It's Shorting Season

by: Edward Schneider, CFA

In the words of hunter Elmer Fudd, it's wabbit season. The extended bull market has lifted all stocks, even those with no real revenue, operations, and tons of losses. These are pure speculative stocks that thrive when risk is perceived to be very low. When the market eventually corrects, these high-beta stocks with no fundamental support should fall precipitously.

Often the biggest challenge is obtaining locates to actually short these stocks after their run-ups, as opposed to just watching these overpriced, hard-to-borrow stocks. But the number of low-quality, speculative stocks with bubble valuations have expanded lately, increasing the number of rabbits that we can hunt and potentially locate.

The year-to-date stock price increases of at least 50% among our fund's shorts are Amazonica (OTCPK:AMZZ), Revolution Lighting (NASDAQ:RVLT), Virtual Piggy (VPIG.OB), Parkervision (NASDAQ:PRKR), Save the World Air (ZERO.OB), Net Element International (NASDAQ:NETE), and Umax Group (OTCPK:UMAX). These stocks' prices should fall both on fundamental and technical bases.

Susceptible Shorts

Stocks shorted Ticker

Price 8/5/13

YTD % chg

EV {M}


Net Loss {M}

Amazonica AMZZ.OB $0.74 +25417% $456 No Revs -$0.05
Revolution Lighting RVLT $4.44 +604% $350 36x -$12.1
Virtual Piggy VPIG.OB $2.40 +140% $241 1855kx -$13.2
Parkervision PRKR $4.36 +115% $368 No Revs -$22.7
Save the World Air ZERO.OB $1.75 +79% $272 No Revs -$6.0
Net Element NETE $6.10 +75% $178 80x -$15.1
Umax Group UMAX.OB $2.46 +64% $240 No Revs -$0.03

Amazonica is the ultimate short. This company consists of one person trying to distribute Brazilian wood in the United States. The company has no revenue, no assets, no business, and hopes to be a mere distributor. Somehow, AMZZ went hyperbolic since June from $0.0029 (post 175:1 stock split) to $0.74 today. This company is not worth $1M, forget $456M.

Revolution Lighting sells solid-state light-emitting diode (LED) lighting fixtures for general illumination or replacement lamps (i.e. bulbs). The company does have some revenue momentum, and is serving the fast-growing solid-state lighting industry. On the other hand, this is not a highly differentiable business. Most of the recent revenue ramp was achieved by the acquisition of Seesmart in December 2012, and a related shift from Revolution's (p.k.a. Nexxus Lighting) flailing retail channel to the industrial distribution channel of Seesmart. The Q1 sales ramp was not driven by product innovation in my opinion. Does Revolution Lighting, and its miniscule $0.8M R&D budget, have more innovative lighting fixtures than General Electric (NYSE:GE), Philips (NYSE:PHG) or the plethora of smaller competitors? This temporary acquisition/channel shifting revenue bump in Q1 jacked-up the stock price over 7x so far this year.

The stock's high valuation of 36x revenue (or 14x latest annualized quarterly revenue of $6.1M) looks even more ridiculous in light of an $8M loss last quarter (and an operating loss of over $1M despite the revenue boost). Moreover, management is running low on cash, and is going to have to raise more capital soon. Fundamental issues like a) mounting losses despite the recent revenue spike, b) non-scalable business model with low gross margins, and c) low revenue visibility, more than offsets the upside of riding the solid-state lighting wave, especially at the current valuation. This stock should have a 1x to 6x revenue multiple, in line with profitable peers like Philips (1x) and pure-play Cree (NASDAQ:CREE) at 6x. But there is no institutional coverage of RVLT. This is a hype stock that now has a bloated valuation with a lot of downside risk.

Adding to the discomfort are questionable management practices like extremely discounted insider share issuances between $0.13 to $1.17 per share for a majority stake in the company, and the new CEO charging $564k for severance expenses relating to the relocation of the corporate headquarters to his personal office in Stamford, CT.

Virtual Piggy is transitioning from a lethargic online child security screen for parents, to a hopefully more robust adult-permissioned child online payment portal. As a venture investor, I understand the future potential value of this model if Virtual Piggy's system receives mass adoption. But also as a venture investor, I would not pay a valuation of $241M for essentially a pre-revenue, early-stage investment that has yet to prove itself. Virtual Piggy recently announced that it has 250k members. But VPIG is not worth anywhere close to $1k per member (EV of $241M/250k) as these users are not being monetized. Virtual Piggy had miniscule revenue of $88 in the last quarter.

Optimistically assume that after past years of no revenue, Virtual Piggy achieves mass adoption and monetization from transaction charges and maybe a membership fee (which is currently free). How successful will these efforts need to be in order to justify the current valuation? The B2C market has brutally high marketing costs. Management will have to burn multiples more cash than the $11M annualized they are losing today to even have a chance at achieving mass adoption and monetization. By my estimate, Virtual Piggy would have to achieve $200M+ in profitable revenue within the next few years to justify today's rich valuation plus future dilution. The chances of achieving this operational milestone are quite remote, and that is only to justify today's fully-diluted price.

But we are talking about the irrational investment world of the OTCBB, where hype trumps fundamentals, and meaningless news releases (exemplified by Virtual Piggy) and stock promotion can sustain these bubbles until the cash runs out. Speaking of which, Virtual Piggy's bank is running low on cash. So, count on either a discounted capital raise to put a damper on the share price fairly soon, or bankruptcy.

Parkervision is a semiconductor patent troll that has not earned any product revenue since 2005. In my view, the company is worthless and has served as a long-term source of egregious compensation for management. Parkervision's patent claims against Qualcomm (NASDAQ:QCOM) are highly questionable; and even in the rosy scenario, Parkervision should receive proceeds that would justify only a small fraction of its current $368M in enterprise value. On the other hand, a local Florida jury and aggressive lawyers may create an irrational outcome. Then Qualcomm would have to decide whether to pay this irrational sum or to appeal. This is the risk of holding PRKR. At current valuation levels, I am comfortable shorting PRKR.

Save the World Air is a pre-revenue company trying to commercialize its particular type of oil viscosity reduction that should increase crude oil pipeline flow. One of the advantages is that the flow is increased without heating or materially changing the composition of the crude oil. Still, there are dozens of alternative oil viscosity reducers, ranging from industry leaders like Nalco/Ecolab (NYSE:ECL) to start-ups like Quantum Ingenuity, all with compelling solutions.

Last week, Save the World Air announced a preliminary commercial agreement with TransCanada (NYSE:TRP), a large oil pipeline company. While the stock went up a lot due to this first sign of commercial validation, the commercial details were neutral at best. The most likely scenario would be a $60k per month lease that would not start until the middle of 2014. In the meantime, TransCanada would try the unit out and see how it works with no obligation. If TransCanada eventually signs up, this comes out to revenue of $720k per year over 90 months (with declines to $20k per month if the unit is not used or breaks-down, with an easy opt-out clause too). TransCanada can also buy the unit for $4.3M.

The hitch is that management would need to sell 50 to 100 of these units every year to justify today's $272M enterprise value, given an industry peer group EV/revenue multiple of just 1.5x. But the company has not even sold one unit yet. Moreover, this is a capital-intensive business with heavy upfront investment and global customer support. Consequently, the company would need to raise large amounts of capital, and incur substantial share dilution, just as a prerequisite to compete. Not coincidentally, management will need to raise more money by the end of the year.

Whether it's Abakan (OTC:ABKI) or Save the World Air, these dysfunctional oil pipeline material companies with essentially no product revenue for the past several years, high cash burn, and even greater unmet capital requirements are a testament to the OTCBB promotional system. In the venture world, these early-stage deals would have a valuation of around $10M. When the valuations get into the hundreds of millions of dollars, however, it is usually the end of the road, as the cash burn, share dilution and insider selling of cheap/free shares leads to a stock implosion.

Net Element provides mobile payments and transactional services primarily in Russia, and also runs some content internet sites in music and motorsports internationally. This Miami-based smörgåsbord of internet and mobile affiliates provides a very comfortable lifestyle for the two top executives earning cash compensation of $1.3M and $0.8M, respectively. Unfortunately, their salaries only equal LTM revenue of $2.2M, and contributed to a LTM loss of -$15M. Since new management took over last year, they have managed to quickly borrow $9M in debt, with only $2M left in cash. This company is a total disaster. The stock is way overvalued, and should be shorted at current levels.

Umax Group was a Poland-based distributor of arcade games. A few weeks ago, Michelle Mercier replaced Rafal Lewnadowski as the sole director and officer of the company. Mrs. Mercier plans to create a nutritional supplement retailing business based in Southern California that is yet to be started. Like Amazonica, this is a one-person show with no revenue, no assets, no business, and just a concept of selling nutritional supplements. The current valuation of $240M makes this short a no-brainer.

Price Action of Past Susceptible Shorts

Stocks Shorted as of 4/4/12


1/1/12 to 4/4/12 % chg

Price 4/4/12

Price 8/5/13

4/4/12 to 8/5/13 % chg

Status as of 8/5/13
Eyes on the Go OTCPK:AXCG +600% $0.14 $0.0006 -100% covered
New Energy Tech NENE.OB +134% $2.74 $2.07 -24% covered
TherapeuticsMD TXMD +67% $2.50 $2.39 -4% covered
Location Based Tech OTCPK:LBAS +56% $0.47 $0.13 -72% covered
Abakan ABKI.PK +50% $1.55 $2.79 +80% increased short

As a brief follow up, I wrote a similar article entitled the The Toilet Bowl Effect in April 2012. Of the five short stock candidates that I presented in that article (see above), four have had price declines since then, despite the 20% rise in the Nasdaq (NASDAQ:QQQ) over that period.

Disclosure: I am short OTC:ABKI, OTCPK:AMZZ, NETE, PRKR, RVLT, OTCPK:UMAX, VPIG.OB, ZERO.OB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.