To OTC Journal Members:
 

PhotoChannel Floundering? Maybe Yes, Maybe No

PhotoChannel (OTC BB: PNWIF) has followed them all down of late as we seem to be in a "cash at any cost" market environment. Typical June mentality. I was hoping this year wouldn't be as bad as past Junes.  Micros are still taking on the chin as we ease into the core of the summer and the "perception" small stocks will not trade very well for some time to come continues to yield low volume sell downs.

PNWIF, clearly one of our biggest wins from the last power up season ($1.80 to $5- September to February), has taken a bit of beating of late. There doesn't any fundamental reason for the sell off- simply a seasonal grinding lower as we head into the listless summer months.

However, there is a lot going on in terms of potential new business at the company. So, as the stock slowly grinds down towards my SSL of $2.73, it's worth examining where we are in terms of the future. You need the facts so you can decide if you want to hang in there through this downturn and hold your nose, sell to preserve your capital, or buy if you like accumulating when everyone is selling. 
 

The Pixology Acquisition

All cashed up from the $15 million financing at $3.40, PNWIF is now ready to spend some of that cash. The acquisition of Pixology should be completed by the second week of July. Pixology is based in the UK, and provides the in-store photo finishing kiosk solution. Walk into any Costco in the US and stick your memory card into the kiosk to get your prints- you will be using a Pixology solution. 

Pixology has kiosks all over Europe- They are in Tesco (Europe's largest retailer), WalMart UK (300 stores), and Jessups. The company delivers about $10 million in annual revenues, and has about $5 million lbs in cash (about $10 million CDN).

There are a number of benefits to the acquisition- the top line will immediately triple. The bottom line will improve as well. However- while the synergies are less tangible today, the results over the longer term could be prolific. Pixology has the instore media kiosk- PNWIF has the online solution. Together, they offer a much more comprehensive package to the retailer.

Costco US is seeking a replacement solution for Snapfish, their current solution. When Costco agreed to allow Snapfish to handle their online solution, the company hadn't been acquired by Hewlett Packard (NYSE: HP)- they are HP now. PNWIF hopes and expects the Pixology acquisition to lead towards Costco US at some point in the future. They already have Costco Canada- with the Pixology acquisition, can big brother be far behind?
 

New Fuji Relationship and Rite Aid

PNWIF recently announced Fuji Canada has anointed it as the partnered online solution for Fuji. This is much like the Kodak relationship in the US that got them into Kmart. It appears everywhere Fuji is in, they will eventually get in.

Fuji provides the online solution for Loblaw's- Canada's largest grocery store chain (about $30 billion in annual sales). The folks at PNWIF believe there is a good chance they will pick up that chain. 

Here's one other big event the company is looking towards: It involves Brooks/Eckards Pharmacy chain. Brooks is morphing into Rite Aid, a chain with literally thousands of locations nationwide. PNWIF already has Brooks/Eckards- Rite Aid is a little behind the curve and does not have a strong online to retail solution in place. PNWIF is looking towards Rite Aid as another potential new client.
 

The Chart- Setting up Expectations

From last summer to the $5 top in February, PNWIF made a five fold move from $1 to $5. OTC Journal subscribers caught a lot of that move if you bought the stock when I first covered it at the end of September in the $1.80 range.

As we move into a seasonally weak period for both stocks and the company, it is only natural for the stock to come back down and offer a reasonable entry level for new shareholders and those who want to add to positions. 

Here's the 64 thousand dollar question- how low will it go before we reverse course? I can tell you what the chart tells me. The chart tells me this stock would be a fantastic buy at $2.42- or in the $2.40 to $2.60 range. This level would represent a nearly perfect 61.8% retracement, the level I love to accumulate stocks.

However, there are some other non-technical factors that might prevent us from seeing those levels. For starters- think about the recent $15 million financing. A number of major US institutions participated at the $3.40 level with a $4 warrant. Those shares are not even free trading, and the institutions are already in the hole. Based on today's trading tape, it would appear someone likes the stock at this level. At 11:16 Pacific Time this morning, there was a 250,000 share buy trade at $2.98. That's one trade for $745,000. That's an institutional buyer.

Secondly, fundamental developments could help prevent the stock from sliding and get things turned in the right direction. Consider the potential new business. All of these chains want any new systems in place for the Holiday Season- this is the best time of year for the photo finishing business. In order to have things working perfectly post Halloween, these chains need to make their commitments over the summer months and begin implementing by September. The summer could bring a dearth of new deals.

Here's my conclusion. Psychologically, prepare yourself for the idea that PNWIF could trade into the $2.50 range this summer. I emphasize the word "could". Charts are handy and can be very accurate, but are far from certainties. Like holding at 12 when the dealer has 5 showing, the odds are a little in your favor, but you never know what is going to happen when all the cards are turned over.

There are two major factors in favor of the stock coming back- 1. The recent $15 million financing at $3.40 might bring more institutions into the open market to average down, and 2. There could be a bunch of major business coming their way.

Here's what I do know- PNWIF has several more years of strong and rapid growth in front of it. They are just coming up on the steepest part of their growth curve. Long term- great position to own.
 

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