I had a rather entertaining day on Friday when I checked the early quotes and scanned the stocks I follow for news. Much to my surprise, a columnist from MarketWatch decided to write a rather nasty editorial piece on Spicy Pickle Franchising (OTC BB: SPKL) entitled “Stupid Investment of the Week”.
I strongly recommend everyone who owns this stock or has any interest read his column. Surprisingly, except for the headline and the way he characterizes the company, I pretty much agreed with what he had to say. I can’t quite figure out why he would pick on Spicy Pickle vs the other four thousand $.30 stocks that are losing money out there in the speculative world. There are a lot of stocks with a lot less substance to pick on.
In fact, I don’t think anybody really cares what this guy had to say about the company in today’s environment when Freddie and Fannie have been ceased by the government, Lehman Brothers and Bear Stearns no longer exist, and AIG is on life support from the Federal Government. I mean, really- who cares.
Factually, he had some good points, most of which I have already pointed out in past writings. Spicy Pickle is still losing money and at some point they will need additional capital. It will probably require $1 million to $1.5 million sometime in the next six months to get to the point of positive cash flow. One year ago today I thought they’d be profitable by now. One year ago today I did not factor in a nasty recession and a complete
implosion of the entire credit world. My mistake.
Needless to say, everyone who wants to be sensational tweaks the presentation to fit their theme. Author Chuck Jaffe does not bother to mention Spicy Pickle had 12 stores open about 2 1/2 years ago, has over 50 stores today, and has a top line growing at about 300% per quarter- the revenue number is small, but the underlying stores are delivering somewhere in the range of $25 to $30 million in annual revenues.
He also points out I still own 1.7 million shares in my disclosure, and that I might just decide to go ahead and sell them all. First of all, it’s really about 1.4 million shares. I have made some money on the stock, but I also wrote the check and took the risk. I paid for every single share I’ve ever sold just like any other investor. He doesn’t bother mentioning that I took most of my profits between $1.50 and $2, which cooresponds with the
exact time I published a BLOG suggesting everyone else take their profits on the stock as well.
So, let’s be clear. Things have changed in the last six months. It is a tough environment for Spicy Pickle. They are not as stable as much larger, much better financed chains. They did pull off a great coup closing the Bread Garden acquisition in Western Canada in a stock only transaction, which added 11 locations to their network. They are reducing costs to match the environment.
I plan to hold the position I own through the recession, and will only sell the shares if I have to because I need the money. I am not recommending buying the shares today for anyone with anything but the highest risk tolerance. I would prefer to see have a better vision of the “path to profitability” before suggesting anyone get aggressive. If you like the company and have a little faith in the management, there’s nothing wrong
with holding on to what you have. I believe the company will find its way to profitability, and will grow and prosper once the recession ends. It could be a painful trip to getting there- I don’t know. Also, I don’t control all the shares in the disclosure on the site, so some associates might sell some to raise cash.
I am a big believer in hearing both sides of the story, so I recommend you read Mr. Jaffe’s article. It’s also available in audio form, complete with movie sound bites that are rather entertaining. His audio version comes out somewhere between Howard Stern and Cramer. It’s a lame attempt at a sort of irreverant sensationalized humor.
And, another point I want to clarity: I am not recommending anything but cash for anyone with less than a six month time horizon on investing. I heard one analyst today say it’s time to buy broken stocks, not broken companies. Let me be very clear about what I am
recommending for bottom fishing courageous investors aside from the standard ideas widely covered (in order of importance):
- FXI (Closed End China Fund on NYSE): This security trades on the NYSE and represents a portfolio of China Blue Chip companies. The stock is down over 60% this year, yet the behemoths with the portfolio are doing fine. The companies within the portfolio have an average PE of 10, and continue to grow anywhere from 10% to 40% annually. GDP growth in China is expected to slow from about 12% to 7%, but I believe slowing growth is priced in. At its current price, there is about a 4% dividend. Eventually, the global investment community will remember China, and realize slower growth is not the same thing as a recession. 1.3 billion people are still there.
- China Energy Recovery (OTC BB: CGYV): Through the first 6 months of 2008, $9.8 million in revenues and $564k in profits. 172% growth rate over 2007. $6.7 million in cash. Has technology that gets rid of pollution and recycles energy in coal burning plants in the Far East. Stock has been decimated by forced liquidations from disolving institutions. I anticipate no need to raise capital, ongoing profitabilty, and growth well into 2009.
- PhotoChannel Networks (OTC BB: PNWIF): Cash was a little low last filing for the June quarter, but no debt. The company should reap the benefits of massive customer roll out for Costco in the first half of 2008. They provide online photoprocessing services for customers of major retail chains like Costco, Sam’s Club, CVS, Walmart Canada, and many more. Upload your photos online, order, pick up in store in one hour. Could do surprisingly well in the coming Holiday Season as consumers will spend a lot less than normal, and framed photos make great, inexpensive gifts. Also decimated by forced liquidations of funds. PNWIF is cash flow positive and should remain that way from here forward.
The other stocks I provide following for: EFSF, NIHK, PLTG- all very risk and stocks I believe you might as well hold if you still have them. I’ll continue to keep everyone informed as a service, but I am not suggesting piling into any of those names without more positive information.
I hope that clears up any misconceptions fostered by Jaffe’s article. To read the article simply Click Here. To hear the audio version, which is highly entertaining, Click Here. Please take the time to do this. If you are a shareholder and disturbed by the content, simply sell the stock and get out. Be done with it. For the most part, no one seemed to care.
In fact I’m pretty sure no one really cares about these ideas right now. Most people are distracted with much bigger problems, and only a few stalwarts will filter out the noise, take a clinical look, and take the risk.
I understand. I am overwhelmed with problems as well. Eventually, investors will come around, greed will creep back in from fear ruling the roost, and interest will resurface. Those stocks you see listed above probably won’t be as cheap, but there’s multi year moves left in all three of them when the irrational selling ends.
Amazingly intellgent comment. Unbelievable finally someone is letting everyone no what I have been trying to say for a year Thank you Chuck Jaffe
Editor: Thank you for your contribution. Actually, when you take out the sensationalism, his conclusions on the challenges the company faces right now are not that different than my own. Here is my response for those who care to read it:
http://www.otcjournal.com/Managing-Stock-Market-Fear-Spicy-Pickle-Slammed-in-Editorial/af/archive/20081018-1/
Have to agree with you in all points of your comment on this article of Jaffee. It also uses too many wordings to make wordings which shall make his articel sensational. I do not like this style of journalism at all. Last but not least some of his arguments are stupid: No question investing in ANY microcap, especially nowadays, might look stupid….as it must have been stupid to invest in bank big caps in Spring 2008 ….while it was already clear that a bubble will boost in might drive bank stocks into the ground. With other words: SPKL has less problems than Bear Stearns! And thus this stock seems a chance for me to invest in a newcomer. But, of course, I invest just part of my cash and watch if how SPKL progresses. If an investment in SPKL is stupid….which inevstement in microcaps is not stupid right now!? Jaffee would find thousands of stocks which are stupid investements now. Strange picking out a growing story. Sorry, this guy is not serious. And, you did well, to make some cash with SPKL…stocks are made to make cash sometimes! Otherwise I would have to take you as such a bad publisher that would not be able reading your journal anymore
. Hope you will continue to comment on SPKL !
Cheers
Editor: yes- as Mr. Jaffe points wrongly points out – I still own 1.4 million shares (he said 1.7). One would think the fact that I have not sold them could be viewed as a positive. I recognize this one is now highly risky as the company is not profitable. The only two microcaps I am recommending are both profitable companies that are growing and don’t need to raise capital. I am sticking with SPKL because I have a gut instinct that tells me they are going to successfully navigate this tough environment and come put the other end as a profitable company that continues growing for a number of years. Don’t forget, when things get better, there are still another 90 franchises committed to in the US, and now they have International expansion.
I don’t own the stock, because there is no short term gain to be had for me, but I did listen to Chuck’s analysis. It sounded like every argument you could ever hear about why an entrepenuer can’t make it in a competitive business in tough times. No great businesses would get started if businessmen were devastated by his arguments. It takes a knowledgeable, long term, courageous, entrepenuerial attitude to go long (6 months plus) on this stock. If you don’t have that, get out and or don’t buy.
Thanks very much for sharing Chuck’s comments. He overdoes the “stupid” stuff, but he is just trying, in his own way, to prevent investors from being devastated.
Editor: I totally understand that what he is really saying is that just because a microcap stock is cheap and you like the product, it doesn’t mean it can’t go down- especially in a nasty recession like this. Why SPKL which really does have some substance vs the hundreds of other choices out there, I can’t say. Here is my response if you are interested:
http://www.otcjournal.com/Managing-Stock-Market-Fear-Spicy-Pickle-Slammed-in-Editorial/af/archive/20081018-1/
Well, well, well. What a damning article, but it validates everything I said for over a year. Hell, the article could have been written by me. Everything, and I do mean EVERYTHING in there is EXACTLY what I’ve been saying.
Editor: I’m not really sure you’ve been saying anything factual. If you would care to share some facts, then give your opinion, feel free to do so. As I said in my response and weekend edition, if you are a shareholder and concerned about the company’s ability to survive this recession, sell the stock and be done with it. Here is my response to the article:
http://www.otcjournal.com/Managing-Stock-Market-Fear-Spicy-Pickle-Slammed-in-Editorial/af/archive/20081018-1/
As you say, why not pick on the thousands of junk pennies out there, rather than a good company? I guess because no one is tempted to buy the junk now and no one is asking him about them. Spicy Pickle got his attention. It is a bad break. I like it when guys like Chuck and Cramer make mistakes, the stock may suffer a little, making a great buying opportunity. Sad thing is it did not work out well this time.
Editor Well, it didn’t really seem to effect the stock much. I don’t know that it’s a great buying opportunity yet, but the company is moving in the right direction for the current environment. I believe they will lower overhead, raise revenues, and raise a little more money. They will bootstrap their way to profitability, which will set them up to do well when the recession ends.
I take the liberty to add: I am amazed about some comments here by people who have known everything already before! I have to laugh my head off: If those ‘eggheads’ know the problematic financial progress of SPKL already since many months ….why the hell those guys included the real financial ‘eggheads’ did not tell us about the bank crisis coming ?! I believe there is a lot of hate in the market in the moment when people loss money with microcaps….otherwise they would not hang around here and invest in GM or Apple. SPKL in my opinion will be a survivor in this microcap desaster. And those who know how to invest in such microcaps like SPKL would anyway invest just 5% of their money and place SL orders….Thus I do not see any stupidity in an investment in this stock as their are much more stupid investments available….and has been done ! I purchase 300k shares of SPKL and until 2009 I hope to hold half a million, bought cheap of course, to profit by the future of this growth story. I am not in love with SPKL!!! I just read between the lines of the news releases. They are hot on getting big !!! And that counts longterm.
Editor: Interesting comment. I don’t have any hard evidence to prove the company will survive. This is simply an instinct based on a 40 year relationship with the CEO. Here’s what I know- same store sales are not falling. I know the cash flow from those stores comes in everyweek. I know they can literally ramp the company down to run on fumes if they have to, and still be around. They have over 50 stores that are all doing fine, and the commercial real estate market is finally cracking. I am informed spaces are being offered at $9 per sq ft for the first- down from $40. Under these terms, leases are now close to being signed for the first time in months. I believe they will survive, but I also believe one will have to hold the stock out to the other end of the recession to make any money.
okay I’m still in there and I also took profits at the $2.00 mark. I have accumulated about 5k shares now and watching for a turn around I can wait!!
Editor: As it turned out, good job selling at $2. It might be a wait to see the stock start to behave better. The company has to reduce its overhead, raise a little more cash, and expand a bit more to turn profitable. It’s very difficult to be a money losing company with limited capital in this environment- however, I also believe all those factors are already priced into the stock. It’s a risky proposition, which is why it’s a $.25 stock.
I notice your ssl is 90 cents why would I invest in this company at 25 cents? There much be something wrong
Editor: No, there is nothing wrong. That was my SSL, and the stock is way below that level. Therefore, if you are still holding the stock, you have to be long term- by that I mean 2 to 5 years. I continue to provide information on the company because there are long term shareholders that follow the newsletter. I think it will be a great stock to own in 2010, but it’s going to be a tough 2009, as it will be for many companies that sell anything to US consumers. However, everyone has to eat, so the company will hold its own, and through some growth and trimming its overhead, it could turn profitable during the course of 2009.
no I am not holding the stock my question was why should I invest in a stock that your ssl is 90 cents and its is trading at 25 cents? I don’t think anyone who looks at that number would go near this stock something bad has to be going on
Editor: I’m not suggesting you should invest in the stock. I suggest you watch the video at the home page on SSLs. There are all kinds of investors. The SSLs are for those who have a shorter term time frame and want to make sure they preserve capital. Others choose to be long term and not worry about price. I invest both ways- sometimes thinking shorter term, sometimes long term. I know which it is going to be when I go in. I provide updates as a service to those long term investors who still own the stock, myself included. If you sold it at the SSL, and you have a lot of courage, you might want to look at it while it’s so cheap. However, I am not strongly recommending new positions in SPKL. In this environment I am not strongly recommending any companies that are not making money with plenty of cash. I believe it is going to be very tough to raise cash right now. On the list I cover, the only two I recommend are China Energy (CGYV) and PhotoChannel (PNWIF)- both are making money, growing, and well financed. SPKL has a plan to become profitable in 2009, but I want to see them move further down that path before I would make it a strong buy. The positive- they have a nice recurring revenue stream that is not going away. If they have to lower their overhead to match the revenues, they will do that. I appreciate the question.