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Shares of STW Resources Soar in the Two Trading Days Prior to Announcing a Big Contract

Even though STW Resources Holding Corp. (OTC Pink: STWS) is not typically the type of stock I buy, I have been watching the stock since early this year.  The company originally drew my interest when it filed all of its 10-Qs for 2013 on the same day in February 2014.  While this is usually not a sign of anything good, I thought it was worth a look.  Upon review, I was intrigued by the fact they actually seemed to have an actual business with revenue.  However, the balance sheet was weak and it did not seem worth the effort to investigate further at the time so I just stuck it in a watch list.

Fast forward to June 20, 2014 when the company filed its 10-K along with a press release that contained an outlook for the remainder of year.  Revenues, while still small, seemed to be gaining steam and it was producing from two income streams – water desalination and oilfield services.  The company also commented that it had turned the corner and was posting positive cash flow on a monthly basis.  At the time, I still did not see this as an investment, but the news seemed good enough to catch the attention of other investors.  I decided the downside with the positive news was limited and there could be a quick jump higher, so I put some money to work in STW as a short-term trade only.  Shares did move briefly higher and staying true to my short-term trade strategy, I took advantage of the move and sold.  It was not a big winner, but probably worth the time. 

Since I made the trade, I continued to read some press releases by the company, but there was nothing that piqued my interest.  Especially since shares had moved even higher since I sold.  I thought I was taking a big risk when shares were at only $0.10, but now they were trading as high as $0.19.  Then, out of the blue, the stock started to move higher. By the end of July shares were trading at $0.25.  I had no explanation.  There had been some contract awards in June, but in the penny stock world you usually want to see the money first.  I am always amazed at the number of companies awarded contracts and then nothing ever happens. 

I presumed maybe the stock had just been attracting some attention with its press releases and investors were taking positions ahead its impending 10-Q filing which is currently well over two months past due.  For me, I had better places to put my money or so I thought.

All of the sudden on August 1, 2014, the stock of STW rockets nearly 57% higher to $0.40 per share.  If that wasn’t enough, shares tacked on another 60% the following Monday which was August 4th.  I checked for press releases, SEC filings and the company’s website to get any hint of what might have prompted the stock to rise 151% in just two trading days.  Nothing…

Then on Tuesday, August 5th, STW put out a press release announcing it had signed a contract with the City of Ft. Stockton, Texas.  Huh?  So the stock rises 151% two days prior to the announcement on high volume, then drops when the market opens on announcement day, and has been generally weak since as if someone is taking profits.  It sure looks a little suspicious to me.  This could be just another pump-and-dump, but seems unlikely with a news release a day after the massive two-day run up.  I don’t follow pump-and-dumps, so if anyone has information that this stock was being promoted, feel free to comment. 

STW Resources is most likely not on the radar of the SEC, so any investigation of the abnormal trading is highly unlikely.  I suspect someone was aware of the news regarding the contract with the City of Ft. Stockton.  Then the individual or individuals proceeded to use their access to the inside information in order to make a nice chunk of change.  Call me a skeptic.

Disclosure:  The author did not own shares of STWS at the time this article was published, but did briefly own shares in June 2014.

Hancock Fabrics Scraps Reverse Split Thanks to Those Greedy Investors

After the market closed yesterday, Hancock Fabrics, Inc. (OTCQB: HKFI) announced it would pull the plug on its reverse split and not seek the approval of shareholders at the upcoming annual meeting.  The plan proposed a 1-for-1000 reverse split with fractional shares being acquired for $1.20 per share.  As expected, the stock took a major hit today as those investors expecting to cash out their 999 shares at $1.20 per share began unwinding positions.

The plan was originally unveiled in an earnings release on April 25, 2014.  On May 9, 2014, the company filed a Schedule 13E-3 and its Preliminary Schedule 14A making its intentions of a going private transaction official.  Investors saw opportunity and immediately started stuffing as many accounts as possible with 999 shares.  This is a very common technique used by many to receive what is normally a low risk and nearly guaranteed return.  That is unless the company pulls the rug out which it did in this case.  Hancock management gave investors their first hint something was amiss on July 15, 2014 when the company filed an 8-K concerning its rights in connection with the proposed reverse split. 

The company stated it was reserving the right to abandon, postpone or modify the transaction as well as reminded shareholders it could aggregate multiple accounts if the accounts were deemed to be all owned by an individual holder.  Apparently the company did not anticipate the attention it would receive from the split announcement and most likely assumed the amount to be gained was insignificant enough to not be worth investor’s time.  They were wrong. 

While many would scoff at the opportunity to make a quick $200 – $250, it can be significant to many as well.  What makes the opportunity even more interesting is stuffing each of your accounts with 999 shares in hopes they will not be aggregated.  It is not unusual for investors to have many accounts made up of taxable accounts, traditional IRAs, Roth IRAs, ESAs, custodial accounts and so on that could easily add up to 10 or more accounts.  If you acquired 999 shares in each of your 10 accounts for approximately $0.95 per share, you are now talking about collecting closer to $2500.  Not bad for a day’s work and each account would have required less than $1000 cash. 

This strategy appears to have been at work in a big way in the case of the Hancock Fabrics reverse split.  In the announcement yesterday, Hancock President and CEO, Steve Morgan, stated, “At this time, the Board feels that the expense of the transaction, due to the abuse of the multiple account purchases, which the Company mentioned in the 8K filed on July 15, 2014, has grown to a point that it now exceeds the benefits it would generate for our remaining stockholders. We look at this transaction just like any other business investment decision we would make and have decided not to proceed based on the economics at this time. This does not mean we wouldn’t propose another similar or alternative transaction in the future when and if it becomes economically prudent and in the best interest of the Company and its stockholders.”  Mr. Morgan believes investors have abused the system with “multiple account purchases.”  I suppose whether or not you believe this is abuse depends on which side of the fence you are standing.

While the opportunity for small positions to profit from the reverse split has past and I am sure there were a few lessons learned, the drop in share price may have opened a door for larger investors to take a position.  The shares finished the day down 11% to $0.80 and may have further to fall as investors continue unloading positions acquired purely to benefit from the reverse split.  Shares spent most of this year until recently trading closer to $1.00 which would give new investors a 25% gain from here if shares move back to those levels. 

The company finished 2013 with some signs of moving in the right direction including positive operating income for the first time since 2009.  The first quarter of 2014 showed some weakness most likely due to weather related issues which many retailers squarely placed the blame for their first quarter shortfalls.  The second quarter results will play a key role in whether or not shares are able to move back up substantially from here.  Due to the issues faced by the company and the high debt loads, it would be prudent to take a wait-and-see approach for most investors.  However, investors with a high tolerance for risk and short-term traders may see an opportunity to play the potential rebound prior to the release of second quarter results. 

Disclosure: The author did not hold shares of HKFI at the time this article was published and did not attempt to participate in the reverse split. 

Disclaimer: The content of this article is for information purposes only and should not be construed as investment advice.  You should perform your own research and form your own conclusions before making any investment.  You may also want to consult a licensed investment professional.

Design Within Reach Shares Skyrocket Nearly 577% on Buyout Offer by Herman Miller

The shares of Design Within Reach, Inc. (OTCPink: DWRI) were up sharply in early trading this morning on news that Herman Miller would acquire an ownership interest of 84% for approximately $154 million in cash.  According to the press release, Herman Miller CFO Greg Bylsma stated,  “Each of DWR’s shareholders will be entitled to receive approximately $23per share on a fully-diluted basis as a result of the acquisition.  Furthermore, an escrow account (borne solely by the largest DWR shareholders), will be established to satisfy any post-closing obligations resulting from the transaction. Shareholders will receive further information from the Company regarding the acquisition shortly after closing.”   

The current CEO of Design Within Reach, John Edelman, and its current president, John McPhee, will continue to manage the operations of the unit within Herman Miller and will convert their remaining ownership in Design Within Reach for a 8.5% ownership stake in the newly formed consumer business unit under the Herman Miller umbrella. Design Within Reach expects to benefit through a larger presence within the higher margin consumer market and Herman Miller will gain access to an exclusive product portfolio further establishing the company as a premier lifestyle brand.  

It sounds like a match made in Heaven, but who cares unless you own or intend to buy shares of Herman Miller.  The real question is can more money be squeezed out of the deal by investors?  The answer is…  Maybe a little.  Shares opened the day at $5.00 after last trading at only $3.25.  It should be noted that last trade was only a few days ago and was the largest single volume day for the stock in the last five years.  If it wasn’t for the fact the stock was actually down that day from the previous close, I might suspicious.  Unfortunately, it may have just been bad timing on the part of an investor tired of waiting for the stock to rebound.  

As I write this article, shares are changing hands at about $21.90 per share.  With an offer on the table valued at $23.00 the easy money has certainly been made and leaves about $1.00 or a 4.5% return on the table.  Of course if you annualize the return begins to look very attractive, but you will have to most likely tie up that capital until the acquisition is consummated.  In addition, there is always some modest downside risk if for some reason the deal falls apart.  However, I see that risk as minimal in this deal. Shares will most likely drift a little lower as investors cash out, and then strengthen again as new investors play the arbitrage.  It will be important to pick your entry point wisely in order to maximize returns.

This is a true turnaround success story for Design Within Reach.  It was only five years ago the company terminated its registration with the SEC and delisted from the Nasdaq as shares sank to well under $1.00 per share.   The current leaders, Mr. Edelman and Mr. McPhee were appointed to their posts in 2009 and have orchestrated an enviable recovery.

Disclosure: The author owned shares of DWRI at the time this article was published.

OTC Markets and Small Cap Notable: ALJ Regional Holdings, Crumbs Bake Shop, First Mountain Bank, Genius Brands, Armanino Foods, Burnham Holdings, Metalico, Hampshire Group, Changing Technologies and SnackHealthy

Movers and Shakers

Shares of ALJ Regional Holdings, Inc. (OTCPink: ALJJ) were up as much as 20% higher in early trading before falling back to gain nearly 12% on the day.  No specific news was out on the company, but the upcoming quarter is expected to be strong and it is possible the stock appeared in a subscription based research service such as Seeking Alpha prior to the markets open.

The ride on Crumbs Bake Shop, Inc. (OTCPink: CRMBQ) has been a wild one ever since Marcus Lemonis and Fischer Enterprises announced they would team up in an attempt to save the struggling and now bankrupt maker of cupcakes.  Shares soared from roughly $0.03 to over $0.60 per share after the possible deal was revealed before crashing back down to $0.16 after the Chapter 11 bankruptcy was announced.  However, today shares saw a revival jumping 90% on news from the Wall Street Journal the bankruptcy was being put on the fast track to consummate a sale.  There has been a lot of money made and lost in the common stock of Crumbs over the last week and this is just a little too sweet for my taste.

First Mountain Bank of Big Bear Lake, CA (OTCBB: FMBP) hit the skids after the bank announced its deal to be acquired by First National Bank of Southern California was off due to issues with regulators.  In May, First Mountain agreed to be acquired by First National for $9.00 per share upon regulatory approval.  Unfortunately, that approval was not forthcoming and shares fell 17% to $7.25. 

The stock of Genius Brands International, Inc. (OTCQB: GNUS) continues to slide after topping $4.00 per share just last month.  The company filed with the SEC to offer 3.125 million shares to be sold by current holders of the common stock and Series A Convertible Preferred Shares. 

Earnings or Lack Thereof

Yesterday, Armanino Foods of Distinction, Inc. (OTCPink: AMNF) reported it had achieved the highest quarterly sales and profitability in the history of the company.  Sales for the second quarter ended June 30, 2014 were up 6% to 7.67 million and earnings jumped nearly 15% to $975 thousand or $0.03 per share.  The company has been on a roll for some time and it just keeps on rolling in the dough.

Earlier today, Burnham Holdings, Inc. (OTCPink: BURCA, BURCB) reported its results for the second quarter ended June 29, 2014.  Sales for the second quarter were up 5.5% to $38.1 million while net income came in at $867 thousand or $0.19 per share compared to a loss in the prior year.  The net loss for the second quarter of 2013 was exacerbated by a $5.0 million non-recurring charge, but the company still reported an operating loss of $569 thousand versus an operating profit of $1.65 million in the current quarter. 

Good News Bad News

Metalico, Inc. (NYSE MKT: MEA) announced yesterday that is expects to report improved results when it releases earnings next month.  The company is forecasting sales to increase approximately 9% to $142 million and operating income to land between $2 million and $2.5 million compared to a loss of $2.0 million in the prior year.  EBITDA is expected to be in the range of $6.8 million and $7.2 million compared to only $2.6 million in the prior year.

In more good news, Hampshire Group, Ltd. (OTCQB: HAMP) announced it has signed a sourcing agreement with Levi Strauss & Company to supply knit shirts, woven shirts and sweaters for the Dockers™ Brand globally.  This extends the company’s current agreement beyond North America. 

Head Scratchers

In the “Head Scratchers” category the stocks of both Changing Technologies, Inc. (OTCQB: CHGT) and SnackHealthy, Inc. (OTCQB: SNAX) were up sharply today.  These both look like a hope and prayer based on the financials for the first quarter of the year.  In the latest 10-Q filed by Changing Technologies, the company shows its only asset to be about $12 thousand in cash and no revenues.  But hey, they are investigating the lucrative 3D printing market.  Thinking about the 3D printing market should at least be worth a market cap of $66 million, right?  This stock was up 83% today to finish at $5.50.

The financials of SnackHealthy do not look much better, but at least they have some inventory.  Total assets amounted to just over $66 thousand mostly made up of inventory and the company had a stockholder deficit of $63 thousand.  Of course no revenues were recorded for the quarter, but don’t let that bother you.  The stock was up 60% today to finish at $4.00 per share giving the company a market cap of nearly $22 million.

First Physicians Capital Group, Inc.: Current Investors Loss Creates Arbitrage Opportunity for Small Investors

Last Friday, I wrote an article about a take under at Gasco Energy in which all minority shareholders will be taken out at a price that was substantially below the most recent trading price at the time of the announcement and put the blame squarely on the shareholders of the stock, not management. Just a week later we have yet another example of a take under being orchestrated by the majority shareholders effectively taking out certain minority shareholders at a price that I believe substantially under values the company.

I have to admit, I struggled with the title for this article. It could have easily gone in completely opposite directions. As a holder of the stock, I am obviously not thrilled about the reverse split that has caused many shareholders to dump the stock prior to the split in order to not own a non-reporting company which will have even less liquidity than currently exists. That is certainly the “glass is half empty” way of looking at it and most likely the way many current minority shareholders are seeing it.

On the other hand, I could view this as a positive for small investors who may not know an opportunity exists to earn Continue reading →