One and a half years ago, Orsus Xelent (ORS) was brought up on this site as a potential stock idea. Despite the numerous risks cited in that article, this author went ahead and invested good money in that company. The results were bad, as the stock has fallen by about 80% since that article. Perhaps by looking at what went wrong, it will be possible to avoid similar such mistakes in the future.
The first risk outlined in the article had to do with Orsus’ customer concentration. Specifically, this distributor concentration led to a huge receivable balance on Orsus’ balance sheet. The stock traded at a massive discount to net current assets, but this receivable balance was the largest component of the company’s current assets. Unfortunately, this customer has been unable to make good on its obligations, and Orsus has now written down much of this balance.
Because of the size of the receivable due from this customer, Orsus did insure a large portion of it. Unfortunately, it did not insure enough of the receivable, as the write-down now brings the company to a negative equity position. In other words, the discount to net assets at which this company traded is not only gone, but the company’s obligations now outnumber its assets! So while the margin of safety looked large numerically, it was in fact quite weak because it was dependent on the ability of a single customer to pay what it owed, and that didn’t happen. Investors would do well to avoid companies heavily reliant on just one or two customers.
Another warning sign was that the company’s former CEO was selling his shares at a rather frantic pace. Insider sales are often difficult to interpret, as insiders must often sell stock to lower their own risk (diversification) or to obtain/maintain the lavish lifestyles by which many managers are seduced. In this case, however, the pace of the sales was so strong (resulting in price pressure on the stock, which no seller would want to do unless he was very motivated) that maybe I should have gotten a clue.
But despite these adverse occurrences, I could have sold this stock for only a small loss. But I believe I instead fell victim to loss aversion bias, whereby I held out hope for a profit in order to avoid realizing a loss. Had I encountered this company a year after I did, I don’t think I would have been interested in purchasing shares due to the company’s inability to collect its receivables over this period. Nevertheless, I continued to hold the stock, which was a serious error in judgment that I believe is explained by this bias.
Unfortunately, knowing about this bias was not enough to prevent me from falling victim to it. Hopefully, having learned the lesson the hard way will save me from this error in the future. I hope this is a stock most readers avoided; and if they didn’t, that they sold at a profit (which was possible) or at only a small loss.
Disclosure: None
