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What's Wrong
With Commerce Planet (OTC BB: CPNE)? |
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Commerce Planet- the stock
that has been so hot it left orbit this year- our triple since the last
earnings release has been a mess these last couple of days.
I know what you're thinking. The
stock was $1.80 two weeks ago, and today actually traded below $1
for a brief moment in time. Why? - The company delivered a stellar earnings
report in the June quarter, and since releasing the earnings on August
3rd, the stock had more than tripled in price.
Here's what you're thinking- what's
wrong with Commerce Planet? What does someone know that I don't
know? Why has the stock been flushed down the proverbial toilet of late?
Is the company's business derailed in some way?
All good questions, and questions
any sane investor would be asking after the drubbing we have taken in the
last two weeks. There are two components to the answer- the fundamental
side and the technical side. Let's start with the fundamental side.
I have checked all my channels to
see if anyone know of any reason this company is not continuing on its
current path. All indications are the company is not derailed in any way.
It's a growing business as usual.
If fact, CPNE issued a press
release on Friday concerning a move to international growth, and the following
statement was included at the end:
"The company
anticipates filing its quarterly results in the beginning of November and
expects growth quarter over quarter."
In its way, CPNE was letting
the market know there has been no fundamental change- the company is continuing
on its current path. Here's a little history:
-
Q1 of 'o6: $3,932,343 in revenues, $194,380
in net profits- less than $.01 per share.
-
Q2 of '06: $7,086,818 in revenues, $1,460,117
in net profits: $.04 per share in earnings
Growth from Q1 to Q2 was basically astounding,
and the stock responded in kind by making nearly a 10 fold run from the
March low of $.19 to the October high of $1.80. Not a bad
start.
Here's something you could only learn
if you dug into the SEC filings and understood the significance. In the
June quarter, CPNE paid off all its debt- the company now has a
totally clean balance sheet and cash is building. They paid off their debt
very early- in fact years early. In return for paying off its debt, the
company paid a $1 million, one time fee.
Therefore, since the company does
not have to make the same kind of payment in Q3, zero growth should deliver
about $2.4 million in earnings, or about $.05 for the quarter. This assumes
margins remain the same.
On the slightly negative side, quarter
to quarter comparisons will definitely not be as strong as Q1 to Q2- Q3
is a seasonally weaker time of year for the company. However, based on
Friday's news, we know they will report growth.
I believe the market will like the
Q3 numbers. I believe they will come in fairly robust. Does this guarantee
the stock will go up? No- the market is not always efficient or logical.
Now, let's look at the technical
side.
During high stress moves like this
it often makes sense to look at the bigger picture. In the case of CPNE,
I have been presenting fairly short term looks at Fibonacci retracement
levels. Let's take a slightly longer term perspective.
The behavior of this stock changed
quite dramatically when the company announced its Q2 earnings on August
3rd. That's when the stock really started to charge up the charts. It moved
from $.50 to $.70 on the first day, took a brief breather, then headed
further north.
If you draw the 61.8% retracement
from the beginning of the rebirth of the stock in early August, you learn
that the uptrend really remains intact. We're only going back 2 1/2 months,
but it was a pivotal moment in time. As it turns out, the perfect 61.8%
retracement for this stock is $.998. Readers know I love 61.8%
retracements as ideal low risk entry points for stocks on the move.
In my view, Friday's action was extremely
important. The stock made a low of $.97, within $.02 of the perfect retracement,
and rebounded to close at $1.14. Equally important to the price was the
volume. In terms of dollars changing hands, it was the highest volume day
in the stock's history. In August it traded about 2.5 million shares, but
that was at the $.50 level. Yesterday it traded over 1.7 million around
$1- many more dollars changed hands. Friday was total capitulation day.
Some shareholder was the catalyst
for the drubbing. I have checked with everyone I know associated with the
company, including the CEO, and no one has any idea who owned enough shares
to get this sell off started.
So, back to the key question we are
addressing. Is the stock selling off because someone knows something we
don't know? or did someone sell for reasons unrelated to the company?
I don't know for sure. I do know
that people often sell stocks for many reasons. Perhaps some fund manager
had redemptions or margin calls, and was forced to sell. Perhaps someone
with a lot of stock needed the money to buy a house. I just don't know.
I am certain once the stock started
dropping, there were many "momentum" traders who sold just because the
stock was going down. It became a selling frenzy. That's why Friday's volume
was so important- it signaled what I hope was exhaustion of the selling,
and buyers wrestling back control.
In my view next week is technically
critical. If this stock wants to head back down and trade down into the
$.90 range or lower, all bets are off. As far as I am concerned, it will
all be over for now. However, if it firms or drifts up, it will be a strong
indicator Friday's sell off was a great buying opportunity.
Here's the last question many of
you have asked: Do I still have a $2 price target on the stock for this
year? The answer is a definite maybe. While this correction certainly sets
the bar a bit higher, this stock could easily rebound and find $2 in the
traditional Santa Claus rally. I will withhold final judgment until Q3
earnings come out.
In case you are wondering, I did
speak with CEO Mike Hill on Friday. I can't share everything I learned,
but I can tell you he wants investors to know the company is still on track
to deliver growth.
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