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To
OTC Journal Members:
Both today's and the weekend edition
will be devoted to exploring two of the OTC Journal's current problem children.
I want to share some thoughts on both of these issues, so as to clear the
decks for next week. There will be a couple of major positive developments
from covered companies next week, and I am hoping each event puts some
life into both stocks.
Here are some thoughts on the first
problem child; American Water Star.
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American Water
Star (AMEX: AMW): Buy, Sell, or Hold? |
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My last publication on American
Water Star hit your inbox on September
15th. It was a review of Chairman Roger Mohlman's August conference
call, and some thoughts on how September quarterly results could affect
the stock price in the short term once they are disclosed. Mr. Mohlman
was extremely upbeat on the future of the company, and particularly proud
of the recent plant acquisitions which are now all online. The company
has an infrastructure in place which could take them up 100 fold in revenues-
the big question is "are they delivering the revenues?"
Since early September shares of AMW
have been grinding down the chart nearly everyday at an alarming rate.
Naturally, as I know many of you own this stock, my inbox is full of inquiries
from concerned shareholders. There are several possibilities to explore,
but ultimately it is your capital, so you must make the decision on what
to do- Buy, Sell, or Hold.
As stated in past editions, I believe
at $1 the market is giving the company the benefit of the doubt
that they are, or can in the reasonably near future, achieve $20 million
as an annual revenue run rate. In the June quarter, which was the beginning
of the sales to Wal-Mart, the company achieved $1.8 million.
On the surface this may seem anemic, but as compared to the $440,000 the
company delivered in March, $5 million per quarter is not a huge leap of
faith. After all, the increase equates to a 1236% annual growth rate.
If you subscribe to my theory that
$20 million in annual revenues gives us about the $1 level, anything the
market believes above $20 million equates to your upside. Anything the
market believes below $20 million equates to your downside.
I believe the market is expressing
its concern that the company might not be delivering the revenues it needs
to support its valuation. There are a lot of fund managers in this stock
with relatively short term outlooks. I personally have no indication from
either the company or any other source that the September quarter might
not be robust. In the August conference call with investors, Chairman Roger
Mohlman gave no information concerning revenue levels for Q3. However,
the behavior of the stock is telling me the market does not believe the
September quarter will be adequate to sustain current trading levels.
This chart of AMW is ugly.
Stocks drop because there is more supply than demand. One needs to explore
the reason there is more supply than demand. If you can find a short term
technical problem which does not relate to the fundamentals, you could
have a buying opportunity. If the imbalance of supply is related the market's
perception the company is overvalued relative to revised expectations,
lower levels could be in the cards until the stock drops so low bargain
hunters step in to buy.
Clearly, the stock has momentum to
the downside. It finally bounced a little today. As you can see from the
chart, the stock dropped to current levels once in August, and promptly
bounced quickly. The chart could be telling us there is support at $.60,
and the bullish "double bottom" has been put in.
My guess technically is as follows:
A break below the double bottom level of $.60 would lead to even lower
levels. A break above the downtrend line, which now sits at about $.80,
would suggest higher levels are imminent. If the stock chooses to grind
in between for the time being, that is fine.
Good news could put the stock back
on track. Preliminary September numbers reassuring the market that sales
are growing could provide the catalyst. Recently, AMW has announced
their beverages are being sold in the school system in Clark County, Nevada.
Ten more school systems like this could make the whole company. Today they
announced three new distribution agreements. The company is working diligently
on potential copacking and private labeling relationships.
I have always thought this idea was
very Peter Lynchian. The greatest mutual fund manager of all time like
to buy stocks in companies with products he could experience first hand.
When I first looked at AMW, I loved the product, and they were getting
orders from Wal-Mart Superstores nationwide. Those are arguments on the
plus side. On the minus side, I go into my local Vons once a week to look
for Hawaiian Tropic, and it has not shown up on the shelves. I would like
to see a consistent inventory of beverage, in the same place on the shelves
every week to be convinced sales are ramping up. Peter Lynch would want
to see the product on the shelves. Peter Lynch also said he made the most
money by sticking with something he liked for three to five years.
They say timing is everything. My
timing on AMW has been horrendous. The stock traded to its highest
level on the highest volume the day after we published our first edition,
and it has been downhill ever since.
So; buy, sell, or hold: The choice
is yours. I have no idea where we go from here. The stock is behaving as
if September quarter numbers will be below par. At this rate, by the time
we get the numbers, any bad news will have already been priced into the
stock. However, any one of a number of events on the horizon could put
us back on track. A good strategy might be to simply set a stop loss for
yourself. Decide your own personal risk tolerance at this point, and if
it drops to that level just sell it with discipline. You are going to have
losses in microcap stocks. Learn to accept them.
On the other hand, if you really
like the company and can be long term, just hang in there and wait for
events to develop. After all, they have massive bottling capacity for a
small company and someone could want to use it tomorrow.
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