Investing in microcap companies can be very frustrating. For me, the worst form of frustration comes when companies deliver great fundamental developments, but the stocks trade poorly. I can put up with companies that fail- that’s part of the landscape. Occassionally, you will get lucky and a stock will do very well even when the company doesn’t do well- you can make money sometimes just by being in the right group.
US Energy is about as bad as it gets. All the company has done since covering them is deliver multilple smallish contracts, a $54 million deal to convert 10,000 buses in Thailand over the next five years, and a deal with GM to include their technology in pick up trucks manufactured in the Far East.
Despite what one could only view as extraordinary achievements for a microcap company, the stock is grinding towards a new all time low, much to my amazement.
I believe we have arrived at what I like to call the “Capitulation” stage. This is the point at which everyone who wants to sell either has or is going to. It’s absurd at this price, but it’s reality.
Here’s a quote from my last BLOG entry on the stock (9/13):
“Here’s what I can tell you with certainty. This stock will begin to trade well when you least expect it. When the frustration reaches maximum threshold- when you don’t believe the stock can ever go up- when you see several other stocks trading much better and wishing you had your capital elsewhere- you will sell out of frustration, and it will be much higher one week later.
You see this time and time again in the microcap sector. Investors who have been disappointed in a situation over time sell their shares the moment they see daylight. The stock is providing them and exit strategy because the company is finally performing. They sell, and before they know it, the stock turns around and rockets to much higher levels.”
Admittedly, I didn’t forsee the stock trading as badly as it has. There must be a multitude of old investors who just can’t wait to pull the trigger and sell at the bottom. Also, I’m sure a number of new investors who bought on the $54 million contract announcement are throwing in the towel as well.
Here’s the current chart:
As you can see, this stock is trading at a multimonth low. This is painful if you own it, and especially painful if you are watching other stocks trade well while this one just continues dropping.
Another issue probably exacerbating the situation- the company just filed a statement with the SEC stating they intend to seek shareholder approval to affect a reverse split- they included several possibilities in the filing; 2 fo 1, 10 for 1, etc.
The approval will be granted as three individuals control more than 50% of the stock. In my view, the negatives associated with a potential reverse split are already factored into the price of this stock.
I’m planning on publishing a mid week update on this company. Should have some more info on the outlook for Q4 etc by then.
Sometime in the future this company will be able to announce purchase orders and much larger trailing revenues. At that point in time, the stock will be behaving much better.
If you assume there are 150 million shares I&O, at $.12 the market is saying the company is only worth $18 million. With $54 million off of one contract alone in the coming years, this has got to be one hell of an opportunity somewhere down here. Long term investors only- I have no idea when this thing will turn, or how low it could go. My instincts tell me we are near or at the bottom.
Comments and questions are welcome.
As always, your insights are welcome and appreciated. I heard that a 1-for-25 reverse split has been approved and will be effective on 10/26. I’m wondering if anticipated short selling (since you can only short shares over $1) and tax selling are driving the share price lower. Hope this capitualtion ends soon!
Editor: I believe it has already happened. It is already priced in. I believe the stock is going to bounce very soon. Could be good for a trade in here.Â
That’s OK, everybody wants to sell… but for every item sold there was of course also a buyer. So who’s buying ? and what’s the rationale behind this buying ? Or is it just one or two Warren Buffets or so who’ve been thoroughly studying the company, finding them sufficiently sound financial and commercial ?
Or are the buyers just speculators going to sell again on the first profit opportunity ?
Who knows, but I guess perhaps there are a bit of both, so the stock might still remain low in price for a very lengthy time.
Editor: Yes, it could remain low. I can’t say for sure. However, I believe bargain hunters are going to materialize soon.
I was wondering why a reverse split causes the price to fall. It seems that each share holder is left with the same precent of the stock just a smaller number of shares and the reverse split has the benefit of posibly moving the company out of the over counter market and this may bring in more buyers. Also I know some investers that will not look at stocks that are under one dollar. I still feel like this is a good company.
Editor: Because many reverse split are associated with the companies that have continued to pump so many shares into their floats due to their endless need for cash and failure to deliver on their business model. In essence, they issue tons of stock at a discount to the market, the stock drops to a very low level, they reverse split, then start the process all over again. The stock is higher, they start issuing shares, and the stock goes down again. However, sometimes companies reach a point where they are ready to be looked at by investors- i.e. fund managers, who can’t buy a $.15 stock. In this case a reverse split can be a positive. I believe this is the case with two of my current follows- USEI and PHCHF.Â
I wonder if you have any stock plays for year end tax selling. Do you see the January effect for small caps this year?
Editor: Good question Tom- the “January Effect” used to actually happen in January. Over the last 10 years, the January effect has really become the Santa Claus rally. Investors tend to sell their losers in the November time frame to lock in their tax loss, and the stocks bounce back in December. The exception was last year- in early 2006 the January effect actually happened in January. This year, it will probably revert to the norm, which means we need to look for January effect ideas around Thanksgiving. The best opportunities will be in companies that are perfoming fundamentally, but who’s stocks are doing so well. USEI could be a good candidate. I expect the stock to have a much better year in 2007 than it had in ’06. I will be looking for opportunities of that nature around Thanksgiving- one that comes to mind- DXCM- since getting clobbered the stock has never recovered and never found a bid. It was a huge win for us earlier in the year.Â
I agree and believe that USEI has bottomed out. Hopefully a decent rebound will now take place. I am so confident that I have increased my position by another 10,000 shares and am hoping USEI rewards my faith the way Titan Global (used to be Titan General) did and increase 200%.
Editor: Would like to see it continue higher. The company needs to keep the news flow coming. Funny you should menetion Titan- someone just asked me to look at that one again. The numbers in their Q4 (end of August) are going to be very strong.Â
My career in the automotive industry confirms that this technology is the future! Its not electric nor is it corn/ethanol…too costly folks.
GM has been working this tech for years along with the Japanese ( Isuzu ) and this company is a direct benefactor.
Best opportunity I have seen on this website thus far!
Editor: Thanks for the contribution. It’s all about the orders. I they get the POs as promised, the numbers will go crazy in 2007, and from this market cap south of $20 million you have an outstanding opportunity. When some real numbers are in the rear view mirror, you will be sitting on some strong profits.Â
Capitulation due to lack of liquidity
Since USEI is going to reverse split, my non-USEI question can hopefully be excused: I feel that OTC has been able to “find” for their clients great concept companies and I usually agree with the “why” they should succeed in the market but often the trading volumen on these “great idea” companies is so ridiculously small that I have the unique (dis)pleasure of finding that I AM THE MARKET and that cannot be good. Examples SUUB, NWKI and HESG for starters. Would it not be better to have microcap stocks that are promising AND have some minimal liquidity? I am writing this as I look at my substantial holding in NWKI and find that I have a MULTIPLE of the daily volume…….and the capitalization of the company went down 20% (on paper of course) in a trade worth less then $200. That is not investing, that is just silly……
Editor: I try to find a smattering of ideas which have varying levels of liquidity. You bring up a few examples, but you aren’t mentioning the micros that are fairly liquid. For example, how about ACTC- 665,000 shares average per day; or CPNE which has been my number 1 idea almost this entire year- 302,000 shares average per day, or even beleagured USEI- 370,000 shares per day. Lots of them start out illiquid, but pick up. Sometimes the illiquid ones get the most price appreciation as they can trade very well on limited volume- see ARGA. NWKI is problematic- the numbers are coming up nicely, and the company should turn profitable next year- they have restructured their debt much more favorable for shareholders. However, the company has gone into an IR shell and is doing nothing to inform investors. I would like to see interest in that one pick up, and if they stay the course I’m sure it will. Â
I feel about TLPE as you do USEI. I bought @ .26, and it’s delivered great news, but continues to grind down. The company must be selling stock. I’m hoping the usual small cap advances of early January will send it up. Otherwise, I’ll just have to take another loss.
Editor: I was very honest about the situation at TLPE- They got in big debt with the most agressive microcap financier out there- they have a reputation for being very aggressive sellers when in any kind of convertible or toxic situation. USEI is a bit different- their problem is old investors who have been in for a very long time- TLPE has the problem of a relatively new investors with a huge pile of debt relative to the company’s corporate performance. TLPE can manage the debt by paying in cash if they start generating bigger numbers- and they seem to have some big growth plans. I can’t tell from the SEC filings exactly how much debt is being converted into common stock which is being sold into the market, however I can tell you the number of shares I&O went up significantly over the past couple of quarters, which suggests debt and interest are being converted into shares which are being sold into the market. On the plus side, the SEC has implemented some new rules just recently to reduce the number of shares these kind of financiers can pump into the market for companies with market values below $70 million. Quite right- a low could be coming soon.