Caution on two VCI stocks and a comment about Legg Mason's terrible quarter

BBSI Barrett Business Services: As I've mentioned many times before, up until recently there's not much to find to fault this company- strong management, high insider ownership, rapid growth and a strong business model, decent dividend and compelling fundamentals. I posted a month or so back that I found in the 2007 annual report a concerning letter from the Auditor stating that the internal controls at Barrett were inadequate and as such, the reported numbers could be not indicative of the financial health of the company. That wasn't bothering me much, particularly since none of the analysts even asked about it at the conference call and the remediation was well outlined in the report. What bothers me much more is the timely resignation of the well respected CFO James Mulholland from the company for "family reasons". I'm not concerned enough to sell my position; however, I will not add to the position regardless of how enticing the price gets until the significance of these events becomes clear or a few quarters go by. I will watch this very carefully and am planning to write a letter to the investor relations person at BBSI. Accounting voodoo still goes on in the US for sure although with SOX and unbelievable penalties (i.e. life in prison) at stake, it's certainly much less of a problem than it was pre-Enron and World.com.

GCC Georgia Gulf: This company teeters on the verge of bankruptcy, mostly due to an ill-timed acquisition of Royal Group here in Canada. The mgt has taken steps to scale down production and eat away at the massive long term debt. So far all the debt covenants are ok. If the chemical sector recession continues or gets worse, the cash flow crunch will kill them. I do see a potential for a large scale recovery reflected in this deep value stock (the P/E ratio is 4!) but the risk: benefit ratio is unacceptable. I plan to sell on a rally-- hopefully over $6/share but that might be wishful thinking.

LM Legg Mason: Mutual fund investor withdrawals (12 Billion in outflows!) and a $151 million noncash impairment charge slammed earnings such that for the first time since its IPO in the early 80's the company's EPS has dropped yoy. Legg has maintained margins with good cost control. It has approved a convertible security issuance that will have a dilutive effect on our shares; however, the new CEO feels that the proceeds will most likely be available for more European asset manager acquisition and not be needed to provide further support to the money market funds/SIVs that have collapsed of late. I will definitely hold on to my shares of this great company and if the share price drops less than 50, add to the position.

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