On May 17, Empire Resources (NASDAQ:ERS) CEO Nathan Khan found himself $18M dollars richer after the aluminum company's top man dumped 750,000 shares of his company's hi-flying stock onto the open market.
Never heard of Empire Resources before? Neither have we. Empire Resources distributes value-added, semi-finished aluminum products including sheet, foil, wire, cast products, and aluminum powder and paste. The stock has gone absolutely parabolic in the last 52 weeks: shares have shot up from $6 to $65 for a 960% return. They've since come down to earth, and that's probably why Khan figured it was time to cash in before the market cooled off some more.
Although we don't consider ourselves "traders," we think the stock's stratospheric rise illustrates several important lessons on (short term) trading strategies, profit-locking, and risk awareness.
1. If you're buying a stock that's followed by a gazillion analysts (and held by household name mutual funds), good luck trying to make money. The biggest pops in the stock market come from obscure names, typically small caps with less than 3-4 analysts providing coverage. The less coverage a stock has, the easier it is for the investment community to misprice it, the reason being obvious: there isn't enough information out there. Two different analysts may have entirely different earnings projections for a stock, leaving the average investor in a musical chairs-guessing game predicament. You could win the lotto or take a bath.
2. If you're an investor, the trend is your friend, but if you're an insider of a company that was once classified as a penny stock, the trend is more important than your mother. Empire Resources was once a sleepy shell company doing less than $200,000 in annual sales (we're not making this up). Today, ERS generates $350M in sales and is compared to industry stalwarts such as Alcoa and Alcan. Talk about a mega-makeover. ERS's valued added services had investors glued in 2005 after the metals, mining, and commodities category took off. A rising tide lifts all boats, as the adage goes.
3. Hi-fliers spell R-I-S-K (and vice versa). ERS may have enabled you to retire at 35, but don't forget about the enormous risk you took to get there. Empire Resources could be a ticking time bomb: although sales have mushroomed nicely, Empire holds a 3.6 debt to equity ratio and has only 5 million shares in the float, 25% of which are held in short accounts (those betting that the stock will fall). Lastly, insiders still hold 54% of the stock. To some, this may look attractive, but to others it may say only one thing: the ball's not in your court, stupid.
ERS 1-yr Chart