Regular readers know that I spend a lot of time focusing on supply and demand issues when I discuss Axion Power International (NASDAQ:AXPW) but most don't understand why because many of my theories are based on recollections of other clients who experienced similar problems during a time when I didn't pay as much attention. Since I predicted last summer that Axion would reach an inflection point by early fall, this seems like an opportune time to explain what I've been tracking and why I think it's relevant.
Sometime last year HTL drew my attention with his discussions of the daily short reports published by FINRA. When I looked at the numbers, they seemed to mesh well with recurring SEC reports from Quercus and Special Situations. So I decided to start tracking the FINRA data more closely to see if it might be useful for my purposes. HTL was a priceless research tool in that regard because he was able to give me the daily data all the way back to April 1, 2010, which was about the time the heavy selling started. The following table summarizes the FINRA total volume and short data from April 1, 2010 through October 5, 2012.
On the supply side, I've principally paid attention to seven blocks of shares. Two were legacy holders who owned stock before the December 2009 private placement and the other five were holders or classes of holders that bought in 2009. The following table identifies the blocks.
The thing that makes each of the blocks different from other shares is that they were sold in private placements. Under SEC rules stock that's sold privately is classified as "restricted" until it is sold by the original purchaser. So even if a resale is registered, every resale requires an opinion of counsel that the resale is legal. Even under the best of conditions, that process can't be completed in T+3 so every sale of stock by a private placement purchaser must give rise to a reported short sale.
My last table is part reported fact and part educated conjecture. It takes the annual FINRA short data and matches it up to the time periods when the seven blocks were selling, or at least presumed to be selling. Some holders like Quercus and Blackrock reported their transactions for a time and then fell off the radar when their holdings hit certain levels. Others like the Winner Estate and Mantuck Hill have been invisible all the way along, but the timing seems reasonable in light of the available facts. The little yellow arrows indicate that the timing of likely sales is fuzzier than it is for other holders.
In my mind the most important data point is the yellow balancing entry, which represents reported FINRA shorts that can't be allocated to other holders. For 2010 and 2011, I believe that line represents sales by small 2009 investors and legacy pre-2009 investors. For 2012, it would also include buyers in the February placement that sold immediately after the offering closed who didn't get their stock into electronic form for a week or two after the closing date.
If you assume that there were no sales by legacy pre-2009 investors over the last three years, total sales by 2009 Investors would have been 17.7% of their purchases in the first nine months after closing and 34% in the following year. Those percentages of tie pretty well to patterns I've seen in the past. Once the 2012 investors received their shares in electronic form, they wouldn't be expected to impact short reporting.
When I pull all the numbers together, the only conclusion I can reach is that even under a worst case scenario we're within a million shares of the bottom of the willing sellers barrel. At this point I don't see any remaining 2009 buyers as likely sellers because they've already held on through two years and nine months of misery. I think the same logic holds for the February purchasers. It may have made sense to filp for a modest gain during the first month or two after the offering, but the decision dynamic changes once you've held a stock for nine months.
The bottom line is that I can't see any other large blocks of shares that can flow into the market as the stock starts to perform. They've already been sold. And until the holders who bought those shares over the last two and a half years see an irresistible price, I think we're on the cusp of a major supply and demand inflection because the blocks that accounted for about 60% of sell-side activity are out of stock.
Disclosure: I am long AXPW.