Red Rubber Ball
Back in 1966, a rock group called The Cyrkle recorded a song titled Red Rubber Ball (written by Paul Simon). It sold over one million copies and reached number two on the Billboard Top 100. In the summer of that year, the group would open for The Beatles at 16 of their concerts, including those at Shea Stadium, Candlestick Park, and Dodgers Stadium. Their brief brush with fame also included having Brian Epstein (the Beatles manager) as their manager. The opening lines of Red Rubber Ball were:
I should have known
You’d bid me farewell
There’s a lesson to be learned from this
And I learned it very well
Perhaps there’s also a lesson to be learned from assigning a Strong Sell, or even a simple Sell, rating for a stock recommendation on Seeking Alpha.
PFSweb to Be Acquired
Earlier this month, PFSweb (NASDAQ:PFSW) announced that it would be “ACQUIRED BY GXO LOGISTICS, INC.” for $7.50/share, “a 58% Premium to PFSW’s 20-Day VWAP”. Well, that announcement obviously provided an immediate boost to the share price, which rose from approximately $5 per share to a few cents away from the $7.50 offer. It also made several of my Sell or Strong Sell recommendations look foolish.
The GXO offer is the third major positive event involving PFSweb over the past couple of years. Just over two years ago PFSW received a Godfather Offer from Merkle, where Merkle made an unsolicited offer to buy PFSweb’s Live Area Labs unit for $250 million. At the time, I noted that the offer far exceeded the entire market cap of PFSW.
With 20,449,507 [PFSW] shares outstanding as of the end of Q1 [of 2021], that put the market capitalization at $154.8 million, well below what Merkle was willing to pay for just the LiveArea piece of the company.
Within days, the price of the PFSweb shares would jump from a mid-$7 price to more than $12 per share.
As the song continues:
I bought my ticket with my tears
That’s all I’m gonna spend
I had spent tens of thousands of dollars on our positions… far more than “tears”. I eagerly took the opportunity to sell covered calls at strike prices of $12.50 and $15.00 against most of our positions, eventually losing those positions that had been acquired during the past 20 years. The company also announced that it had retained Raymond James to explore strategic alternatives for the $185 million (after taxes) it expected to net from the sale of LiveArea Labs.
The PFSW shares would reach a high of $14.47 in late 2021, but apparently Raymond James was unable to find any such alternatives, and the company decided to pay a $4.50 dividend towards the end of 2022. Then, earlier this year, PFSweb announced that a relatively small portion of the remaining windfall would be used to fund a one million share repurchase program.
Impact of Recent Share Buyback
With some of the remaining windfall pile of cash being used to support the price, I then took the opportunity to increase my rating from a Strong Sell to a simple Sell rating, noting that I saw little reason to expect that relatively small buyback to have a significant impact on the share price, but that the price might stabilize.
My main concern was what I considered a bloated – and overpaid – upper management that would be unable to respond to increasing labor costs and a potential slow-down being engineered by Jerome Powell and the Federal Reserve. As it turned out, the shares would regularly trade below $4 per share, potentially making the small buyback more effective and more efficient.
What’s next? The lyrics of Red Rubber Ball continued:
…The story’s in the past
With nothing to recall
I’ve got my life to live
And I don’t need you at all.…
The worst is over now…
“The worst is over, now” – meaning the sharp gyrations in the price and the paper losses I had seen on some of our positions. Those sharp gyrations included a price that would recently peak at $7.36 before falling back below $4.00. I hadn’t been too surprised to see the shares dip back to low single digits, and admit I remain puzzled by the GXO offer. I had previously written about the high compensation paid to top executives, and trimming those positions to save millions of dollars per year might have been factored into its offer. Or, it could be that GXO sees some other synergies with certain luxury brand relationships managed by PFSW.
Regardless, having tendered our shares, I expect to soon be a former owner of shares of PFSW. I will have come full “Cyrkle” and be reminded of the way the song concludes
…The mornin’ sun is shining
Like a red rubber ball…
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