The Pickle Gets Panned

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.

China Energy Handles Sludge

CGYV was out with news pre open today, and it reveals a bit more about what they are capable of doing.

On the negative side, the stock is now trading at $1.30, which is a new all time low for the stock. Technically, it is still obviously wrestling with supply- it could be from more forced liquidations, or it could be from people who have been open market purchasers just throwing in the towel. Whichever the case, I’d like to see a few up days consecutively in the stock before suggesting it is any sort of a technical buy. Clearly, one big up day in the large cap markets is not going to right the ship in the small stocks.

So- just so we’re clear. For those who wanted to protect equity, my SSL was $2- so you should have sold it at that level. Technically, until the stock gets back into an uptrend, I would stay away. Fundamentally, if you want to buy the value and be long term, the stock is a buy right now at these levels. The choice is yours and you have to know your own style. If you have a six month window in time, I believe the stock is a buy.

Today’s news concerned the delivery of a boiler to a paper mill. The paper mills are the big polluters of the rivers. They are the ones who crank out the black sludge which gets into the water systems and wreaks havoc.

CGYV has solutions for that in addition to its solution for air pollution. CGYV designed and installed a boiler to solve the black sludge problem. According to the press release, the boiler can handle up to 160 tons of this black sludge daily. It takes the steam generated from the boiler, and turns it into 2 megawatts of power. The factory can also reuse some of the waste from the boiler.

As you can see from the chart, the stock simply continues to grind down a bit lower everyday. I don’t know where the bottom is, just as I don’t know where the bottom is in anything.

It seems there is probably about 50% more stock for sale than is being bought. The goods news- as long as the company continues to grow, the supply will eventually be finite and the demand can be infinite.

Right now, there is an imbalance and I can’t say when or if the imbalance will change. If the fundamentals keep improving, and growth money goes back to China, this idea will benefit.

Comments and questions are welcome.