Unpleasant news from both these companies has me re-thinking my exposure to these speculative growth stories and selling out at a loss.
Assure Holdings
This was supposed to be a “fun” holding; a way to add a little spice to the portfolio in an exciting niche market. Sadly, it wasn’t quite the thrill ride I was hoping for. I first bought into this company 3 years ago. They were players in the emerging field of remote neuro-monitoring and seemed to offer strong sales and profits and the possibility of rapid growth, all at a pretty reasonable price. To be fair, they actually did deliver on the growth side of the equation as they expanded into multiple new territories over the subsequent years and dramatically grew the number of procedures they performed. But those sales and profits that had attracted me to the company in the first place turned out to be largely illusory.
Owning this stock has been a water torture, drip, drip, drip of bad news. First, company management was found misusing company funds and then subsequent repeated and escalating receivable write-downs ensued as insurers simply refused to pay up for the services Assure was billing them for.
All along the way, it looked as if maybe the stock had hit bottom. With each restatement I was left thinking that perhaps the bad news was finally all out in the open. The company had examined their billing history and made the appropriate adjustments and now it could move forward with a clean slate. Even with the adjustments, I would argue, the company looked reasonably priced, especially considering the hit that the share price had taken, and the still-favourable growth prospects in front of it. Inevitably, this hope was dashed as yet another revenue restatement ensued.
Last quarter probably should have been the straw that broke the camel’s back for me. A new $15 million write down of receivables was announced and with it, quarterly revenues were revised down to a mere $4 million. But the full impact of this adjustment didn’t hit me until Q3 results were released last night. At the current rate of revenue accrual, the company is losing money. And a fair chunk of it at that. Debt has accumulated to an uncomfortable degree and they announced a substantial share dilution to raise fresh capital to fuel future growth initiatives.
All things considered, I am struggling to make the current share price look like a bargain in light of these developments. With profits at least temporarily on hiatus, I have to fall back on making very rough guesstimates as to what a reasonable price to sales ratio might look like for a company like this. This isn’t really my bag. I love investing in profitable growth but investing in unprofitable growth for growth’s sake, not so much.
I’ve decided to leave the next chapter of Assure’s future in other investors’ hands and blew out my entire holding of Assure today at what could well turn out to be a bargain price for some other lucky investor. It is with some sense of relief that I say farewell to this company and try to look on this episode as a useful but painful education in the byzantine workings of the US medical system.
Adcore
When it rains, it pours. Adcore too came out with some disheartening news last night. Customer “A” (as they refer to them) announced that they would no longer be in need of Adcore’s services. This customer was a major client for Adcore, accounting for around half of overall revenues. What’s more, these were high margin revenues that made an outsized contribution to Adcore’s profitability. With the loss of this customer, Adcore would be scrambling to make up the lost sales and profits.
The news was not all bad. Management reported that business is booming and they expect to largely be able to replace this lost revenue with new client wins. Their new Hong Kong and Australian offices are doing very well and they continue to refine and add to their technology product offerings.
I considered hanging on to this stock to see how they might fare over the coming year. But again, I am worried about the profitability side of the equation. Profits have been slumping as they have been ramping up expenses to fuel expansion. The customer they lost was a high margin contract for them and while they might be able to replace the lost revenue, the lost profits may turn out to be harder to come by. Like Assure, I am left making somewhat vague price to sales types of calculations. This type of investing is too nebulous for my taste.
I suspect that both Assure and Adcore will continue to grow over the coming years. The future actually looks reasonably bright for both of them. But the question is whether the current share price is low enough to let investors fully participate in that growth. I’m not sure it is. I’d like to have a bit more certainty in that regard. Without a reliable profitability anchor to tie my boat to, I feel cast adrift.
So I have sold both stocks. I will lick my wounds and studiously avoid checking the share prices for a couple of months at least, as in the current frothy market environment I could see either company catching the eye of more speculative investors. Watching the share price run away without me would just add insult to injury.
100% Probability Of Precipitation
In reference to the stock market, Citigroup just announced that they see a “100% probability of losing money in the coming 12 months.” This is owing to the extreme nature of their panic/euphoria indicator which is currently sitting deep in euphoria territory.
I’m not sure I’d peg the number quite that high myself, but I certainly understand their apprehension. With the sale of Adcore and Assure, I have a bit of extra money sitting around. I’m happy to let it sit in cash for the time being.
Full Disclosure: I do not own shares in Assure Holdings or Adcore.