Small Cap Values

It never ceases to amaze me some of the dumb things management at a company can do, even what I consider good management.  This was just filed with the SEC by ARK Restaurants (ARKR):

During September and October 2009 the Company made advances against salary to its Chief Executive Officer totaling $298,146.91. It also loaned $160,000 to the Chief Executive Officer’s former wife. The CEO believed the advances and loan were permissible after he consulted with the Company’s General Counsel. In the latter part of November 2009, the Company reviewed these matters with its auditors. It also informed members of its Compensation and Audit Committees and outside counsel. The Company concluded that the advances and loan may be deemed extensions of credit and violative of the Sarbanes-Oxley Act. The CEO immediately repaid the remaining balance on the advances with interest. The loan to his former wife was repaid in October before the review had begun. The Audit Committee is reviewing the Company’s policies and procedures regarding payments to or for senior management, as well as the Company’s overall internal control procedures. The Audit Committee adopted changes which require that its prior approval be obtained before any extraordinary payments may be made to or at the request of management. It also directed that management undergo governance training pursuant to a program approved by the Audit Committee.

Really? How can you not know that loans to management are no longer permissible?  And what does the CEO suddenly need $460k more for anyway?  He made almost $1,000,000 last year as CEO.  He owns over 1M shares, so with the recent $1 per share special dividend he was just paid $1m from his stock.  He’ll be getting another $250k next month when ARKR pays it’s regular dividend.  I wonder what’s such a good deal, inquiring minds want to know.

This move makes the recent special dividend and resumption of the quarterly dividend make a little more sense.  It’s nice to participate alongside management when they’re paying themselves.

Disclosure: Long ARKR.

Today I’m adding ARK Restaurants (ARKR) to the Small Cap Values portfolio.  ARK owns and/or operates 20 restaurants and bars, 30 fast food concepts, and some catering/bakery operations.  They have locations in New York, DC, Boston, and some at casinos in Las Vegas, Atlantic City, and some others as well.  They’re unique in that they don’t use the ARK Brand, each one is it’s own independent name.  Some were purchased from other owners and the original name was kept, Ark just took over running it.  The company’s website is here.

One of the issues with investing in small/micro cap companies is they are quite volatile.  One large seller can push the price down.  One large buyer can have the opposite effect.  And right now someone is trying to sell ARKR.  The volume has been much, much heavier than normal the past few days, and every tick seems to go lower.  It was just a few weeks ago the stock was at $19, now it’s at $12.48, a decline of almost 35%, with no reported news.

No rational seller would push the stock down by so much, so I have to assume that someone is being forced to sell.  There could be someone with inside knowledge of a future negative announcement, but I do not believe that to be the case for two reasons: 1.) they just re-instituted their dividend, (troubled companies do not do this) and 2.) an insider bought 5k shares today and 1500 shares on the 28th.  I have no idea why someone is selling, but I don’t think it’s company specific.  Unfortunately I can’t pick the exact bottom, and buying shares in any size is impossible at the bottom, so it’s worth starting to buy now with an 8% yield.

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