the SEC's Naughty list

From dumb and dumber investment decisions made to dramatic “You Can’t Handle the Truth” shout-outs roared by actor-wanna-be (Jack Nicholson’s) Colonel Nathan R Jessep-types (“A Few Good Men”), 2011 was a bad year to make money with unjustified umbrages: Read on and see how companies once thought to be golden locks often turned to be salivating sticky drool from  the worst and bad of the baddest of regulatory filings delivered to the Securities and Exchange commission in 2011.

Total SA (NYSE:TOT) showed us in 2011 that a big, bad oil company could be visionary when it announced a friendly tender offer for a 60 percent stake in solar module maker SunPower (NASDAQ:SPWR) in late April. “Total is executing on its strategy to become a major integrated player in solar energy,” said Philippe Boisseau, President – Total Gas and Power Division.”We evaluated multiple solar investments for more than two years and concluded that SunPower was the right partner based on its people, world-leading technology and cost roadmap, vertical integration strategy and downstream footprint.” The French-based energy major might have wanted to wait another year before jumping into the solar pool: Unfortunately, like most manufacturers of photovoltaic panels, San Jose-based SunPower derives most of its sales from European customers with operations in troubled countries like Italy and Spain. Euro woes coupled with subsidy cutbacks has decimated dema nd and average selling prices for solar panels. Total paid $1.4 billion, or $23.25 per share, for a controlling interest.  At year-end, SunPower’s common stock had lost 77 percent of its market capitalization, selling at $5.25 per share. With a rebound in photovoltaic demand or prices unlikely next year, expect Total to write-down this solar investment as impaired.

Yahoo’s (NASDQ:YHOO) online search ranking in the U.S. continued its slide this year – falling to an all-time low in September:  Digital intelligence researcher comScore reported that Yahoo’s share of the overall market fell to 15.5% (compared to Google’s leading 65.3% share), down from 18.9% in June 2010. Even after the messy firing of embattled CEO Carol Baratz in September and other management shuffles, criticism of the board’s recognized inability to engineer a strategic turnaround continued. Third Point, a hedge fund run by Daniel Loeb, disclosed a 5.1% stake in the online media company last fall and called for the resignation of co-founder Jerry Yang and other board members: “From the failed Microsoft (NASDQ:MSFT) sale negotiations [rebuffed $44.6 billion, or $31 a share, buyout offer in 2008], to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections… this Board’s failures have destroyed value for all Yahoo stakeholders,” excoriated Loeb in a letter addressed to the board on September 8. “Instead, a reconstituted Board with new Directors who will bring fresh eyes, relevant industry expertise and increased investor alignment to the table is immediately necessary.” Loeb opined further that Yahoo was an iconic asset, which led by a reconstituted board and management team could result in a rapidly appreciating stock to a targeted value of up to $23 a share. Notwithstanding all the noise generated by Loeb, given the fractured board’s inability to ever reach consensus on a unified business strategy – such as, spinning off its 43 percent stake in Chinese internet provider Alibaba or rebooting its advertising and online shopping businesses –  Yahoo’s long-suffering stockholders won’t find much deal-making value in their stockings come Christmas

Domestic sales at Skechers (NYSE:SKX) plummeted 34.6% to $591.3 million for the nine months ended September 30, mostly due to softening demand for the footwear maker’s toning shoes (sneakers purposely designed with rounded soles that allegedly re-shaped one’s doughy backside). The average selling price per pair of “Shape-ups” in the September quarter fell to $20.16 from $24.81 per pair in the prior year; unit volume sold declined 38.9% to 7.4 million pairs in the latest quarter. That consumers have tired of this next “great” fitness fad was evidenced in corporate “speak” found in Skecher’s third-quarter earnings filing: “We believe that new styles and lines of footwear that we will be launching later this year will have an offsetting positive impact on our results of operations in 2012.” With the share price off 52 percent from its 52-week high of $23.66 per share (reached on February 9), investors have little confidence that management can turn around dismal fundamentals. Given that chairman and chief executive Bob Greenberg (and his family), beneficially control 34.9% of the collective voting shares, it’s doubtful any radical shakeup will occur from within too.

Led by chief executive Reed Hastings, Netflix (NASQQ: NFLX) delivered one of the biggest PR blunders of the year. In July 2011, the video streaming and content provider unexpectedly announced a 60 percent price hike to its nearly 25 million subscribers, followed by news of a decoupling of DVD-by mail delivery (renamed Qwikster) and online services. Faced with a slew of cancellations, the company revised its third-quarter guidance downward by one million subscribers on September 15. In a letter to shareholders, Hastings acknowledged that the initiative to split services had upset many subscribers – “which we don’t take lightly,” he wrote – but management nonetheless said it would stand by its decision. “We believe this split will help us make our services better for subscribers and shareholders for years to come,” opined Hastings. Less than a month later, in a Netflix blog posting, the CEO informed customers the company had abandoned plans to spin-off the DVD-by mail service. In a regulatory filing on October 24, the company admitted (begrudgingly) it had misjudged customer expectations and that the price changes had resulted in the loss of more long-term subscribers than expected. “Investors and members will be relieved to know we are done with pricing changes,” said Hastings. Shareholders are likely more “pissed off” than relieved: From a 52-week high of $304.79 a share hit on July 13, the common stock has lost more than 75 percent in market value.

Bob Evans Farms (NASDQ: BOBE) reaffirmed fiscal year 2012 EPS guidance of $2.36 to $2.44 a share and annual earnings growth guidance of approximately 7 to 10 percent during the next five years. More pressing issues concern significantly higher sow costs and expenses associated with an expanded Bob Evans Restaurants remodel program. The only gadfly in the restaurateur’s cookbook remained the Humane Society of the United States, a group of health food activists looking to push Bob Evans to “phase in” cage-fee eggs (to be used in consumption). The Society opined that cage-free facilities would not only improve the lives of hens, but also reduce public health risks (such as, materially lower rates of food-borne illnesses like salmonella.) After several delays, at the company’s annual meeting held on July 14, shareholders overwhelming voted down a resolution that good animal welfare practices, such as banning of caged eggs, would improve supply and health conditions longer term.  Contrary to the do-gooder society goal, it was a righteous win for Bob Evans shareholders. For a company trying to stay steady on its feet, and demonstrate it can deliver sustainable and consistent operating profitability, more talk of range-free eggs should be viewed as nothing more than a gossamer-like distraction – to be blown away with the next spring breezes. Bob Evans business strategy is on track for 2012, especially when “do-gooder” chicken activists are marginalized to the sidelines.

Related Posts: The 10 Worst of the Bad 10-K Filings in 2011

-David Phillips