Caldwell Partners (TSX:CWL.A)

Caldwell Partners (TSX:CWL.A) is an executive search consulting firm. Its shares last traded at 52 cents and with around 16.5 million shares outstanding, that's a market capitalization of just $8.5 million. The company carries $10 million in cash and marketable securities and has no debt. So it actually has a negative EV. That's cheap!

So what's the catch? Cash burn. The company had built up a pretty large stockpile of cash and investments over the years while it was cashflow positive. At the end of Q32008 there was over $20 million in cash and investments on the balance sheet but today that number has been cut in half due to a combination of investment and operating losses. Prior to the recent downturn in the company's fortunes they had been generating around $2 million a year in CFBIT (cashflow before interest and taxes).

The company claims the recent losses are due in part to the recession, which makes sense, and also to increased expenses relating to the investment "in the addition of new search partners" and "aggressive expansion into the U.S." They say these investments will "build a solid platform for sustainable and profitable growth." If those statements are actually true and the company returns to profitability quickly, then the shares will likely see a significant rise.

Besides significant operating losses over the past several quarters, another red flag is the possibility that management is not of the highest ethical calibre. Last year a lawsuit with 3 shareholders (JC Clark Ltd, Tailwind Capital Inc. and McElvaine Investment Management) was settled with part of the terms being that Caldwell will move to a single share class effective November 2011. The class B voting shares will be converted at a rate of 1.149 class A non-voting shares for each class B. Based on the most recent share counts, this would increase the shares outstanding to 18.3 million. The action alleged that "Mr. Caldwell and members of the Board of Directors...[engaged in] a series of related-party transactions that are alleged to have benefited certain members of management at the expense of Caldwell Partners and its minority shareholders." The statement of claim also asked that "the Company declare and pay a dividend from the Company's excess cash reserves."

I don't know the details behind all of this, other than what's noted above. I do know that there was no extra dividend paid out and instead the excess cash reserves have been "invested" in growing the business and another $2.6 million was lost on investments during the market crash.

Are the current woes simply a temporary setback caused by the recession? Will the new capacity built in the last year actually add to the bottom line in future? Unfortunately these are questions I'm not qualified to answer. We would definitely welcome input from anyone with more knowledge on the economics, opportunities and outlook in the executive search space. In the meantime, even with the uncertainty, the rock-bottom valuation is very compelling.