Bogumil Baranowski – Be Careful With Businesses in Secular Decline

BIO: Bogumil Baranowski is a founding partner of Sicart Associates, LLC, a New York City investment firm. He has almost two decades of investment experience. STORY: Bogumil invested a lot of time and money in two companies that were drowning in debt, had poor management, and had a secular decline. LEARNING: Just because it’s cheap, don’t compromise on debt, management, and secular decline. Debt is the number one risk for an existing company.  “Yes, you can make money, but keeping it is equally as important.”Bogumil Baranowski  Guest profile Bogumil Baranowski is a founding partner of Sicart Associates, LLC, a New York City investment firm. He has almost two decades of investment experience. He holds a master’s degree in Finance and Strategy from Sciences Po Paris and a master’s in Finance and Banking from the Warsaw School of Economics. He is the author of Outsmarting the Crowd and Money, Life, Family. He is the host of the Talking Billions Podcast.Worst investment ever In 2011, Bogumil picked up Verifone stock because it was cheap. The company had just acquired Hypercom, one of its competitors. It looked like they were well positioned, with Ingenico being the other competitor to coexist in a growing industry. Bogumil paid attention to how cheap the stock was. However, he had questions about how the merger would go, and the management was questionable. But Bogumil thought the price was so reasonable. So he overlooked the debt added for the acquisition and the fact that management was not exactly the team he was comfortable with. Soon enough, the management changed. There was a temporary chairman who even went to Bogumil’s office for a chat. Bogumil and his team invested so much time in understanding all the Verifone’s pieces, the payment systems, and how its products are sold. Then the stock started going down and got to 50% of his entry point. The earnings were also dropping, but Bogumil kept holding onto the stock. Then the tipping point came when Bogumil met with the new management. He didn’t like their approach, so he finally dropped the stock. He walked away with about a 70% loss at the time. Bogumil also shared an interesting case study, a South African retailer - an example of what can go wrong. The company was importing furniture from communist countries and then reselling it at very good prices. So it was a good business. One of the managers decided to get more aggressive with growth, and the company ran into some trouble. Bogumil looked at this company because some people had told him it was an exciting story. He had reservations about retail but put the company on the list regardless. Bogumil did his research well. Five minutes into reading about the company, Bogumil was ready to say no, no matter who was recommending it. But he decided to use it as a case study to teach his interns. The company was piling up debt quickly, and the market cap reached 20-something billion. It was the zero interest rate time in Europe, and money was so cheap. Businesses could easily get loans. This company accumulated about 20 billion in debt and was not picky about what it bought. The company purchased a US mattress business rolling up at a very high premium (over 100%). Bogumil...