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A Sneak Peak
at July |
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On November 24, 1859, Naturalist
Charles Darwin published an abstract which would go down in history as
the definitive work on theories of evolution. Entitled "On the Origin
of Species by Means of Natural Selection, or The Preservation of Favorured
Races in the Struggle For Life", the first edition sold out immediately.
By 1872 Darwin had published six more editions.
According to Darwin's theory of Natural
Selection, competition between individuals of a single species within a
single population allowed the strongest to survive and pass advantageous
traits on to future generations. Individuals with less competitive traits
gradually disappeared from populations.
Microcap companies over the past
three year's have experienced the full wrath of Darwin's theories. For
the most part, the roughly 4,000 microcap companies which trade publicly
are operating at negative cash flow, and therefore unable to go to banks
for financing. They depend on the equity markets to raise much needed capital
to fuel expansion.
The nasty bear market has led to
a drought of capital for microcaps. The stocks have all collapsed, and
many companies have failed and been forced to close their doors.
The companies that have been able
to survive this natural selection process potentially represent great buying
opportunities.
The stock, which used to be $1 to
$3 three years ago, is now trading at $.05. It might not move back to $1
easily, but $.25 is easy money in the next six months with any kind of
corporate progress. 500% return on invested capital is nothing to sneeze
at. Here are a few examples of penny stocks I have featured which have
starting doing well:
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StockGroup (SWEB)- featured last
September at $.19, now $.34 (up 80%)
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Family Room (FMLY)- Clobbered
in February down from $.40, but since then off the low of $.07 to $.13
(up 85% since the bottom)
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Amnis Systems (AMNM)- Introduced
June 3rd at $.07- Now $.10- (up 43%)
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XML Global (XMLG)- I view this
one as a failed idea. Nevertheless, the stock rebounded from $.03 to $.09
in May and June. 300% return for the agile trader.
In recent weeks I have been looking
at a lot of very low priced stocks. Call them microcaps, nanocaps, or penny
stocks. These are companies that have survived the last three years, trading
at very low historical prices, with a high probability for appreciation.
I've even found one company generating about $200,000 in positive cash
flow per quarter, currently trading at $.015.
Finding $.05 stocks that will be
$.25 in the next six months is like shooting fish in a barrel. If they
ain't dead yet, they ain't going to be- but they were priced as if they
were dead. One or two might even find their way back to $1. One or two
will probably still fail.
Look for some penny stock ideas in
July as the market digests some of the 2nd quarter gains in larger cap
stocks. There are a surprising number of microcap companies doing well,
and their stocks will rise with the tide.
Members' Forum- Comments On Selected Stocks
You Have Written About
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Level
3 Communications (NASDAQ: LVLT) |
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My June
20th Trading Alert on LVLT at $7.37 completely bombed. The suggested
stop loss of $6.37 was hit a couple of days ago, making this idea a loser.
The market loved it when a group
of investors, including Warren Buffet's Berkshire Hathaway converted $1/4
billion in debt to equity. The market hated it when the company replaced
that debt with a new round of $400 million in convertible debt.
I don't really get it. The $250 million
in convertible debt had a 7% coupon and a $2.80 conversion price. The new
debt has a 2.8% coupon and a $7.20 conversion price. Any way you slice
the pie, this company is now able to obtain much better financing terms,
which implies it is a much better company.
In this past March quarter analysts
expected the company to lose $.67 per share. LVLT delivered $.22 per share
in profits for a huge upside surprise.
The stock has a schizophrenic history.
Last year on July 3, 2002, the stock was $2.75. On July 31, 2002, the stock
hit $7.44. I believe there could be another upside surprise in the June
quarter, which will be announced on July 24th.
Personally, I own the September 7.5
calls at $1. They are now trading about $.30. I will add to my position
and perhaps buy a few shares of the common stock as I believe the precipitous
drop you see on the screen is an emotional overreaction. This is the only
"dot-com" with Warren Buffet for a shareholder. I'd rather bet on Buffet
than the Bear Stearns analyst who has a "underperform" rating on the stock.
I put a one year window in time on
this alert. If the company does well, the Bear Stearns analyst will be
upgrading to a "buy" at $10, and a "strong buy" at $15.
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Irvine
Sensors (NASDAQ: IRSN) |
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Lack of reportable news is keeping
this stock out of the limelight. However, there could be a lot going on
behind the scenes. After the market closed on Wednesday the company announced
it had completed another round of equity financing at very favorable terms.
They raised approximately $1 million. An institutional investor purchased
restricted shares at $1.40- representing a reasonable 15% discount to the
prevailing market. They also received one warrant for each four shares
purchased, which converts into common stock at $2.25, and can be called
in if the stock trades over $3. Clearly a vote of confidence on the future
stock price by this investor.
The military side of their business
is well documented and growing. The private sector side of the growth prospects
remains a bit mysterious. Look for some disclosure on this side of their
business to put some life in the stock in the hopefully not too distant
future. This stock remains an undiscovered gem as it stills sports a very
low market cap despite rapid growth over the past two years. Something
is bound to happen which will put this stock on the radar screen.
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QT5
(OTC BB: QTFV) |
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Those who have been following this
situation know the stock price was sabotaged by an obscure politician from
Maine who didn't like their smoking replacement beverage.
Since that event the company has
been dead quiet.
I have heard the legislative proposal
in Maine has been dropped. Brooke's Pharmacies has restocked NicoWater.
Distribution is picking up nationwide. However, this information comes
from an unverified source. The company has made no public disclosure.
I have also heard the company is
afraid to make any public disclosure on its distribution efforts. It seems
each time they get high profile publicity, the anti-smoking lobby groups
attack them.
I don't understand this attitude,
as it seems like their product fits the needs of the anti smoking groups.
At any rate, the stock began behaving
much better on Thursday. It rebounded to $.24 on 247,000 shares. Perhaps
the rumors are accurate. Time will tell. My feet are firmly planted in
the air on this one until we know more about what's going on.
Charts Provided Courtesy
Of TradePortal.com |
