A lot of low-quality PIPEs and private placements are coming out lately. I just received two today.
Maybe we are witnessing the Toilet Bowl Effect. As the market keeps going higher, a lot of crap starts floating to the top. Any market correction would serve as a plunger, flushing these crappy stocks down the drain.
Further supporting this theory is the performance of the low-quality shorts in our fund. These tend to be the worst fundamental tech stocks on the planet with median EV/revenue multiples > 500x, hemorrhaging cash, weak balance sheets, and broken business models. After getting decimated in 2011, they started performing better in Q1 2011 on an equal-weighted basis, following the lead of the Nasdaq (QQQ).
|Q1 2012||CY 2011|
|Shorts Total Return||+1.8%||+56.3%|
|Decliners/ Short Gains||14||35|
|* Shorted stocks' positive returns equates to a falling stock price.|
The sample size could be a bit larger and more diverse, but the anecdotal evidence intuitively makes sense. These are high-beta companies that thrive when risk is perceived to be very low. From my experience, these speculative OTC Bulletin Board stocks are the last to bloom (i.e requiring a longer duration bull market), and the first to wilt (i.e. fall quickly on the first sign of a market correction). But when they bloom, they can go up dramatically, and that is the best time to short them if you can locate the shares.
The top five year-to-date stock price increases among our shorts are Eyes On The Go, New Energy Technologies (OTCQB:NENE), TherapeuticsMD (TXMD), Location Based Technologies, and Abakan (OTCQB:ABKI). These stocks are due for a fall on a fundamental as well as technical basis, in our opinion.
|Shorted Stock||Ticker||Price 4/4/12||YTD % chg||Ent Val||EV/Revs||Net Loss|
|Eyes On The Go||AXCG.PK||$0.14||+600%||$164M||40429x||-$0.4M|
|New Energy Tech||NENE.OB||$2.74||+134%||$55M||No Revs||-$3.0M|
|Location Based Tech||LBAS.OB||$0.47||+56%||$91M||1540x||-$9.3M|
At the onset of 2012, we provided a positive stock market outlook for 2012 (see here). The market may have more upside. Still, it is more challenging today to find the >2x home-run long stocks, after the extended market rally since December. On the other hand, these bubbly shorts are looking increasingly attractive.
Additional disclosure: I am also short TXMD.OB, AXCG.PK, LBAS.OB