FTI Consulting

FTI Consulting (FCN – $35.80) is a consulting firm that specializes in fraud investigations, forensic accounting, corporate valuation, bankruptcy, etc. It is not actually a stock that is currently “swimming” but a special situation trade (not an investment because it doesn’t pay a dividend). The stock price recently gapped down 24% because of an earnings warning for this quarter. That gap down was bought by insiders so I’m comfortable that it is not symptomatic of longer lasting problems.

FCN is one of the few counter-cyclical stocks. It’s business generally booms when growth is slow or finance/credit is stressed or such. That’s precisely when employees/corporations begin to commit fraud, break contracts, go into bankruptcy, merge under stress, etc. That element of their business was, perversely, harmed when the federal government instead chose to bailout Wall St and socialize risk. Those actions took these issues out of the normal avenues (courts/arbitration/negotiations) and into the realm of lobbyists/Congress/DC and taxpayer subsidy/whitewash.

Whether that counter-cyclical business recovers (due to for example the federal government stopping its perpetual bailout of the rich/connected because it has run out of the ability to issue debt to do so) however is not really the case for FCN being a trade. That may just be gravy that shows up in a few months.

The case for a trade is based on their smaller pro-cyclical business — mostly based on mergers/valuations. They are a minor secondary player in that and that is the reason they warned on this quarter’s earnings/revenues. The recent market swoon has hit the M&A “use” of corporate cash hoard and credit/financing — and it never really extended to small businesses (which is FCN’s main clientele in this area) anyway in the 2009/2010 “recovery”.

So you have a stock that is trading at very low valuations compared to its 10-year averages (even before the 24% swoon) – and whose business has been hit by a double whammy. A “recovery” that is bogus and narrow — and a recession where government has backstopped/socialized/subsidized failures (and in so doing has eliminated the potential fraud/etc lawsuits against them).

The trade is based on one or both of those current situations changing. Either the recovery broadens out (and FCN returns to its longer-term trendline – a potential 30% return over the next year) — or we head into a slowdown that will have less government micro-meddling/subsidy (and FCN returns to its headier counter-cyclical “blips” – see 2002-2003 and 2007 on the stock chart – a lot more than 30% return)

If the status quo continues, FCN will go nowhere. But the recent insider buying at $33-$35 – which has continued up to at least two days ago — provides some comfort that the downside is limited. At least in the case of this company, insiders are anteing up even if the company doesn’t reward shareowners to wait it out with a dividend.

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