It's one of the most common questions I see in the Axion Concentrators and one of the most fervently debated topics. Everybody has an opinion, if not a bit of an obsession. While some seem to believe the flipping can continue for an indefinite period of time, experience tells me the end is closer than most Axion shareholders realize.
This is one of those fuzzy areas where there aren't any clear answers because we don't have enough data, but history can provide some pretty good guidance.
2011 was a year of dreadful selling pressure that came from three big holders: Special Situations, the Quercus Trust and the estate of a deceased stockholder. By my count, those three holders sold a combined total of 22.7 million shares in 2011. The total reported trading volume for the year was 77.7 million shares, which means that roughly 38.8 million shares left the hands of willing sellers and entered the hands of willing buyers. So during 2011, about 60% of all selling came from the big three and the other 40% came from small stockholders who bought in the 2009 placement and others who bought shares in the open market and resold them for one reason or another.
In January of this year, total volume was just a hair under 12 million shares, which implies 6 million shares of selling as the price moved from $0.30 to $0.60. Of that total, 622,500 shares came from Quercus, none came from Special Sits and none came from the estate. If we're willing to accept the idea that most investors are reluctant to sell stock for a loss, then the most likely source of supply for the other 5.4 million shares of January selling was the 7.4 million shares that people bought during the second half of Q4 2011 while the price fell from $0.38 to $0.27.
At the beginning of February Axion added 26.9 million shares to the potential supply pool with a registered direct placement at $0.35. Over the course of my career I've represented clients in more comparable transactions than I can count. My clients always tried to place the shares well so that they wouldn't flow back into the market quickly. They always failed to some extent and in the typical deal the market had to absorb somewhere between 20% and 30% of the new shares within the first couple months after the offering. I've never been involved in a transaction where more than 30% of the new shares flowed back into the market. It does happen from time to time, but only in deals that are structured to flip 100% of the shares back into the market and those deals always go to one or two buyers.
Based on prior experience, I think it's reasonable to assume that somewhere between 5.4 million and 8 million of the February shares were likely to flow back into the market in the short term. Anything outside of that range, either on the high side or the low side, would be very surprising to me.
Since the registered direct offering was announced on February 1st, a total of 21.5 million shares have traded. That works out to 10.7 million shares of selling and 10.7 million shares of buying. Using last year's ratio of 60% from direct purchasers and 40% from normal trading, I'd peg the number of shares that have flowed back into the market from direct purchasers since February 1st at 6.4 million. Quercus sold 888,500 shares during that period, which suggests that the February purchasers have sold about 5.5 million shares, or 21% of the total number of shares sold in the February offering.
We do not and cannot know how good a job the placement agents did in putting the February offering into strong hands. Based on my experience with comparable deals, I'd expect a flow back of 20% to 30% of the new shares. We've already passed the 20% level and for the last several weeks the market bias has been toward the high side of the Bollinger Bands. We've also seen the spread between the 10-day and 200-day VWMA narrow to $0.0221.
If the placement agents did a cruddy job at keeping the flippers out of the February placement we might see another 2.4 million shares flow into the market, which would require a total trading volume of about 8 million shares of total trading volume to absorb. If the placement agents did a more skillful job with the February placement, the willing sellers could run out of stock at any time.
At the end of January Axion was running on fumes and had a market capitalization of $52.7 million. Today, with about $8 million more liquidity and its first order in hand from Norfolk Southern, Axion has a market capitalization of $48.3 million, a 10% discount from late January levels. I know that everybody likes a bargain, but with the 10-, 20-, 50-, 100- and 200-day VWMA ranging from $0.42 to $0.45 I don't see the price declining from current levels. I would not want to be sitting on the fence or bottom fishing when the last of the willing sellers runs out of stock.
Disclosure: I am long AXPW.