And so it ends, not with a bang, but a whimper.
A little over three years ago, the service that we all know today as Motley Fool Hidden Gems made its first two stock picks after transitioning from its old name, Motley Fool Select. The first of those recommendations, the inaugural pick of the service, was a little-known telecom provider by the name of Talk America (NASDAQ:TALK).
At the time, the firm seemed the ultimate embodiment of a "hidden gem." In a world where the word "telecom" was synonymous with scandal (remember Global Crossing and WorldCom?), in a company that had just completed a financially ruinous partnership with Time Warner's (NYSE:TWX) AOL, and that was facing tough competition from better-funded competitors such as Sprint (now Sprint-Nextel (NYSE:S)), Verizon (NYSE:VZ), and AT&T (NYSE:T), Tom Gardner saw an overlooked, unloved, undervalued opportunity: Talk America.
Share price: $10
He recommended that Fools buy the company, citing the firm's growing sales, strengthening balance sheet, what he thought would be a "favorable regulatory environment for upstart telecoms," and arguing that in three years' time (that would be July 2006, for those keeping count), the firm would be worth between $17 and $30 per share.
It took less than a year for Talk to falter, however, and for Tom to rue the day he made it our inaugural pick. By April 2004, the regulatory environment had reversed itself as the Federal Communications Commission sided with the Baby Bells' request to charge more than "cost" for upstart telecoms like Talk to use their networks, hobbling Talk's business model.
Share price: $8.50
Recognizing that an unanticipated risk had reared its head, Tom made the hard decision to sell rather than let his investment thesis play itself out for the usual three-year period -- a risky move that garnered criticism from some Fools. In explaining the action, though, Tom argued, "The failure is that I should have cut out sooner. Once the basic business model of an enterprise wobbles, simply sell it and move on. Replace the position with a new holding that you believe in."
Share price: $8.10
Ever since, we've kept an eye on the stock, checking in on its progress from time to time. On Friday, we learned that this will no longer be necessary. Privately held Cavalier Telecom announced it will buy Talk for $8.10 per share -- meaning that those who continued to hold after Tom's sell recognition received a negative 5% return on their money over the next 29 months.
Moral of the story
And as for the two companies that Tom recommended to "replace the [Talk] position. and move on?" As luck would have it, both of them were acquired as well, some time ago. The names: Group 1 Software and Transkaryotic Therapies; and the profits: 87% and 251%, respectively. Sell it and move on, indeed.
It's never easy to part with a recommendation to which you've staked your reputation -- but sometimes, sticking with it only makes things worse. It's in large part due to Tom's courageous decision to eat crow, cut bait, and move on to better opportunities that Hidden Gems members are today outperforming the S&P 500 31% to 13%. And you can join in, too -- just by clicking here.
Time Warner is a Stock Advisor selection, and AT&T is a former Stock Advisor pick.
Fool contributor Rich Smith does not own shares of any company named above. Sadly, the only one that he ever has owned was . Talk America. The Fool has a disclosure policy.
