A "low float" stock is one with a relatively low number of shares available for trading. Stocks with a low float and low market-cap tend to be volatile, and can make huge moves to the upside very quickly if they have a positive catalyst. The three most interesting low float stocks in play right now, in my opinion, are CombiMatrix Corporation (NASDAQ:CBMX), Good Times Restaurants (NASDAQ:GTIM) and Renewable Energy Trade Board Corp (NASDAQ:EBOD). All 3 of these stocks have made large moves lately and represent opportunities to profit both on the long and short sides.
#1: CombiMatrix Corporation - CBMX
By far the wildest stock in the whole stock market on Friday, CBMX closed trading on Thursday at $1.97 and closed Friday at $8.6 - a gain of over 336%. This one didn't hit my radar until it had spiked to around $5, at which point I believed its run was coming to an end (fortunately I didn't try shorting it). From a purely technical standpoint, there were a few intra-day breakouts in CBMX that brave traders may have considered buying, such as the breakout past $5 around 10:20am, the breakout past $6 around 1pm, and then the breakout to new highs at 2:30pm.
Some traders shorted CBMX after 3pm, and held short over the weekend. To their surprise, CBMX continued running on Monday, all the way to a high of well over $13 - a truly monumental high from its price of below $2 just a couple of days before. CBMX then faded for the rest of the day, and continued fading during Tuesday's trading. It would seem that most of the insanity here is over, though one must never underestimate these low float stocks. It wouldn't surprise me if CBMX makes another run upwards this week or next, so be careful about shorting it in the belief that it'll probably retrace back.
The news for CBMX, released before the market open on Friday, was that a leading journal had published studies stating that chromosomal microarray analysis was more effective than karyotyping for genetic prenatal diagnosis and genetic evaluation of stillbirths (CBMX is apparently the only publicly traded company specializing in microarray analysis). Whether this news really means that CBMX should be valued 3 times higher is up for debate. It is difficult to determine CBMX's fair valuation.
I believe that its current share price is largely the result of short squeezing and speculation, and that for the time being, CBMX is very much a day-trader's stock where price action is the most important indicator of where the stock is heading in the short term. It's very possible that CBMX is currently not trading anywhere near its real value, whether that is $1 or $20. I cannot yet comment on what CBMX's fair valuation should be, or what the stock will be trading at a month from now.
#2: Good Times Restaurants Inc. - GTIM
While the two companies operate in completely different industries, GTIM is similar to CBMX in that both are very low-float stocks that were previously barely trading at all, which then had positive news and exploded upwards. GTIM convincingly broke past $3 prior to 1pm, before retracing and finishing the day at $2.74 - a gain of over 40% on the day. Similar to CBMX, I believe that much of the volume for GTIM on Friday was from day traders, rather than value investors.
GTIM owns several restaurants in Colorado and reported being (barely) profitable for the three months ended June 30, 2012. On Thursday December 6th, GTIM reported sales growth of 6.8% for the month of November and the completion of its new breakfast menu. GTIM had no activity on Thursday, however, and only started moving on Friday. A 40% move upwards on the day for GTIM may seem highly disproportionate to the news released. However, GTIM still has a low market cap, reasonably healthy balance sheets and many prospects for expansion. It's possible that GTIM has decent long term prospects, though at this stage most traders are only interested in how the action plays out over the next few days.
The drop in volume in the last two trading hours on Friday and on Monday and Tuesday leads me to believe that GTIM's recent moves are at an end (at least for the time being) and that we're unlikely to see another huge run on GTIM in the coming week unless there is another very strong catalyst. GTIM dropped nearly 20% on Monday, and then sidelined on Tuesday. It seems to me that the market overreacted to the news, and although GTIM may have decent long term prospects, the time for trading it in the short term is over.
#3: Renewable Energy Trade Board Corp - EBOD
The Chinese-based stock EBOD surged past $2 on Wednesday and has since managed to hold up in the mid $3s. Unlike CBMX and GTIM, EBOD has not released any substantial positive news that would explain such a move. Rather, it appears that this independent article (published before the market open of Wednesday December 5th) is responsible for spiking the stock up. I am highly suspicious of the neutrality of that article, being that the author disclaims being long on EBOD. I believe the author's intention was to sell shares at an inflated price, rather than to help readers find a stock "set to shine".
As one frustrated investor commented, EBOD has "never been able to deliver on promises", and since their inception have caused huge investor losses. Perhaps even more worryingly, the current financial health of EBOD is a mystery. The latest financial report I could find for the company was for 2011, when the numbers were not pretty. The author of the aforementioned article lists other, apparently more recent cash asset and liability numbers for EBOD, but since there are no recent financial reports it's completely unknown where these numbers are coming from (when questioned on this, the author did not reply). Chinese-based companies trading on the NASDAQ are often risky investments, but especially when they have horrible histories and unclear financial numbers. I believe there are too many red flags on EBOD and that no serious investor should be long at this stage.
Now that the volume on EBOD has faded, it seems the stock is a prime shorting opportunity, bearing in mind the risks involved in shorting stocks with low market caps. EBOD finished down on the day on Friday and Monday, and I seriously doubt there is more pump left in this stock. Unfortunately, the volume is now so low that it is a difficult stock to trade.
Please feel free to contact me if you disagree with anything in this article, or you would like to discuss anything in more detail.