Tuesday, October 19, 2010

Parting Ways with Lazare Kaplan (LKII)

One of the great frustrations with the companies that end up in net/net land, is that you never know what might happen. This comes with the territory. In the case of diamond company Lazare Kaplan, "lost diamonds" led to a 10 month period where shares did not trade. The company was not talking, either. Shareholders were left in limbo with very little information, and no financial statements. The company was suspended from trading, but ultimately listed on the pink sheets, and began "trading" again in July.

We'd all but given up on Lazare; this was the second time we owned it, and thankfully our cost basis this time was $1.18.

But more details of the company's troubles began to emerge over the summer. We've seen some speculation by others that the company's $640 million lawsuit against its insurers, who are refusing to pay claims over the missing diamonds, may end up handsomely rewarding shareholders. We, however, have decided that the risk-reward is not in our favor in this case, and have closed our position.

While a lawsuit victory would be a huge windfall to the company, we believe that the fundamentals continue to deteriorate. The company's most recent 8K suggested that Q1 revenue will be about $33.2 million, down from $74.2 million last year. Meanwhile, we don't know what shape the balance sheet is currently in; it's been ages since we've seen one. In any event, we would rather walk away with $.80 or $.90 per share of our original $1.18 investment than take the chance of total loss.

*The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

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