RGS Energy (OTC:RGSE) will provide its monthly Business Update for August on Friday, August 16, 2019. Traders considering a gamble on a potential swing trade here may be wondering whether to take the leap and, if so, how to safely play this stock leading up to these events. This article outlines a fairly straightforward plan that seeks to minimize risk and maximize gains.
Background & Risks
Before going into our trade strategy, we want to remind readers of the risks associated with this stock at this time. Our prior article pointed out that simple math applied to the cash reported in the company's Q1 2019 Report, net proceeds from the company's April 2019 Cash Raise, potential warrants associated with the April cash raise, and cash reported in the company's subsequent 30-day Business Updates, suggested that the company was dead broke.
Accordingly, our article pointed out the obvious risk of a cash raise, and the selloffs and dilution that would follow such an event. Moreover, since the company has just about maxed out its authorized shares, and investors voted against increasing the number of authorized shares, we pointed out that the company might consider a vote on a reverse split to free up authorized but unissued shares (which would then also lead to selloffs).
We further pointed out the company's tendency to over-promise and under-deliver. Specifically, we illustrated how the company's 1.3% hit rate on the "over $127 million" in "written reservations from roofing companies" for the company's product - solar roofing shingles, is worrisomely similar to the company's current 1.7% hit rate on its current "purchase orders."
Lastly, in a comment to our article, we addressed an investor's criticism that we neglected to mention the company's revenues reported for its solar division. Specifically, we concluded that any revenues produced by the division were probably negated by its costs because of the following facts:
- RGS did not factor the revenue into its Business Updates' break-even analyses, thus suggesting it was worthless;
- The company's Q1 2019 report, at page 15 under section 9, showed that the division represented about $1.6 million in costs per quarter, which would have consumed the overwhelming majority of the revenues reported in the Business Updates;
- The bottom first page of the latest Business Update made it clear that the break-even analysis assumed no income "or loss" from the division (meaning there is no way to tell from the Business Updates whether the division is producing positive or negative net income); and
- If the division was producing net positive cash, then, given the company's tendency to exaggerate good news (i.e., over-promise), then it likely would have harped on this fact rather than simply glossing over it with a fleeting reference.
So, those are the risks. No, you are not watching a television commercial for a new pharmaceutical drug. Now we can get to the information that prompted you to start reading this article in the first place - a reasonable strategy to spot and then execute a potentially massive swing trade.
Step One: Avoid Potential Pitfalls
Our prior article mentioned that the terms of the April cash raise legally prevented the company from doing another cash raise until August 9, 2019. So, now that we know the company could do another cash raise, how does that let us predict whether the upcoming Business Update will report good news or bad news?
If the company is in fact broke, meaning this week's Update will be horrible and send the share price plummeting, then the company will want to get as much cash as possible from a cash raise. In order to do this, it will have to do the cash raise at a time when its stock is at its highest. It may be anticipating gambler traders to buy in leading to the Update.
This is because the amount of money the company can get from a cash raise depends entirely on how much it can sell its stock for. And no bank or other purchaser is going to pay more than what the stock is worth.
So, putting it all together, if this week's Business Update will be bad (meaning, if the company is in fact broke), then it will in all likelihood do its cash raise before the day of the Update - this Thursday. This is because a bad Update would send the stock plummeting, which would frustrate the purpose of the cash raise.
For these reasons, the safest course of action is to sell now. This would avoid potentially having your portfolio wiped out by a cash raise announcement and then selloffs. Afterwards, wait and see if there is a cash raise after hours on Thursday.
Step Two: If The Coast Is Clear, Buy
And here is where the real fun begins. If there is no cash raise by Friday afternoon, then that will probably be a good sign that we were wrong in our prior bearish article. If the company is not broke, then it will be because it generated a huge ton of cash since the last Update.
If this is the case, then this week's Business Update will be wildly good, investors will go into stampede bull rally mode, and this stock will in all likelihood skyrocket. So, if there is no cash raise (or other horrible news released prior to the day of the Update), then it would probably be worth buying in for a monstrous swing trade.
Step Three: If All Goes Well, When To Exit
This is always the million dollar question. Our prior article pointed out that sales of $10.42 million would have justified Westpark Capital's $2 price target (which we adjusted down to $1.90 in light of the dilution effect from the April cash raise). Westpark noted the price target on November 29, 2018.
We believe that the only way that RGS will be able to avoid a cash raise is if it has turned the entirety of the $4.97 million in purchase orders noted in the June 17, 2019 Business Update into cash. As such, if and only if there is no cash raise by Thursday afternoon, then we project that the Update will show at least $4.97 million in cash.
In such event, we believe $0.95 would be the highest price to which the stock might jump. This is because $4.97 million represents roughly half of the monthly cash needed to justify a $1.90 target, and half of that is $0.95. As for the low-end of the range, the June Update bumped the stock up to $0.37 on June 18, 2019.
So, a good exit point for a swing trader would be somewhere between $0.37 and $0.95, in the event of a good Update that prompts a rally. Admittedly, that is a wide range. We suggest that you use your own best judgment (if we even get to Steps 2 and 3), and make decisions based on your own level of risk tolerance.
Also, keep in mind that, if the company reveals that it has finally generated significant cash, then it may be worth considering a long position. If (note the emphasis on "if") the company actually proves it is capable of generating cash and running a profitable business next week, then, given that the California 2020 Solar Mandate law will generate immense demand for RGS' solar shingles, our prior bullish stance on this stock will return, as it would then once again seem to be a good long investment.
We have outlined a trading strategy that allows investors to make an educated guess as to whether our prior article will prove to be right or wrong this week. If we were right in our prior opinion, then a cash raise announcement and selloffs will probably occur by this Thursday after hours.
However, if there is no such announcement by that time (or, more conservatively, Friday afternoon), then it will be strong evidence that we were wrong in our prior opinion. In such event, the Update will probably show a huge influx of cash, which would most likely lead into a monster swing trade opportunity (and give back confidence to true longs).
So, in our opinion, a good, prudent strategy is to sell everything now, and wait until the day of the Update. Then, only if there is no cash raise or reverse split announcement by the day of the Update, consider taking a risk on a potential hugely profitable gamble.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RGSE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.