CECE

[tokyopua]

Guess nobody likes the news on this....down 8% in after hours. Yuck!

Consider too that the news hasnt been posted yet on Yahoo...

[wxmang]

Correct me if I am worng, but this can't be a bad thing..
Paying down the debt of the company by using some of the built upshare price.

Dave, what is your take on this?
I would think we should back up the truck on a any kind of pullback, wouldn't you agree?

Thanks,

Wx

[DragonAMG]

Correct me if I am worng, but this can't be a bad thing..
Paying down the debt of the company by using some of the built upshare price.

Dave, what is your take on this?
I would think we should back up the truck on a any kind of pullback, wouldn't you agree?

Thanks,

Wx

The more I think this through... the more it actualy makes a lot of sense.  Converting from insider ownership to publicly owned shares will allow institutions and funds to begin buying this stock. 

David - we all would really like to know your take on this.  We eagerly wait your reply.

[JKN]

Paying off debt can't be bad.  I was hoping to get Dave's take on this early.  I have to be out all day...

[David Randolph]

Paying off debt can't be bad.  I was hoping to get Dave's take on this early.  I have to be out all day...

Just 2 minutes more JKN, it's almost done.

[David Randolph]

Dave, what is your take on this?
I would think we should back up the truck on a any kind of pullback, wouldn't you agree?

Let me study the news in detail and see how it impacts the long term valuation model. But, whatever the impact is, I never average up or down, as that would disrespect the money management rule of diversifying capital through 15 different holdings to be full invested.

As I've written previously (but not to you, since you're a recent subscriber to 3 SOF Premium), we already need to know what to buy and at what price, we don't need to wonder about how much to buy, that should always be pre-set and shouldn't change on any occasion.

David - we all would really like to know your take on this.  We eagerly wait your reply.

Hi dragonamg, I always update the analysis on all holdings of the Main Portfolio when the market is closed, but sometimes I do it right after the close, other times I do it before the open, it depends. But either way, the market is closed, there's nothing you can do, so relax

Let's get to the point now, the news out after the close was:

FORM S-3 CECO Environmental Corp

In my model I had 11.5 million as the initial share count and 13.3 million as the final estimated share count, that lead me to dilution factor of 1.05. The 1.8 million difference is what was expected, and corresponds to the following part:

«the expected exercise of the warrants by the selling stockholders to purchase 1,749,500 shares of common stock with a weighted average exercise price of $2.68 per share, which are included in this offering;»

Let's consider the Offering part of the prospectus and include everything the company is excluding from the # of shares outstanding after this offer:

Common stock to be outstanding immediately after this offering(1): 14,256,809 shares

+ 283,000 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $4.51 per share as of April 9, 2007;

+ 750,000 shares of common stock issuable upon the exercise of outstanding warrants (other than the warrants that are expected to be exercised by the selling stockholders and included in this offering) with a weighted average exercise price of $4.98 per share as of April 9, 2007;

+ that the underwriters do not exercise their over-allotment option to purchase up to 502,225 additional shares in the offering from us.

The total number of shares outstanding will be: 14,256,809 + 283,000 + 750,000 + 502,225 = 15,792,034.

So, I need to change the initial share count number in my model, from 11.5, to 15.792034. I'll continue to assume a 1.05 dilution factor going forward:



The stock remains attractive, but a lot less than what it was previously. The share price CAGR estimate declined from 46.8% previously to 33.4% now. The optimal selling price declined from $29.32 to just $21.66 now.

But, as I read more of the risk factors and other information, I get quite worried. The selling stockholders are the insiders:

«Phillip DeZwirek, Jason DeZwirek, Richard Blum, David Blum and Lawrence Blum are the selling stockholders in this offering. Phillip DeZwirek is our Chief Executive Officer and Chairman of the Board; Jason DeZwirek is our Secretary and a member of our Board of Directors; Richard Blum is our President and a member of our Board of Directors; David Blum is our Senior Vice President; and Lawrence J. Blum is Vice President of Kirk & Blum. The selling stockholders are offering an aggregate of 2,348,166 shares of our common stock in this offering. We will not receive any of the proceeds from the shares offered by the selling stockholders.»

Moreover, the proceeds the company will get from the conversion of warrants, will partially be used to pay a company controlled by insiders:

«We will use approximately $5.9 million of the net proceeds from this offering to repay all of our subordinated debt and accrued interest payable to Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. Green Diamond is an affiliate of Phillip DeZwirek, our Chief Executive Officer and Chairman of the Board, and Jason DeZwirek, our Secretary and a member of our Board of Directors.»

They're also selling their biggest factory and corporate headquarters and still don't know where they're going next, which is weird:

«The relocation of our largest manufacturing and corporate office facility located in Cincinnati, Ohio could result in a negative impact on the Company's financial performance.

We have entered into a purchase agreement for the sale of our largest manufacturing and corporate office facility in Cincinnati, Ohio. The agreement, which may be terminated by the purchaser for any reason prior to July 2, 2007, provides for the 10.7 acres of real estate and improvements to be divided into two parcels, with the closing of the first parcel scheduled to occur on or before July 16, 2007, provided that the purchaser makes a required payment to us by July 2, 2007. The closing of the second parcel would occur on or before the later of March 25, 2008 or 30 days after we have vacated the second parcel, subject to certain conditions. The closing of the sale is subject to customary closing conditions and the negotiation of our rights to occupy both parcels for a period of up to 10 months following the first closing. There is no assurance that the sale will be consummated. We will be required to relocate all of our manufacturing operations and administrative offices that are currently being performed at these facilities. Although we are currently making plans to vacate these facilities, we have not located replacement facilities for our operations. If we are unable to locate replacement facilities and relocate our operations within the required time periods, our manufacturing operations and administrative activities may be disrupted and we may be required to incur additional expenses, which may have an adverse impact on our business and results of operations. In addition, the disruption on our manufacturing operations and administrative activities during the relocation, and additional incurred expenses may also have an adverse impact on our business and results of operations.»

This and other information about seasonality and the risk of lower margins leads me to lower my estimates on other variables of the valuation model:



Ouch. Just because I lowered the net profit margin estimate from 4% to 3%, and the EPS multiple estimate from 45 to 20 (45 is the industry average, but with this kind of dilution, I realistically don't see the market pricing it at more than 20 times earnings).

So, with the current estimates the model says CECE will decline 7.5% a year, on average, for the next 3 years, and CECE went from attractive to avoid.

The trading plan is:

SELL CECE.

So, what went wrong on CECE? As I read this thread again and watch the video analysis, I believe I didn't pay the necessary attention to the balance sheet, which is extremely weak. I failed to see the composition of current assets, which, wow, is 93% composed of receivables and inventories, but especially receivables. This was the clue to know they would dilute shareholder's value, the way they're announcing now, in advance.

I believe the new balance sheet graph, with the composition of current assets and its evolution, will avoid this mistake in the future.

Again, the trading plan for CECE is SELL.

[raspi]

Just got out at $13.65... I only bought yesterday at $14.1, so it's not so bad after all.... It seems that I have an extraordinary talent to pick up 3SOF's holdings that do not perform that great :-(... I do not have enough funds to hold 15 stocks and instead of buying SILC and CIMT.. I went for CECE :-(

[sfhappyfish88]

I do that too.  But with Zecco trading, I can diversify a little bit more since they don't charge commission fee.

[David Randolph]

Just got out at $13.65... I only bought yesterday at $14.1, so it's not so bad after all.... It seems that I have an extraordinary talent to pick up 3SOF's holdings that do not perform that great :-(... I do not have enough funds to hold 15 stocks and instead of buying SILC and CIMT.. I went for CECE :-(

In that case you should consider the 3 Stocks on Fire Portfolio holdings going forward, that's the current and future purpose of that portfolio. I believe you went for CECE because you could buy it lower than the Main, but you should be more suspicious of the losers and more confident about the winners, because trends usually persist. If a stock is above my purchase price, I was probably right, so the stock will continue to appreciate. If it is lower than my buying price, I may be wrong, and the loss will just get bigger.

Anyway, great timing on that sale, much better than mine, I got out around the open at $12.75 (my execution skills are lousy, which means almost always you get a better entry and exit point than the Main Portfolio).

By the way, currently the most attractive stocks on the Main Portfolio, in this order, are: SILC, CIMT, GIGM, NVTL.

Good luck

[wisebuys]

Your timing was a lot better than mine.  But losses are to be expected.  I must admit, I do prefer Dave's new approach for looking for long term companies rather than trades.  Especially since I always tend to get burned on my entry and exits.  I would much rather hold onto a great company and grow with it.

[soxguy]

I sold this morning at 12.85. Just got home and cece is almost back to even. Why didn't the market interpret the news as terrible?

[raspi]

i just sold the second half of my holding... I think the news is definitely a bad one and I do not understand todays action... I am however really glad it only cost me few dollars 

[tokyopua]

I learned an important lesson here about analyzing the current assets composition as you mentioned David.  

I dont remember Mastering Fundamental Analysis saying anything specific about that when looking at the current ratio, but it does make sense that having too many receivables and not enough cash would lead to a need for dilution...

[David Randolph]

I sold this morning at 12.85. Just got home and cece is almost back to even. Why didn't the market interpret the news as terrible?

I don't think you should say right away that the market didn't interpret the news as terrible, the market works in strange ways over the short term. Today's climb from the opening lows can be just a "fill the gap" kind of day, but six months from now I believe the stock will be trading below $10.

If I were to sell a big quantity of shares in the open market, I wouldn't sell them right after the news, I would try to establish a trading range where I would be distributing on balance.

That or else I was wrong on my selling call ... time will tell.

[stock]

CAN YOU CHECK  [CFPC] I WOULD LIKE YOUR OPINION