller b) måste uppfyllas:

a)

• Räntebärande skulder/Eget kapital < 20 %
  • = 0 %

b)

• Z-score ≥ 3
  • = 5,7

&

• Räntebärande skulder/Eget kapital < 50 %
  • = 0 %

2.2 Bolagets affärsmodellen är inte helt olönsam (kriterium a) eller b) måste uppfyllas):

a)

• Positivt balanserat resultat
  • = 2,4 MUSD

b)

• De aggregerade rörelseresultatet under de senaste 10 åren är starkt positivt
  • = 9,7 MUSD

3. Låg utspädning av antalet utestående aktier YoY och QoQ (< 1 %):

• YoY = +0,1 %
• QoQ = 0 %

4. Risken för oegentligheter är låg (bedömning görs utifrån nedan svar):

• Bolagets ledning har inte historiskt varit involverad i oegentligheter:
  • = Har inte funnit några tecken på fraud historiskt.
• Bolaget är inte huvudsakligen kinesiskt (verksamhet eller majoritetsägare):
  • = Amerikanskt bolag med huvudsakligen amerikanskt ägande.
• Bolagsdata existerar för minst 10 år:
  • = Ja.
• Bolaget har återkommande skiftat ut kapital till aktieägarna historiskt (utdelning och/eller återköp):
  • = Bolaget har återkommande givit utdelning historiskt.
• Starkt insiderägande (> 20 %):
  • = 25,3 %
• VD har ägarincitament (värde av aktieinnehav/lön + bonus > 3x):
  • = 3x

Klarar bolaget samtliga krav?

JA

 

Disclosure: Jag har en position i NASDAQ:TCCO när denna analys publiceras.