Tuesday, August 5, 2008

Interesting Times at Optimal Group

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.


DaveinHackensack said...

Update: Listening to the conference call now. The news the divestiture of part of the company's payment business (the “card-not-present” segment) for $7 million. Management added that they intend to sell off the rest of the payment business over the next 12 months, for substantially higher prices. No update on the company's negotiations with the DoJ.

DaveinHackensack said...

Sold out of this at $2.19 per share, and used the proceeds to pay off some of the margin loan I took last month to buy a couple of Edelheit picks.

Anonymous said...

Is that your stategy: buy high and sell at the bottom.



Anonymous said...

Stats: 20% pick average
Strategy: Sell on emotion.
Your STATegy heeds some help.

Don't feel bad. About 90% of traders and investors loose money in the markets.


Anonymous said...

This is so ironic. Your blog is maybe 1 of 3 in the blogasphere covering OPMR. You buy on a Seeking Alpha article one year ago written by Ross Greenspan (short idea). Then no OPMR Seeking Alpha articles until a year later. Then Badger The Lion puts out three (3) articles on Seeking Alpha (long idea) and you sell. This August I put my entire net worth into OPMR and you sell out. And people say the markets are boring.

Anonymous said...

Correction: maybe 1 in 10 blogs (including Seeking Alpha):


DaveinHackensack said...


1) All five stocks were picked from the Magic Formula list last August when I was following that strategy. I wouldn't have picked OPMR, or most of the others, on my own.

2) I didn't buy OPMR based on the SeekingAlpha article. I don't think I had even read it before I bought the stock.

3) The Magic Formula sell discipline calls for selling the picks one year later. I sold the stock because of that, not because of emotion.

4) Since your blog is apparently invitation only, what's the point of posting links to it here?

5) Good luck with OPMR.