Optimal Group (Nasdaq: OPMR) is one of five stocks I bought last August in my fourth Magic Formula tranche. All except one, Vaalco Energy (NYSE: EGY), are down significantly since then. Since most of the conceivable bad news has been priced into the four stocks that are down, I've been waiting for their earnings to be released to sell them, on the off chance that some good news might move the stocks up a bit. Optimal Group released its earnings today, but, at the last minute, postponed its conference call to 9am tomorrow due to "pending news". Optimal Group was primarily an electronic payment processor that ran into trouble with (and had some assets seized by) the Department of Justice relating to internet gaming. Subsequently, it diversified into something completely different by buying a toy company called WowWee, which sells, among other things, a creepily realistic, animatronic talking Elvis bust (pictured above, but you need to click on that last link and watch the video to get the full effect).
Last August 13th, when Optimal Group was trading at $5.94 per share, a writer named Ross Greenspan wrote an astutely bearish article about the company on Seeking Alpha, "Optimal Group: A Home-Run Value Trap". Greenspan wrote,
Based on cash per share and book value, Optimal seems like the most home run value stock in the market. But management is going to have to grow the business before anyone really starts to take notice. Otherwise, you're investing on the hope of a reversal of the gambling ban in the US.
This stock is a value trap in plain sight, with no near-term catalysts to reverse this slide. The selling today is overdone, but with no upside catalyst, a bounce is all you can hope for.
Nine days later, Greenspan added a surprising addendum, in the form of a comment on his article,
Since the tone of my article was negative, I feel its important to disclose that I bought 50 Optimal Group today (8/22).
Optimal Group closed at $5.64 on August 22nd, 2007 (I unfortunately bought this at over $6 per share). Today it closed at $2.10.
It will be interesting to see what news tomorrow brings on this one, and I'm looking forward to unloading it in any case. A few expensive lessons from this:
1) Sometimes stocks trade at a discount to book value for a reason.
2) Buying stocks from the Magic Formula list without applying some common sense and doing sufficient due diligence on them is a mistake.
3) Diversification provides little protection when you are diversifying among a basket of poorly-selected stocks.