Friday, July 11, 2008

New Position: Destiny Media Technologies, Inc. (DSNY.OB)

Today I picked up some shares in Destiny Media Technologies, Inc. DSNY.OB at $.40 per share on margin. I plan to pay off the margin loan next month, when I sell the wreckage of some of the stocks I bought from the Magic Formula Investing list last August. Destiny Media is a pick of "issambres839" on the Value Investors Club. Thanks to Daniel Wahl, I've learned that issambress839 is the professional value investor Aaron Edelheit, of Sabre Value Management in Santa Barbara, CA. Edelheit may be one of the best investors I had never heard of up until last month.

In contrast with many value investors who use trailing metrics such as P/S and P/E to screen for stocks (recall rules-based investor Marc Gerstein's frustration with this approach in "What's Wrong with Today's Value Investing?"), Edelheit often researches small stocks without current earnings that are nevertheless trading at a low multiple to his estimates of their future earnings. When he recommended DSNY.OB on the Value Investors Club in January (when it was trading at $.68 cents per share), Edelheit wrote that it was trading at 7x his estimate for fiscal '09 earnings (at the current quote, it's trading at about 4x his estimate; insiders have been buying on the way down). Destiny Media is the second stock I bought based mainly on Edelheit's write up (and subsequent news that confirmed his thesis); the first was the precision agriculture company Hemisphere GPS (HEM.TO), which I bought around $4.34 per share (Edelheit originally recommended it last summer when it was trading at $2.74 per share). Like Hemisphere, Destiny Media is a Canadian company. Edelheit is willing to consider obscure Canadian companies (including those such as DSNY that trade on the OTC Bulletin Board) in search of undiscovered values.

I recommend signing up for guest access to the Value Investors Club so you can read issambress839/Edelheit's write-up for Destiny Media in detail, but here's my summary in a nutshell. Destiny offers a service (its Play MPE network) that enables record labels to digitally (and securely) transfer songs to radio stations. The service includes security features such as a (recently patented) digital watermarking technology to prevent unauthorized redistribution of the songs. The value proposition here is that Destiny Media can save the record labels a lot of money: Destiny's service costs about 90% less than the old method of sending songs in CD format via courier. Destiny had been offering its service to some labels at no charge last year, but has been signing contracts with them to pay to continue the service this year. As Edelheit pointed out in his write-up, since Destiny's stock is obscure, foreign, and has no analyst coverage, few are aware of the paying customers it is lining up for its Play MPE network.

According to Edelheit, Destiny also offers a product called Clipstream, which is similar to Adobe Flash but uses 90% less bandwith. This product could a source of additional future earnings, but his multiple estimate above was based solely on Destiny's Play MPE service.

One note about risk: Destiny has a collection of conventional wisdom red flags for risk -- it's a microcap, it's foreign, and it trades on the OTC Bulletin Board. So it's not exactly a widows & orphans stock. Then again, in the last year we've seen stocks that some would have considered suitable for widows and orphans -- e.g., Citigroup, Fannie Mae, etc. -- suffer stomach-churning drops. This subject is a subject worthy of its own post, but the conventional wisdom about potential risk versus reward with respect to stocks may be worth revisiting.

9 comments:

Daniel said...

Found this post in my mail this morning as your mention of Hemisphere showed up in one of my Google Alerts.

Been watching Destiny for a while and been thinking of buying it too. Good luck with it!

ravinsu said...

Good luck on Destiny, I also have been watching it. Very interesting!

ravinsu said...

Incidentally, Dave's post showed up in google alerts for "Sabre Value Management" in my inbox :)

DaveinHackensack said...

Thanks, guys. I'm surprised it even showed up in your Google Alerts, since I forgot to tag this one (I'll put some tags on it now).

Incidentally, Daniel: I just remembered that I asked you about DSNY in this thread, but I'm sure you missed it. No worries.

Related to this buy, John Krantz and I had a conversation via PM on GuruFocus where we talked about risk versus reward -- that given the risk of most stocks, you might as well invest in some where the potential upside compensates you for taking on risk.

Also, if you guys didn't catch it (and you're interested), I spoke with the CEO of USEG today. I'll probably post my notes on that tomorrow.

Daniel said...

Ah, I missed it. Haven't been able to sign onto any blogspot page for a while.

Yes, I read the write-up. And I've contemplated buying Destiny at 40 cents even without knowing much more about the company than what's written there.

Seems like an easy 50% before even getting to the level that Edelheit wrote it up. But I haven't figured out how secure the 10 million in expected earnings is.

By the way, Rav, nice to see you 'round these parts. Aren't you going to join the fun soon and start up a blog?

Marsh_Gerda said...

Good stuff Dave. There is no doubt that if you are skilled enough to forecast forward earnings, then value investing becomes much more effective. I personally think there are SO many value stocks out there right now where you can find a quality small cap company with actual earnings that you don't need to take a flier on a DSNY. You have mentioned a few, such as CAST and KSW. QXM and CHCG are other examples.

Good luck with using margin, I would be able to stomach that in today's market, which is totally irrational.

DaveinHackensack said...

Thanks, Marsh.

You're right that there are values among stocks with current earnings. I own CAST, but since it's Chinese, it's something of a black box to me. A friend has raised a couple of red flags about Chinese stocks to me. Same goes for QXM and CHCG, of course. Also, the fellow who wrote-up DSNY wrote an interesting post on his blog about investing in China; I'll post a link to it here later today. KSW is definitely cheap now, and I'm happy holding on it, but I'm not sure how much upside is there over the next year or two.

If you want current earnings, you ought to take another look at that Australian company I've written about here, Alloy Steel. Here's the thing though: Had I been aware of this company 6 months ago and been convinced of its value proposition before it had earnings, I could have bought it for under a dollar. Still plenty of upside potential from here though, IMO.

Also, regarding margin: I don't like to use it a lot, but this was my rationale. First, I didn't want to sell my MFI stocks early in the midst of the general market sell off, and I think one or two may actually go up after their next earnings releases. Second, I didn't want to wait until after the next earnings release to buy DSNY. So I borrowed the money knowing that I should be able to pay it back in about a month.

Albert said...

I started looking into DSNY this past weekend, and decided I would buy some as well this morning. Because of a technical glitch, I wasn't able to buy it, and it turns out I was surprised by the fact that DSNY announced Q3 results this morning. I see that their operational income (or rather, loss) is improving, but that their revenues have been flat for 3 straight quarters I think. I also don't understand why their Clipstream revenue keeps declining.

The company says it expects a spike in both MPE and Clipstream revenue by Q1 (Sep-Nov) so it may just be a little bit of a delay until we see better results. Edelheit had expected to see improved revenues for this quarter, but that hasn't happened yet.

The stock may yet drop a little more today and tomorrow because of the flat revenues. I wouldn't mind too much, because I'll likely make an investment anyway, because I like Edelheit's write up from VIC.

DaveinHackensack said...

Albert,

The Q3 announcement caught me by surprise too. See my later posts on this.

Thanks for your comment.