I made several mistakes buying shares in Ottawa-based March Networks Corp. in early 2007. Let me count the ways.
First, we were at the end of the monetary cycle in 2007, with central banks withdrawing stimulus to rein in an overheating economy. Second, I allowed myself to be influenced by the general mood of optimism and tendency toward greater risk-taking. Third, buying individual stocks requires a fair amount of due diligence, which I did not do in this case.
I had been aware of the company since 2000, which was carving out a niche in video transmission over Internet Protocol (IP). It had been started up by billionaire high-tech entrepreneur Terry Matthews, the force behind two great growth stories in the 1980s and 1990s: Mitel Networks and Newbridge Networks.
I guess I thought Matthews magic would carry over a third time. When he said video applications over Internet Protocol were an area of frontier work, an area with upside beyond belief, the Kool-Aid was hard to resist.
The IPO came in 2005 but the shares were too expensive. Then in early 2007, Wal-Mart, the biggest customer, cut back on orders for the companys IP video surveillance product. Those tidings chopped the value of shares in half and left them trading 10% below the IPO price. Thats when I bought. The shares are now sitting in my account, down 70% from the purchase price.
Recently, it occurred to me I should do some due diligence! But this time the question would be: are the shares worth keeping?
March Networkshad just days before released financial results for the three months ending July 31 (the first quarter of the companys fiscal year). At a mere $108,000, there wasnt much of a profit to report. But it was the first quarterly profit in three years.
CEO Peter Strom said: The first quarter of fiscal 2011 was very encouraging for the company as demand returned in the North American market after a tough fiscal 2010. Revenue for the quarter came in at $26.3 million, up 10% from same period in fiscal 2010.
Strom sounded a positive note for the future. Recently announced retail and banking deals [see company news releases] are expected to help drive continued revenue growth and profitability in the second quarter of fiscal 2011, he said. Dare we imagine a turnaround in the works?, I thought to myself.
Mr. Matthews remains with the company, as chairman and largest shareholder. He did sell a whack of shares about a year or so after the IPO, but his holding company, Wesley Clover Corp., still owns 3.1 million shares, or close to 18% of the amount outstanding.
Sentiment is so poor that market capitalization is not much more than cash holdings on the balance sheet. It wouldnt take much money to buy the company. Aware of that fact, management recently passed a shareholders rights plan to make it more difficult.
Alas, the customer base still appears rather undiversified. Wal-Mart accounted for about one-third of revenues in the last quarter (and Wal-Martoftendrives a hard bargain with its suppliers). Recent contract wins for March Networks, though, suggest less dependence on the giant retailer going forward.
Im not finished the due diligence, but its beginning to look like it might be worth keeping the shares, despite the risk in the customer base. In addition to the above considerations, we are in the early stages of the monetary, risk-aversion and sentiment cycles.