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The Microcap Speculator submits: Reader Mo T. sent me a series of emails this weekend detailing his thoughts on NewMarket Technologies (ticker: NMKT.ob). He has a better grasp on the stock than I do, and has agreed to let me share his thoughts with you:

You are quite right, the capital structure is the weak point here and as you know naked shorting has pushed the stock to very low levels. Since preferred convertible notes are structured around a fixed ammount, the weaker the share the more the fully diluted count. And we know with otcbb stocks many end in a death spiral.

As far as I understand the management can withdraw an aditional 22M of fully diluted. But last time they did it, the hedge fund who is short pushed the share price lower. That was last october.

However, I think that now they are trading at a very compeling valuation and their VOIP subsidiary Xiptel is getting traction and should be profitable in Q106. I understand that in Q305 it accounted for 10M of revenue with a 370% growth QonQ. I suppose that they could book a 20M revenue in Q106 and get a 35M valuation in case of a spin-off. That's NMKT current market cap.

This year they had many problems with their first spin-off of DFTS, the Canadian operation of Logicorp, the AMEX listing and a few other minor points. I think that raised also a lot doubt about the company and a lot of hot money sold. As we know there are a lot of hot stories on the otcbb market, just to collapse later. I think that MOBL is just one of them.

But at this stage, profit and cash generation is strong and the company is also streamlining and costing out redundencies. We should see better financial ratios. I think that if they can clear DFTS in time and move to the AMEX, the stock will get a proper valuation and the fully diluted count will come down.

For next year I anticipate a revenue stream of about $160M and profits of $11M. I think that NMKT is easly worth about $2.

Thanks Mo. Keep up the good work.

DISCLOSURE: I am long NMKT.OB (and I assume Mo is as well). Not a recommendation to buy or sell any security. For informational and educational purposes only.

NMKT 1-Yr Chart