I have been known to bottom fish, dumpster dive, or however you describe taking positions in down-and-out names that have experienced radical declines. When I've done so, there always has been a method to the madness beyond just the fact that a particular stock's price has fallen precipitously. It could be that there's a significant amount of net cash or other assets; or perhaps the company could be in an industry that the markets have decided to overly punish due to guilt by association or the presumption that the whole sector is on death's door. That is what happened last year in specialty retail.
However, buying distressed names is not for the faint of heart, and it does not always work. You sometimes can get lost in the web of your own analysis and not see the forest for the trees. Distressed stocks are sometimes priced appropriately; the market does get it right often enough, and failing companies are just failing companies. Making the correct determination between what will and won't recover among the distressed is certainly not easy. It is fun when it works, and that goes well beyond monetary rewards.
This past week, Super Micro Computer Inc. (SMCI) has been embroiled in a manipulated hardware controversy that sent shares down 41% last Friday, up 19% on Monday, then down 18% on Tuesday. An unidentified U.S. telecommunications company allegedly discovered the compromised hardware in August; according to Bloomberg Businessweek, a Super Micro Computer product contained sabotaged chips intended to spy on U.S. companies.
Super Micro Computer was cheap enough last December, trading at less than 2x net current asset value, to be included in my 2018 Double Net Value Portfolio. The company's current forward price-to-earnings (P/E) ratio is just 5, although only one analyst covers the name, so it's not much of a consensus.
However, even I am not intrigued in this story as an investment. It's too volatile for me. If the stories are true (and SMCI has issued denials), who is going to want to buy the company's products? How would it earn back the trust of its customers? If it's not true, this is at the very least a PR nightmare. Adding insult to injury, Super Micro Computer is behind in its required Securities and Exchange Commission (SEC) filings and the stock was suspended from trading in late August, although it was on appeal and not delisted and continues to trade.
The stock's volume has been high over the past four sessions, so there are investors trying to play this story, but I will remain on the sidelines. Maybe this story blows over and the stock recovers, but that's too big of a maybe for me. It's just not worth the risk in my view, and not the kind of dumpster diving with which I am comfortable.
