Friday, September 26, 2014

Research: BBSI Barrett Business Services, and how I was misled

Every now and then, if we are so lucky to, we come to a moment where we become completely humbled and humiliated. Feeble minds may get discouraged and see this moment as a sign to back down or give up. I'd like to believe that it is an opportunity to learn where my weaknesses are.

The company is BBSI, Barrett Business Services. It is a staffing company. A quick glance at the financials shows pretty solid numbers. The only thing that raised my eye was that net income was a little small relative to it's operating cash flow - capital expenditures. (This is my proxy fore free cash flow) This did not bother me. Generally it's not a bad thing to see net income to be less than operating cash flow - capital expenditures. It can mean that they are using very conservative depreciation methods, which can be beneficial to the investor because it results in a larger margin of error. I did notice that shareholder equity was not rising, but I attributed this to their large share repurchase in 2012.

I didn't find anything that I thought was a red flag in the 10-K. This was a company which was ripe for me to invest in. Until that is, I came across this article here. At first, I thought I was looking at a different company. The article says that BBSI is essentially an insurance company. That's quite far off from a staffing company, and insurance companies are in an industry where I know for a fact that I do not have the expertise to evaluate. The things that I read in the 10-K did not alert me to BBSI operating as anything close to an insurance company. This was quite alarming to me, as I've completely incorrectly classified BBSI's business model.

It turns out that BBSI was not just a staffing company. It was more specifically a PEO, or Professional Employer Organisation. I thought this was just fancy wording for a recruiting firm / staffing company, and it did not occur to me to do further research. Apparently, PEO's have been used to conduct State Unemployment Tax Arbitrage (SUTA), and are sometimes associated with defrauding state governments out of tax money.

Fortunately, I did not enter into a position, so no money was lost. However, it does make me wonder about my other potential investments and how the company might not be what I think it is. This is a wake up call for me. I plan to re-read the BBSI 10-K, to see what exactly I missed. If anyone is able to point to something specific that I should double check, or share similar experiences, it would be greatly appreciated.

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