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To
OTC Journal Members:
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Cross Media
Marketing (AMEX: XMM)- Anatomy of a Disaster |
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Until the third week of June, Cross
Media Marketing was the one stock which was still a significant win
for the OTC Journal in the worst Bear Market of modern times.
We introduced the company to members
on November 5, 2001 at $6.70. Since that time the stock reached a high
of $14.89 (122% gain) back on April 8th, and recently had
been trading in the $9 to $10 range when disaster struck.
We had a $20 price target on the stock, and called it our
best idea of 2002.
In a market environment where fund
managers sell everything first and ask questions later, the management
of Cross Media Marketing could not afford to make the mistakes they
made in forecasting their sales and earnings for 2002. This market takes
no prisoners, and mistakes are magnified one hundred fold.
Their inability to monitor internal
performance has cost investors a lot of money. Moreover, the performance
of the stock prior to changing conditions disclosed in last Friday's conference
call suggests someone knew what was happening at the company before management
knew, which is probably the ugliest factor in this whole mess.
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Recent
Interview With the OTC Journal |
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Shares of Cross Media Marketing
closed
at $10.19 on June 11th, and dropped to a closing price of $8.70
on June 12th. This sudden drop in price became cause for concern. We
wondered if the drop was a harbinger of future negative events, or a buying
opportunity.
Rather than speculate, we chose to
invite the Chairman, Ron Altbach, to be interviewed about the state
of the company. Here is an excerpt from the interview we recorded on June
14th and published on June 17th:
| [OTC Journal] Let’s talk
about some of the hard numbers right now. Ron, you have publicly stated
that you expect to achieve $210 million dollars in revenues this year with
earnings in the $1.25-$1.30 per share range. Do you feel like the
company is on track to achieve those results?
[Ron] Absolutely, we have
been very accurate in being able to project our business. Why is that?
Because we understand testing, we understand response rates, and we understand
results. Our business really depends on our ability to source data, to
understand data, and to act on that data.
Having said that, is it possible
that there might be some slight dip from the FTC in the second quarter
in our sales? Absolutely. Can we make it up in the third and
fourth quarters? As we did last year, we projected this year to be
very much heavily weighted in the third and fourth quarters and we delivered
last year.
We fully believe that we are going
to deliver the numbers that we projected for the year.
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Based on Mr. Altbach's comments that
the company was still on track to achieve $1.25 per share
in earnings this year, we felt the stock was very undervalued.
On July 1st, a brief two weeks after
we conducted our interview with Ron Altbach, shares of Cross
Media began plunging rapidly in a tailspin which accelerated for ten
days and culminated in a stock now trading in the $2.50 range, 75% the
below the levels at the beginning of the month.
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We
Took Our Losses Along With Everyone Else |
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As we have disclosed in many of our
past editions on Cross Media, one of our editors purchased 3000
shares of Cross Media in his own account in the open market at an
average cost of $9.185.
The shares were held in a margin
account, and as the stock began dropping, our editor was getting margin
calls. Here is the net result of his personal trades in the month of July:
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Sold 500 shares on July 2nd at $8.70
to meet margin call.
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Sold 500 shares on July 3rd at $8.05
to meet margin call.
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Sent in $2000 in cash to meet margin
call on July 8th.
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Sold 300 shares at $4.91 to meet margin
call on July 11th.
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Sold 1700 shares at $4.30 on July 11th
to avoid forced liquidation.
-
Net Loss for investment: $10,633.97
with costs included.
We went down with the ship along with
everyone else, and took a substantial loss. We believed the management
of the company was giving us accurate information. We were wrong and management
was wrong.
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What
Happened? |
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Cross Media held a conference
call last Friday morning prior to the market opening to bring investors
up to date on recent their sales and earnings forecast for the June quarter.
In the conference call it was disclosed
management was revising its expectations for the June quarter. They were
previously expected to make a profit. They now expect to lose $.11 to $.14
per share. This revelation came on July 12th, less than four weeks after
Ron Altbach stated in our interview they would make a profit.
Furthermore, the stock had been falling
off a cliff a full ten days prior to this public disclosure, suggesting
this information was available to someone. According to security laws every
investor is supposed to have access to the same information at the same
time. Management speculated word could have gotten out through their subcontractors
and suppliers before they even knew some of their divisions were doing
poorly. This is certainly problematic and shareholders deserve an explanation.
Hopefully it will be forthcoming. In fact, we suggested to Mr. Altbach
that the company request an SEC Investigation into the trading activity
of the stock.
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Where
Do We Go From Here? |
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Management stated in last Friday's
conference call they believe the June quarter was an aberration. All three
areas of their business were weak- telemarketing, print media, and internet.
Each was weak for its own individual reason, none having much to do with
the economy.
They believe the ship has already
gotten back on course. The Internet travel club initiative they put in
place has now been dropped, and they had projected it would add $.45 per
share to the bottom line this year.
Telemarketing suffered worse than
anticipated as a result of the previously disclosed FTC action, but they
claim the division is back on course.
Print media through National Syndications,
which owns Parade Magazine, had a temporary problem, and management claims
this division is back on track.
Of course, in light of what management
was telling us back on mid June, one wonders whether any of these statements
have any basis in fact. If, what they are telling us is true, this stock
is a bargain basement buy. If the problems, excuses, and inaccurate information
continue, any investment in this stock could be dead money or continue
losing value indefinitely.
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A
Clue |
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If management knew the company was
having a bad quarter at the end of May when they reaffirmed guidance, and
knew when we conducted our Mid June interview, then they should be immediately
hauled off to jail.
If management simply made an outrageous
mistake by not properly monitoring it's divisions, and really did not know
the company was going to have a bad quarter in June, the stock could end
up being a great buy at these levels. Having made a mistake of this magnitude,
one would expect management will err to the side of caution in the future,
and undoubtedly over perform on any future projections.
There is one clue which leads us
to give Cross Media the benefit of the doubt. In order to perpetrate
a scheme to defraud investors as in the WorldCom and Enron cases, there
needs to be a benefit to management. In the case of both Enron and WorldCom,
management was exercising options and dumping stock on the unsuspecting
public in order to line their own pockets.
The OTC Journal has learned
two facts which lead us to believe this was not the case at Cross Media.
First, during the month of June, no senior management sold any shares.
If they were going to mislead investors for their own benefit they would
have been sellers.
Secondly, the OTC Journal
has learned through an SEC filing made today that the President, Richard
Kaufman, did in fact buy for his own account in June. He bought 1000
shares at $9.10 on June 19th, suggesting he had no idea Cross
Media was having a bad quarter. This helps alleviate suspicions of
wrong doing.
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Conclusion |
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We were emotionally charged and contemplating
an extremely nasty article on Cross Media last week. However, we
decided to get all the facts, and evaluate the situation with a cool head.
We now believe management made a
colossal and incredibly costly mistake which hurt a great many of us badly.
If the company does get back on track from here forward, the stock is a
great buy at these levels.
Risk factors include continued poor
corporate performance and the possibility of litigation or additional regulatory
related legal fees.
Current shareholders should probably
hold as the serious damage has already been done. High risk oriented investors
should probably roll the dice at these levels. Prudent speculators should
wait for actual June quarter results and an updated forecast for the remainder
of the year. We believe the stock now has upside potential to about the
$10 range this year, especially if the company manages to settle the FTC
matter successfully and general market conditions improve. If the next
30 days do not bring any news of litigation, this stock could rebound,
but we now place the shares in the high risk category. Unfortunately, all
stocks seem to be high risk these days.
Our editor is considering repurchasing
the shares he sold. After all, the stock owes him about $10,000 now.
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