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 |
Four Phases
of Microcap Evolution |
|
On September
27, 2003, I published an edition which described the four phases of
corporate evolution which lead to big profits in the microcap world. Here's
a recap of the four phases:
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Phase I: Recession starts, capital
dries up, stock prices go down, companies go into "survival" mode. (2001
to 2003).
-
Phase II: Growth begins to return,
companies get access to equity capital, stock prices bounce off the bottom.
(late 2003 into 2004)
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Phase III: Companies invest new
found capital in expanded goods and services, new capital financiers cause
excess supply of stock to hit the markets, slowing potential rebound in
stock prices. (2004 to now)
-
Phase IV: Companies implement
new business strategies fueled by access to capital; business grows, financiers
run out of supplies of stock which have held markets back, and stocks break
out as companies announce fundamental progress. (immediate future)
If you invest at Stage I, you
are generally buying at the bottom in the worst market conditions. You
have to be long term, and you have to have courage because you may be buying
into companies who could run out of money and go bankrupt before conditions
improve. A great example from our covered companies: HYPD: you could
have bought all you wanted one year ago at $.30 when the company had nothing
going on.
Stage II is far less risky.
As the market improves, small companies get access to capital for expansion
and stocks are often still at bargain basement prices.
Stage III offers the best
risk/reward ratio, as companies are using the capital to fuel growth, and
technical pull backs related to excess supplies of stock from financings
offer favorable entry levels.
A number of the companies we follow,
both winners and losers, are in Stage III and making the transition
to Stage IV. A few examples include HYPD, NTDL, AMWS, FMLY, NWIS,
and NWAV. The companies are putting recently raised equity capital
to work, and those that are successful and implementing growth strategies
will provide rewards to shareholders.
Here's the short term problem: Large
equity financings are always done at a discount to the prevailing market.
The company gets the money and issues restricted shares. The company then
files a registration statement with the SEC to cause the shares underlying
the financing to become "free trading". Once Registration statement gets
cleared, there is generally an excess supply of cheap stock which could
cause a temporary downturn in the stock price. These windows represent
great opportunities to accumulate.
Generally, after a financing is completed,
it takes at least three months, and sometimes upwards of six to twelve
months to complete the regulatory process and for the shares to become
free trading. Oftentimes, by the time the process is complete, the company
has invested the capital and is already generating the desired result,
which creates more volume and liquidity in the stock.
Over the last several months there
has been a change in this pattern. Registration Statements are flying through
the SEC seemingly much faster than they used to. This shortens the window
company's have to put the capital to work before the excess supplies of
stock are free trading.
It happened to us on Nutech Digital
(OTC BB: NTDL). The company filed its registration statement, and the
shares were cleared within a week. I was expecting it to take three to
six months. It caused a severe downturn in the stock price before the company
had delivered enhanced results from the use of the capital. The funding
sources have been particularly aggressive on this stock, but that is not
always the case.
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American
Water Star (OTC BB: AMWS): Stage III Opportunity Imminent |
 |
American Water Star recently
filed a registration statement on behalf of investors. The company raised
$8
million in February, which allowed AMWS to acquire new bottling
facilities to meet skyrocketing demand without taking on any debt. The
company also raised capital some time ago from founding shareholders, who's
shares were included in the registration statement. Many of those founding
shareholders might already have had the opportunity to sell under Rule
144, but have chosen not to.
All in all, the company is registering
38 million shares of stock and some underlying options. Once effective,
the possibility exists there could be a short term excess supply, which
could lead to lower prices.
On the other hand, an excess supply
might not materialize. The company is just entering an accelerating growth
phase and looking as if it will grow at least four fold over 2003. The
company is also hoping to make the jump to the American Stock Exchange
in concert with substantial growth. Investors with a longer term perspective
could be looking for much higher returns.
If recent history repeats itself,
the registration statement for American Water could go effective
later this week. I have no idea if there will be sellers. The company just
let the cat out of the bag on its Wal-Mart distribution, and successive
quarterly reports from here forward will show substantial growth.
You will make the most money in microcap
stocks with the least risk as they make the transition to Stage IV.
This company is making the transition, and any weakness due to excess supply
should be viewed as an opportunity to accumulate.
If you like this company and you
see some weakness over the next two weeks, get ready for a bargain basement
steal. I believe the stock could trade down into the $1.25 range, but that
is just a guess. The professional money managers who put $8 million at
risk did so because they believed the growth of the business would provide
their exit strategy.
Charts Provided Courtesy
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