One of the risks of investing in small caps is lack of liquidity, and shareholders of Trans World Media Entertainment (TWMC), operator of f.y.e. (For Your Entertainment) stores, were reminded of how illiquid their stock is when CEO Robert J. Higgins withdrew his proposal to acquire the firm. The stock fell not only after the announcement, but was down already some 10% during the day just prior to the press release. Some shareholders seem to have known the news before it was published.
While the SEC is busy going after investment bankers and lawyers who benefited from insider trading in some of the largest buyouts, we encounter occasionally noteworthy price action just before significant events in smaller mergers – and nobody seems to care.
We were somewhat annoyed recently when another stock we hold jumped 10% a few hours after we submitted a shareholder proposal to the firm. (We will not name the firm here because the company has not yet filed its proxy with our proposal with the SEC.) The proposal was delivered at 11:15 a.m. To the mailroom, and probably took a few hours to make its way to the executive office in an adjacent building. In the afternoon, the stock jumped over 10% on volume of 60,000 shares – compared to a daily average volume of only 5,000, according to Yahoo Finance.
We have no idea who sold their shares, but can’t help the feeling that something just wasn’t right in these two cases. There is a plethora of over 100 government agencies that could get involved – the SEC, FBI, DOJ, some 50 state attorney generals and as many state security regulators, not to mention the self-regulatory organizations, FINRA and the exchanges – so we would expect that at least one of them takes action. The SEC appears to expend so many resources going after the well publicized Wall Street insider rings that they appear to have no bandwidth left to police the rest of the market. We are slowly loosing faith in the markets, and as taxpayers and investors paying the 0.0011% regulatory SEC fee on every sale.
In the meantime, the TWMC trades at a deeply depressed level that does not reflect some of its strengths. We will happily acknowledge the weakness of music retailing, but TWMCs gaming segment is growing strongly at 14% per year. Its market capitalization of $75 million compares favorable to some other metrics – cash on balance sheet of $75 million, and inventory exceeds all liabilities by $100 million. Even liquidation looks quite attractive at a stock price of $2.50. We are not quite sure why Higgins and Riley could not get the necessary funding for the buyout, but the market discounts that stumbling block by too large a margin. At $1.2 bn in sales, it would make more sense to sell TWMC to another retailer than to try to take it private through a financial buyout.
Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of Trans World Entertainment.