My First Pick: Synacor (SYNC)

Once again, the caveats.

There are still a lot of things I haven't decided about how precisely this blog is going to work: how often I post, what events warrant posts, whether I should post  about stocks that I investigate but decide to leave on the table (which will likely be most of them).  But one thing is certain: I definitely need to post when I decide to buy or sell.  So here I am, chronicling my first (albeit virtual) trade.  Unfortunately, as I have no practice organizing my thoughts about a stock, this post is likely to be somewhat rambling; so my apologies for that.

Synacor (SYNC)

Current price (as of close, June 5, 2013): $3.52

First, the basics: Synacor is a internet service company that designs and implements "TV Everywhere" solutions.  Largely, they appear to be selling their services to cable companies (as well as companies offering similar services like Verizon's FiOS), so that those companies can (hopefully) make a smooth transition as more and more TV viewers seek to access TV content on the internet rather than on a broadcast schedule.  This "disruptive" move to a more internet-based TV consumption model has been presaged for some time; and while cable companies haven't been put out of business (nor, in my opinion, are they likely to be), TV watching is changing, and services like HBO GO have demonstrated the effectiveness of a subscription-based TV everywhere solution.

Unfortunately, on the surface, Synacor has a lot going against it.  It's a relatively new company (the IPO was only last February) and it's operating in a new and untested business.  In 2012, it's annual net income dropped from $10 million to $4 million, yielding a earnings per share of only $0.14.  The most recent quarter did little to improve on this, and the current P/E ratio is an unimpressive 38.  Fairly few analysts have paid much attention to Synacor (not surprising, given it's $98 million market capitalization), but those who have are giving it the thoroughly uninspiring rating of "Hold".  And perhaps most damning of all, Synacor's stock is far lower now that it was less than a year ago.  In fact, only eleven months ago, Synacor was trading between $15 and $17 a share.  Since then, SYNC has dropped like a stone, and has been stuck between $2.70 and $4.00 a share for the last couple months.

So given all these issues, why would I like Synacor?  Because, in reality none of those issues are really that critical. The massive drop in stock price was not primarily driven by investors suddenly deciding the stock wasn't worth as much as it claimed to be worth; when Synacor had it's IPO, it was sold at a much more reasonable $5-6.  The stock price, however, rose rapidly, seemingly driven by a group called the National Inflation Association, in an apparent pump-and-dump scheme.  It seems unlikely that Synacor itself was involved in this pump-and-dump, as insiders at Synacor still own almost 6% of the company, even with it's massive stock drop.

That 6% insider ownership was one of the first things that suggested to me this company might actually be moving in the right direction.  But what about the sudden drop in earnings?  Well, on closer examination, that appeared to be less of a issue as well.  Though EPS (earnings per share) did drop in 2012, revenue didn't.  In fact, revenue in 2012 went up 33%, and stayed up in the first quarter of 2013.  In fact, if you look at free cash flow rather than income, Synacor actually improved considerably in 2012, going from $7 million to $10 million. (Free cash flow is a measure of the actual money that moves in and out of the company during a period, rather than income, which is a more abstract accounting measure of increase in assets and decrease in liabilities, and includes things like depreciation, amortization and accounts receivable.  Free cash flow is often a more accurate representation of a company's business health, particularly companies with large advertising revenues, even if it translates less directly into shareholder equity).  And while Synacor has a fairly mediocre P/E multiple of 38, its price to free cash flow multiple is a much more appealing 15, well below the average of its peers.

Given these underlying strengths, and adding in almost zero debt, a big pile of cash (over 80% of their assests) and a market that is, one way or another, destined for growth, Synacor seems like an excellent buy.  Given that I have a (virtual) $10,000 portfolio, and assuming that I don't really want to be involved with more that 4 or 5 equities at a time, I've started things off with a healthy $2000 investment in Synacor (SYNC). At last night's closing price of $3.52 a share, and factoring in an $8.95 trade fee, that gives us 565 shares of Synacor.  So here is the state of the portfolio as of last night:

	6/05/13
Capital	8002.25
Synacor (SYNC)	3.52
x 565	1988.80
Total	9991.05

Check back soon to see how things go.

My First Lessons

As always, remember the caveats.

Last weekend, I read my way through Joseph Greenblatt's now famous investing book, "You Can Be A Stock Market Genius."  In all honesty, I started with this reference because it was cited as an influence by no less than two of the three fabulously successful (if somewhat idiosyncratic) hedge funds profiled in Michael Lewis' chronicle of the financial crisis, "The Big Short."  It would be hard to interpret Lewis' book as implying that reading Greenblatt was the secret of their success, but if they thought it was good, I figure it's worth a look.

The book, despite it's doofy title, and despite now being a little bit dated, is still an excellent read.  I won't go into the details of his "special situations investing" advice; after all, if I did, what reason would you have to read the book? Nevertheless, perhaps the most important lesson to be drawn from the book is this: it is in fact possible for an intelligent, motivated personal investor with only a small amount of capital to make better than average money in the stock market.  This, of course, is very counter-intuitive; if there are people far more highly trained than I, with far more experience, who were specifically hired and are specifically paid to invest in stocks (and there are), and if they drive the overall behavior of the market and the stocks within it (and they do), then how can I hope to make any money, if making money requires exploiting an inefficiency that they have ignored?  His argument - an argument that I think, to some degree, still holds - is that those professional investors are not trying to make money in the same way as I am.

There is, after all, a difference between investing hundreds of millions of dollars and investing tens of thousands.  A large, institutional investor can hardly invest a significant amount of his or her portfolio in a company with a market capitalization of only $500 million.  Most professional investors are investing someone else's money; the only way to earn a living doing that is to invest a lot of someone else's money, and so most professional investors will deliberately avoid or altogether ignore certain types of investment opportunities, especially small ones.  Nevertheless, such small opportunities may offer more than enough reward for a small, amateur investor like myself.  So, in brief, there's hope for me yet.

Of course, the development of the internet since the mid-nineties when Greenblatt published his book has both increased the number of small-time personal investors and the availability of stock information about even the most micro-cap of companies.  This has, undoubtedly, ironed out or at least reduced many of the market inefficiencies that Greenblatt championed.  But the important point remains: a small, personal investor like myself is not competing with the big-time Wall Street professional investors.  So the market is not quite as hopelessly closed off to success as it might initially seem.  Which leads somewhat clumsily to ...