Seeking Alpha

Edward Schneide...'s  Instablog

Edward Schneider, CFA
Send Message
Edward Schneider is a managing director of Quan Management LLC. Mr. Schneider has over 25 years of investment experience, including 18 years managing technology funds in both quoted equities and venture capital. Mr. Schneider holds a CFA designation, an MBA from Thunderbird and a BA from Emory... More
My blog:
View Edward Schneider, CFA's Instablogs on:
  • Let's Go Fly A Kite
    Let’s go fly a kite
    Up to the highest height
    Let’s go fly a kite
    And send it soaring

    Up through the atmosphere
    Up where the air is clear
    Oh, let’s go, fly a kite

    CareView Communications (OTCQB:CRVW) is that “kite”, and its stock is soaring into the stratosphere and beyond.

    CareView attempts to provide video monitoring systems to health care providers. The term “attempts” is used because, up to now, they have barely sold anything. Revenues were only $87k in 2009, and were even less in 2008. The company had a net loss of $6.2M and negative EBITDA of $3.4M in 2009, doubling the negative results from the prior year. No news of any substance has been released so far in 2010. As of December 2009, debt was at $2.5M and cash was at $0.2M.

    What appropriate market value should be assigned to this company? Well, today (23 April 2010, $2.34 per share) it is trading at a market cap of $254M.

    Welcome to the world of the OTC bulletin board and pink sheets where a Christian video games company (OTCPK:EARI) with no product yet still has a market cap of $510M after falling 30% since our blog last month. We would have shorted EARI a long time ago, but we have yet to locate any shares. However, we were able to short 25k shares of CRVW net of buy-ins, and are currently losing a bundle as it more than doubled over the last month. We have been average-shorting-up when shares were available.

    The major risk is the powerful insider Board members that are backing the company. The Chairman of the Board is Tommy Thompson. Mr. Thompson had served as the Secretary of U.S. Department of Health and Human Services under President George W. Bush, and prior to that was the Governor of the State of Wisconsin for 14 years. T2 Consulting owns 13% of CareView. Other Board members include Craig Benson, the former Governor of New Hampshire, and some other well-connected businessmen. The CEO is an industry veteran. The COO increased his stake in the company to 12% in 2009 when the stock usually traded at around $1.

    A secondary risk is that management makes a huge announcement about signing up customers. Any such announcement will have a low probability of justifying the current valuation. It may create further pumping fuel, or also lead to a sell-on-the-news market reaction.

    Up to now, the insiders and market-maker had the firepower and trading techniques to resist short sellers and hold the stock at around a $1 low in 2009 (or $100M+ market cap), despite the extreme overvaluation. Apparently, they have the ability to push the stock even higher today to $2.34 versus $1 only one month ago.

    I am not sure how much longer this will last. But it is only human nature for insiders to cash in some of their tens of millions in paper profits. One possible sign of a top is when no more shares are available to lend to shorts for a while. This occurred last Friday, after recently being bought-in earlier in the week. If this continues, then there is a good chance that the stock sales are being saved for insiders and other natural sellers, and the stock should start declining in the medium term. Where it goes over the coming weeks is anybody’s guess.

    You would think that investors should make a bundle in shorting these extremely overvalued stocks with no fundamentals. But if it were that easy, then these ridiculous valuations would not exist in the first place.

    As a side comment, I just saw Mary Poppins with my 9 year-old daughter, and we both loved it.

    Disclosure: Short CRVW
    Tags: CRVW
    Apr 25 6:26 PM | Link | Comment!
  • Gravity
    I have always been amazed at how certain stocks with no revenues, heavy losses, weak balance sheets, weak prospects, and questionable management can obtain exaggerated market caps sometimes in the hundreds of millions of dollars. These stocks can defy gravity for longer-than-expected periods, especially during bull market runs. Eventually, the stock prices deflate, although the market caps decline more gradually due to a rising share count.

    First, I would like to address how gravity can be defied for substantial time periods. In recent years, Reg SHO and other measures were introduced to curb naked shorts and generally protect smaller stocks. A by-product of Reg SHO, however, was to shelter promotional penny stocks that are pumped up by insiders. Previously, it was easier for the market mechanism to efficiently price these stocks.

    The biggest challenges today are locating shares, avoiding buy-ins, dealing with excessive margin maintenance requirements on sub-$2.50 per share stocks, obtaining reasonable borrow rates for an extended time period, dealing with OTCBB and Pink sheet market makers that manipulate stocks. Unlike Nasdaq, there is no requirement to respect the best bid and offer, nor is there any requirement to honor locates - creating a short squeeze on settlement date or thereafter. So currently, a tightly controlled float, high borrow rate, feisty market maker, low stock price, good promoter to pump the stock, and deep-pocketed backers that fund the cash burn, can lead to an inefficiently priced stock that is difficult to crack.

    (As a side point, is it fair to protect these pump-and-dump stocks, where insiders get rich at the expense of unsuspecting retail investors? Is it correct for OTCBB and Pink sheet exchanges to treat investors differently? Is it necessary to create arbitrary margin maintenance requirements on faulty math assumptions that protect penny stocks from being shorted?)

    So how does gravity bring these stocks back down to earth? Dilution to fund these negative cash flow businesses inflates their market caps, as does pumping up the shares on speculative news. A rising market cap with no fundamentals often creates more short interest (overcoming the above-mentioned barriers) and greater insider selling. Finally, a macro downturn that sucks liquidity out of the market is a death knell for most of these pump-and-dump stocks.

    I read a post by stockerblog from February 2007 on fuel cell stocks (
    An indicative sample of the extremely overvalued stocks mentioned in the article were decimated. ECOtality (ETLE, price/sales of 137x in Feb 2007) fell from about 100 in February 2007 to 5 today. Hydrogen Engine Center (HYEG, P/S of 411x in Feb 2007) went from 3.25 to 0.06. Medis Tech (MDTL, P/S of 900x in Feb 2007) slumped from 17 to 0.07. Normally, once these stocks begin their downward spiral to earth, they never fly again, although ECOtality is trying to resurrect itself. All three of these stocks experienced declines since February 2007 which then accelerated during the market crash at the onset of 2009.

    Sometimes, however, these pump-and-dump stocks can crash quickly irrespective of market conditions. This can be due to a confluence of factors such as how high was the market cap inflated, initial low short interest levels, solvency fears, insider lock-up expiration, just to name a few. For example, over the weekend, I posted a blog on Entertainment Arts Research (OTCPK:EARI) at $9.80. EARI fell 30% in three trading days to close at $6.90 on Wednesday, but still sports a market cap of $500M (

    Sooner or later, gravity wins.

    Disclosure: No positions in stocks mentioned
    Tags: tech short
    Mar 24 9:16 PM | Link | Comment!
  • Extreme Tech Shorts
    Extreme Tech Shorts March 21, 2010 by techshort

    Entertainment Arts Research (EARI, 9.80, 19 Mar 2010)

    Mkt Cap: $714M, Revs (NYSE:LTM): $0, Loss (LTM): ($1.3M), Net Cash: ($0.3M), Short Interest: 0.3 days

    EARI produces faith-based interactive video games and “edutainment”.

    EARI chart 100319

    This is the perfect fundamental short.

    The stock is fairly new on the scene, so there is little short interest. It has an extremely high market cap of $714M.  It has been over-hyped recently, leading to a speculative spike in the stock price. Despite the hefty market cap, no revenues have ever been earned by this company. Promises of future revenue are based on still-to-be-developed products. The web site shows nothing more than a home page.

    The skyrocketing stock price is primarily driven by the Universe of Faith (UOF) – a virtual world designed for the faith-based Christian community that was developed by EARI’s President Jonathan Eubanks. The Legacy Group Global (LGG) advertising agency will work with EARI to make the Christian community aware of faith-based video games, online avatar opportunities to express their faith, etc.  Adding to the speculation, was a second announcement of providing content for distribution through the Shaolin Temple of China.

    In EARI’s press release about partnering with LGG in the UOF launch, Damon Davis, CEO of LGG, stated “History repeats itself. The Word of God, since the beginning has moved by being carried through the mouths of men and women who believed in the life changing, penetrating word of Truth. Whether it’s a bush pilot carrying Bibles in the back of a fixed wing airplane into the jungles of South America or an avatar of Joel Osteen in front of a virtual community of 2 billion people worldwide, it will be his mouth delivering this word to a community that will spread this message like wild fire to the four corners of the globe. UOF provides that and we are committed to its success.”

    While I do not underestimate the power of the Church, my faith in this business venture supporting a market cap of anything close to $714M is being severely tested by past real-world experiences. Let’s look at the fate of Left Behind Games (OTC:LFBG), an EARI peer. At $0.0044 per share, LFBG has lost 95% of its market value from its June 2009 peak. They also produced interfaith video games, and claimed to have a large distribution agreement with Wal-Mart. The current market cap is $8M, losses were $6.8M on revenues of $0.1M. To support their loss-making operations, LFBG had to issue billions of shares at dilutive prices.

    While some may try to argue that the quality differential between EARI and LFBG is greater than the market cap differential of 87x, the bubble created in EARI stock is even harder to dismiss. Even if EARI reaches millions of zealous Christians above the poverty line over the next five years, the ability to monetize those viewers to justify the current market cap is highly questionable. Just converting church-goers/television evangelists into online gamers and avatars, forget even monetizing them, will be a daunting challenge.

    According to EARI’s only-two news releases, video content will start being released this month for UOF, and by Christmas for the Shaolin Temple venture. Time will tell.

    Disclosure: I am a manager of a tech stock hedge fund. My fund currently does not have a position in EARI.

    Disclosure: No Positions in stocks mentioned
    Tags: Tech Shorts
    Mar 23 7:40 AM | Link | Comment!
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.