US Energy Flops- Stock Swimming In Supply

Revised 9/14
I was optimistic after reading the revelation this weekend out of USEI. Frankly, it doesn’t get any better for a microcap situation. A company with a revolutionary new fuel saving technology and annual revenues in the $1 million range inks a $54 million contract to have their technology installed on 50,000 buses in the Far East. This is a microcap investors dream. Those who took the risk and bought before they inked the contract should be seeing green on the screen.

However, investors were treated to a disappointment as massive as the size of the contract- an absolutely pathetic showing by the stock on the highest volume day in the stock’s history. The stock actually closed a penny lower than the opening price- technically this is atrocious. It suggests lower levels are imminent.

I’m sure many of you are wondering how this is possible. How could the company deliver such huge news and the stock end up lower? The answer is rooted in the company’s history.

If you read USEI’s bio, you will note the company was formed in 1996. It’s 10 years old. According to the SEC filings, the company has burned through $20 million in funding over that time period, and to this date still carries about $5.5 million in debt. There is negative shareholders equity of nearly $2 million.

Shareholders are now paying the piper for the survival of the company over the past failed years. Companies do what they have to do to keep the doors open. The float of USEI is clearly polluted with cheap stock, no doubt issued at deep discounts to the current market value. If you look through the SEC filings, you will see numerous registration statements, and several classes of preferred stock which no doubt have a conversion feature with a discount to the market. One year ago there were 83 million shares I&O- today there are 123 million, and I’ll bet that number will climb.

Monday’s trading action in the stock was pathetic. I was very encouraged in the early going as the stock did not have a huge gap at the open. It only opened 10% higher than Friday’s close, then started trading up for the first hour. It made a high of $.26 about an hour into the trading day, then simply started cratering.

Here’s the way I see it. I can’t identify who the sellers are in this stock, but I can tell you they are selling “stupid”. They sabotaged their own value with their greed. Once the stock started down, instead of curtailing their selling they no doubt kept hitting the bids. As the stock started to collapse, traders with a short term outlook who had probably bought that day began to sell as well. This created momentum to the downside, and resulted in a terrible close. With a lighter hand, they could probably all be selling a few shares every day at $.28 right now, instead of a lot of shares in one day.

With the damage done, where to from here? Let’s look at the positive side of the equation- the numbers. The company has formally provided a forecast of $1.6 million in revs in Q4. This equates to annual revs of $6.4 million. Looking out to 2007, based on announced contracts, I would expect no less than $17 million with no further new sales. I am assuming the 5 year contract for 50,000 buses is divided up equally. It should equate to $10.4 million per year in high margin business plus the current $6.4 million.

This will also equate to a 750% top line growth rate. With their margins, the company should be able to generate gross profits of $8.5 million, which should translate into at least $2 million in positive cash flow in 2007. Companies with this kind of growth rate and black ink can easily trade at a very conservative 5 times sales- $87.5 million market value. Assuming the company finds its way to 150 million I&O by then, you are looking at a minumum $.60 stock.

10 times sales could also be a reasonable target if the stock can get some momentum and the company delivers more contracts. Therefore, a reasonable 2007 target price is somewhere in the $.60 to $1.20 range.

Here’s a look at the chart.

usei11.gif

All this stock needs is more big volume days to clean out the excess supply created by 10 years of ongoing losses.

The stock will then break out, and investors who had the patience to stick it out will be rewarded with superior returns.

So, how much volume will it take and when will it happen? I don’t know. I don’t have enough information from the company to quantify the number of shares that could be for sale, or how long it will take to eat through them. I do know we need more high volume days like Monday to get there.

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.

In conclusion, here are my thoughts. With the corporate developments, higher levels in the future are a fait accompli. However, this stock is not for traders looking for a short term pop. There are too many sellers at this time, and they are selling stupid.
If you view yourself as a longer term investor with a 6 to 12 month time horizon, this is a great microcap speculation.

There appears to be unlimited supply north of $.20 for the time being, so I would be an aggressive accumulator of the stock below or around $.20. If you bought between $.22 and $.25 over the weekend as I suggested, you can sell at the next surge if you want out. Or, just hang in there if you are longer term. This might take some time, or it might be ready to take off. I just don’t know.

Comments and questions are welcome. They will not show on the web site until I respond. Give it 24 hours.

11 thoughts on “US Energy Flops- Stock Swimming In Supply

  1. Thanks for the additional information. My only concern is that they previously gave away a lot of shares to insiders as compensation for nothing or pennies. I’ve seen this in other BB boards where they are so happy to get something for their shares because they don’t believe in the company. I wonder how much of that is going on here. Is this the cancer you keep speaking of?

    Editor: I can’t say who the sellers are, and I don’t know the history well enough to know exactly who has how much. However, I know it is a finite number. I also know the CEO believes his stock is absurdly undervalued. If the company just delivers on announced contracts, it will break out sooner or later.

  2. Question
    Wouldn,t the 54 million dollar contract over five years amount to almost 11 million in revenues per year and not 5.4 million as you have stated

    Editor: Oops- quite right. It would be $10 million per year- equating to $17 million in annual sales. Could bring $1 into play as a target. 

  3. Great stuff. I really enjoy your work and have done very well with cpne. Just a comment on your answer to Howard about how the CEO believes the stock is absurdly undervalued.
    Do you have enough information to find him creditable. We don’t need another CEO like Mr Mohlman of American Water Stars. Thanks

    Editor: All I care about is results. If the company delivers on the contracts it has announced, we will see results. If you recall AMW, there were major contracts promised, but they never seemed to get signed. Therefore, at this point I believe we have a really good shot here, but until the numbers are in the rear view mirror instead of out on the horizon, the stock might continue to struggle. I am a serial optimist, so I am prepared to believe until proven otherwise. 

  4. any chance that the current drop in oil will have a negative impact on sales for this company. How far do you think oil would have to drop for this to have a negative impact on sales?

    Editor: That’s a very good question. I have always looked at this technology on a “pay back” basis. Anotherwords, how long from paying the money for the system does it take to recoup your investment. There is a huge variance based on the price of diesel and the type of engine. However, 4 to 6 months to recoup your costs has been about the time frame quoted by the company. If diesel drops 20%, it would make sense that the payback time would go up by 20%. While that is a little bit of a concern, my bigger concern is more macro in the market. If Wall Street loses all interest in this group because it rotates out of the alternative energy sector, the stock might flounder even if the company delivers. I don’t believe that will be the case- I believe the alternative energy sector will continue to hold the attention of investors for some time to come. 

  5. How will the military coup in Thailand affect the contract? How should we view the coup?

    Editor: Very good question. Will look into that. I never thought of Thailand as unstable.- FYI- I spoke with the company- they say it will have no effect on the contract. In fact, as it turns out it is better. The King is very much behind what they are doing.

  6. Hi,

    With all the shares outstanding, would it be possible for USEI to do a share buy back program in the future, instead of maybe having to do a “reverse” stock split? I hate reverse stock splits and wanted to know how likley is this to happen?

    Editor: This is a distinct possibility, and I am glad you brought it up. I can tell you the CEO is spitting mad about the way his stock is trading, and really fed up. He doesn’t feel the market is rewarding his shareholders for performance. As covered in the last BLOG, this stock is swimming in supply from old shareholders. A quick look at the amount filed for sale in August only touches the surface. These are investors that have owned their shares for less than 2 years. You don’t see the filings for the ones that have owned their shares for more than 2 years- this is called a 144k filing, and no reporting is required. I don’t blame you for hating reverse splits- typically it happens with stocks that have huge floats and failed business models. This one could be different. Regardless on reverse split or not, the stock still has to go through the process of eating through the excess supply. A reverse might just accelerate the pain, and provide an unbelievalbly cheap entry level for investors. However, since the company is absolutely rocking, it’s time for institutions to start looking at this idea. Not all reverse splits are bad- it’s really about where the company is. If it happens, in this case I believe the pain would be short lived and provide investors with a bargain basement steal.

  7. Perhaps I’m reading too much into the possibility of the reverse split, but I’ve seen it really hurt the stock price – if the price went to $5 as a result, it does give opportunity for short sellers to hit the stock again – I’m not saying the company is bad, it does seem to be running on all cylinders as you say, but I’ve seen lots of bad things happen to these BB stocks – I do believe its fair value is close to $1, but who knows?

    Editor: Fair value close to a dollar seems a little pricey to me. I always look at market cap-price is relative, market cap is absolute. $1 would be a $140 million market value. This company could definately draw that kind of value, but not until a lot of these announced orders have actually been delivered on, and the company continues growing. For now, my view is $.50 would not be an unreasonable valuation by any means. As far as a reverse goes, it might be an appropriate move in this case. It might cause a little short term pain for shareholders, but longer term they are ready to get out of the penny market. 

  8. What a farce, another one of your great pick. The stock is droping like a ton of brick ???

    Editor: You have to take the good with the bad. I noticed you didn’t mention CPNE- $.19 to $1.70 this year, and published, published, published, and published as the number 1 pick. Or, you could have mentioned BTYH, that has been a complete flop. Or, you could have mentioned the May 21st edition, where I told you to sell USEI if it dropped below $.27. If you are going to whine, you might want to bring in the whole picture. I had an SSL of $.27 on USEI- if you didn’t sell, stop whining and decide if you want to keep it in here, or sell it and move on. 

  9. Thank you for your coverage of USEI. I have been following them for a couple of years (started as HYFS.) Your response to the last comment seems to imply that you may that USEI is no longer a good investment. I feel that it is very underpriced given the contract and that last press release saying that December maybe their first profitable month. I know you can’t be sure until all the numbers are in but a large part of a stock price is based on predicted future income and USEI seems to be in a very good position. All the good news lately can’t get this moving up but I feel like it is biulding a foundation and it will start up sometime soon but it is unclear what will start it moving. Thanks for you information.

    Editor: I do believe it is a good stock to own for the long term. I really like what the company is doing, and plan to continue covering them. However, people need to understand why the stock traded so poorly in light of the fantastic news the company delivered in September- I believe this problem is an opportunity to accumulate. However, if you have a trading mentality, forget about this one for sometime. There is substantial excess supply, and every decent surge up will probably bring the sellers back out of the woodpile until their supply is eaten through. If they continue on the path they are on and start turning some of these contracts into cash, this stock is going to trade at much higher levels. The bad news: about $.20 might continue to be a ceiling- the good news: you can accumulate a lot of this stock while it is cheap.

  10. I purchased a couple of small blocks and am tempted to get a few more as the price of USEI approaches 10 cents. I believe in the company and appreciate all your analysis, but I have seen too many of these BB companies blow up and just wonder what you see as the downside. Its stock price movement is typical of a company heading for bankruptcy where insiders get out because they know their shares will become worthless at some point. I have a long time frame and no sour grapes here like that other poster, but I wonder what gives here. The persistent selling here is causing me reason to pause and reflect.

    Editor: In this one, I believe the downside is 100% technical- not fundamental. This means I don’t see any chance of  bankruptcy or anything as nasty as that. They have the resources to keep rolling, and once these contracts start generating revenues, I believe the stock will start to behave better. It’s simply a matter of time before the supply gets eaten through. There are two scenarios which could hurt shareholders: 1. a big reverse split- this would be temporary, or 2. allowing the stock to drift down to pennies and taking the company private for next to nothing. I can’t say for sure that neither will happen.  

  11. Drop, drop, drop, like a ton of brick, hitting new low every day, very bad news here.

    Editor: Depends on how you look at it. This one is definately a mess as I explained in a very lengthy BLOG shortly after the big announcement on the contract. So, if you are a trader, and you are long this stock, it definatley sucks. However, if you understand the supply/demand dynamic, you realize that this stock will eventually trade better. If the company were not delivering, I would not make that claim. Therefore, if you want to make some real money, this problem is more of an opportunity – if you are a long term investor. If you are a trader, stay the hell away from this mess.