Hummingbird Buys Into Sangoma
I'm happy to report that my favorite stock - a tiny VOIP company whose shares I've been buying up madly for the past three years (to the point where it dangerously represents most of my savings), and which has laid dormant for much of this time - has found a new and powerful admirer.Sangoma Technologies Corporation is a very small company in the VOIP arena. They are still very much under the radar.
My average buying price is about 30 cents over the past three years. The stock is still only trading at about 45 cents. The company has no debt. They have been generous with dividends for the past three years. A month ago they recorded their latest and best quarterly earnings. About $1.3 million with net revenues of over $300,000 for the three month period. There are less than 28 million shares outstanding. They have lots of cash in the bank and their prospects look very good. Their closest competitor is probably the much better known Digium. In my opinion, the stock is very undervalued now. Disclaimer: Obviously given my big personal stake in this company, I have a bias toward this company.
Well I just found out that an investment group based out of New York has recently been quietly buying up Sangoma shares. They are the 'Hummingbird Value Fund'. As of June 15th, they had bought more than eleven percent of the total outstanding shares of Sangoma.
At first I thought Hummingbird might be related to Hummingbird Ltd., the technology company. But this doesn't appear to be the case. There is very little info out there about Hummingbird Management LLC and the Hummingbird Value Fund.
The key person behind Hummingbird seems to be Paul D. Sonkin. Sonkin, at a young age of 38, has some very high-level credentials. He has served as the Chief Investment Officer to Hummingbird Value Fund since its inception in December 1999. Since January 1998, Sonkin has been an adjunct professor at Columbia University Graduate School of Business, where he teaches courses on security analysis and value investing. From May 1998 to May 1999 he was a senior analyst at First Manhattan & Co., a firm that specializes in mid and large cap value investing. From May 1995 to May 1998 he was an analyst and portfolio manager at Royce & Associates, which practices small and micro cap value investing. Mr. Sonkin is a member of the Board of Directors of Vodavi Technologies Inc. (NASDAQ: VTEK), a company that designs, develops, markets, and supports a broad range of business telecommunications solutions. He received an MBA from Columbia University and a BA degree in Economics from Adelphi University.
I also see that Paul Sonkin is a big follower of Security Analysis, the classic investment book by Benjamin Grahan and David Dodd that came out just after the Great Depression. Here's a little gem of info I found at WallStraits.com about his investing style:
"The book is currently in its fifth edition, but Sonkin and many value buffs prefer earlier versions. For Sonkin, the third edition, published in 1954, stands out. It is the last one actually written by Graham, and thus it benefits from the enriching of his own experience between the depths of the Depression and the post-war recovery. Sonkin also appreciates the letters that Graham wrote to the investors in the Graham-Newman partnership, as he does Warren Buffett's letters from the days before Berkshire Hathaway, when he was running the Buffett partnerships that made so many of his investors into genuinely wealthy people.
Sonkin has less interest in, if no less regard for, the Berkshire annual letters. They date from a period in which Buffett had so much money to invest that he was forced to concentrate on large cap stocks that he could hold forever. Though the value discipline can still be applied in these circumstances, it is considerably more difficult. The investor is now betting against some of the most informed and intelligent players in the game, and the margin of error, if not the margin of safety, has been squeezed. Like other value investors, Sonkin prefers games with few if any other participants.
Following Graham, Sonkin's favorite place to locate value is on the balance sheet. And here, the higher up the asset list--cash and accounts receivable--the better. Though Graham's net-nets are much harder to find today than in 1934, the only place where one has a chance to locate any of them is in the small and especially the microcap area. No decent-sized company is going to escape the searches that investors perform every day looking for value. The small ones may not escape either, but people managing big pools of money will still stay away, and occasionally a net-net may fall through the cracks.
There is a better chance of finding a company that is still cash rich, though it doesn't meet the net-net standard. Sonkin loves to spot situations like the following. Say the firm has a market capitalization of $20 million with earnings of $1 million. Ordinarily this looks like a price earnings ratio (PE) of 20, and in most cases the stock is no bargain. But if the company has $15 million of net cash (cash after all the loans have been subtracted), then the whole company can be bought for an outlay of $5 million. The real PE is closer to 5 (the interest earned on the $15 million has to be subtracted from net income), and the stock becomes a screaming buy."
and another excerpt;
"The standard arguments in favor of small companies are that they have better growth prospects than those that are already large, that they can be more nimble to take advantage of new opportunities or changes in markets, that their shares may be a bargain because many funds are prohibited from owning them, and, finally, that because there are fewer if any analysts following the company, information or insight about the company is less likely to have already been incorporated in the share price.
If there are 500 analysts following General Electric (not an extreme estimate, based on the number of institutional accounts that own the stock added to the sell-side analysts who cover it for the brokerage firms and all the other experts), the 501st is not likely to add much to the store of information or understanding about the firm. But if there has been only one analyst covering the company, a second one certainly has a chance of discovering something important. And if the analyst is not publishing the findings but is using them to make investment decisions, then the value of that research and analysis should be found in the portfolio's performance.
Sonkin agrees with all these reasons and adds another: Small companies are much easier to understand. Both their financial statements and their business models tend to be simple. Usually they operate in one line of business, not the 5 or 15 of a Standard & Poor's 500 firm. They probably have a few competitors and a few major customers. It takes almost no time to make the phone calls that analysts rely on to feel comfortable about the business. PUt in economic terms, the marginal value of time spent studying a small company far exceeds that spent on a large one."
"The standard arguments in favor of small companies are that they have better growth prospects than those that are already large, that they can be more nimble to take advantage of new opportunities or changes in markets, that their shares may be a bargain because many funds are prohibited from owning them, and, finally, that because there are fewer if any analysts following the company, information or insight about the company is less likely to have already been incorporated in the share price."
See the full article about "Sonkin on small-cap Investing" at WallStraits.com. Much of their article is extracted from the book 'Value Investing' by Greenwald et al, 2001.
Needless to say, I'm hoping Sangoma is one of those investments that goes from pennies to $3.00 in the next year or two. (All dollar amounts quoted here are in Canadian, which is about 90% of the US dollar now.)
