JCTCF -- “Da Bulls” -- Part II

In the previous post I made the case that the only reason to own shares of JCTCF is due to the company’s growth and high profitability of the company’s non-wood products segment that is hidden within the company’s commodity wood business.

I also believe that there is evidence that management--who are the largest shareholders with 37% of the stock and effectively control an additional 16% owned by the ESOP--thinks that the stock is worth a lot more than the current market value.

Now, we all know that a management team that SAYS their stock is worth more than the current share price is easier to find than a Democratic politician bending over for the labor unions or a Republican paying homage to the religious right ayatollahs.

However, I think in the case of JCTCF there is some tangible evidence that management really does believe that a minority share of their little company is worth more than its current price.

The company re-filled an S-1 form in September 2006 notifying shareholders that they are looking to sell 500,000 shares to the public which if completed would increase shares outstanding by 25%. The shares would be sold at $20 per share which based on pre-split figures represented a roughly 50% premium to market price and 170% premium to book value.

There are a few nuggets in the filling that give me a warm fuzzy feeling. For starters, this is being done on the cheap. This is a self-underwritten offering with the company spending $125,000 which is 1.25% of gross proceeds and substantially less than the 6% or so ibanks charge.

Also, I could not find any evidence that management is going to be selling their own shares as part of this offering. This means that management is not cashing out and is willing to accept 25% dilution in the ownership of the company. I can only think of one reason why they would do this which is that they believe the cash can be successfully reinvested (this must surely be to grow the non-wood business) and they will be better off owning a smaller portion of a much larger pie.

Finally, this stock will be sold only in two states Washington and Oregon and only by Donald Boone (who is the President and CEO and owns 24% of the stock), Michael Nasser (who is the Secretary and owns 13% of the stock), and two other directors. They will personally solicit potential shareholders with the “intended offerees will be friends, family, and business associates of the our Management.” The filling does state that a broker-dealer maybe engaged to sell the shares, but I don’t believe this has been done yet.

What is so important about people asking their friends and family for money? This happens every day.

The important part is that when you have to pick up the phone yourself and call someone you have a personal relationship with and ask them for money you think differently about the offering price and the outcome than you would if you let Mr. iBanker sell to Mr. Fund Manager. When you are selling to people you know and presumably want to keep knowing, you are much more likely to charge them a fair price which leaves a lot of room for upside. You are also much more likely to be careful with the money they give you.

I should note that management has been unsuccessful in getting this offering done since at least 2004. Does this concern me?

I am not happy about it primarily because I am bullish on the company and think a lot of money has been left on the table.

However, I am glad to see that the offering price has been increased to $20 from $7 (see 2004 S-1)

Also, as a current shareholder it gives me confidence to know that management is willing to sell the stock to friends and family at a much higher price than the shares currently trade. I think the only reason they would do that and be willing to accept dilution of their ownership stake is that they truly believe their stock is worth more and they can successfully reinvest the cash.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.