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UPDATED: MagneGas (MNGA) - From Day Trade Watch To Long-Term Legitimacy

|Includes: Donaldson Co Inc. (DCI), MNGA


Pollution management, rebranding, and European expansion.

Involved with U.S. Army Corps of Engineers.

Prospective government backing.

Disclosure: I am long MNGA.

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. This is not intended to be financial advice, this is simply a presentation of my research with the intended use of showing an example of my competency in equity research. I encourage all readers to do their own research before taking any position in any market, including but not limited to those discussed throughout my presentation. My position(s) may or may not change with future major events or extenuating circumstance beyond the time of publication.

Background & Opinion

While in the midst of my post-MBA career search I have taken a liking to Nano and Micro-Capitalization equities as a way to keep my research, analysis, and portfolio management skills as sharp as possible. While a mock portfolio is more logical, I prefer to "have a horse in the race" if I'm going to dedicate considerable time into it.

These "penny stocks" often carry a negative connotation in great part because of their volatility and lack of reasonable risk mitigation techniques in comparison to equities with a larger market capacity. While this investor sentiment is beyond reasonable, it is hard to imagine every single company that isn't over 300 million in market capitalization being a poor investment.

In the midst of my research, I came across a 6 dollar 1-year price target across a majority of common resources and could not help to think "how on earth can someone justify such valuation?" Although seemingly far-fetched, there is much reason to believe said target price would increase exponentially when going beyond a 1-year projection.

What is MagneGas Applied Technology Solutions?

"Tampa-based MagneGas Corporation (NASDAQ: MNGA) is a technology Company that counts among its inventions, a patented process that converts liquid waste into hydrogen-based fuels. The Company currently sells MagneGas® into the metalworking market as a faster, safer, and hotter replacement to acetylene. In addition, the Company is developing a variety of ancillary uses for MagneGas® fuels by utilizing its high flame temperature for co-combustion of hydrocarbon fuels and other advanced applications. It is also selling equipment for the sterilization of bio-contaminated liquid waste (such as pig manure or leachates) for various industrial and agricultural markets."


Important Surrounding Events

The decisions which triggered a multi-day trading volume influx is as follows:

1. A corporate rebranding from MagneGas Corporation to MagneGas Applied Technology Solutions, a name they believe will "better align MagneGas’ corporate identity with its broadened commercial approach"

2. Accelerating marketing efforts in Europe to help make a case for their current applications for government-backed, non-dilutive funding programs.

3. MagneGas Accepted as a Member of The Welding Institute

MagneGas Implements Corporate Rebranding

Further Government & U.S. Army Involvement

The following is an excerpt from an August 20th, 2018 press release:

"MagneGas...announced today that it has conducted a preliminary permitting meeting with the North Carolina Department of Environmental Quality (NCDEQ) and the U.S. Army Corps of Engineers last week. The purpose of this meeting was for the Company to gain a clear and complete understanding of the various regulatory and permitting requirements to begin scaled commercialized sterilization of agricultural waste in North Carolina. The permitting process is expected to take 8-12 months, with the goal for the Company to launch full commercial operations in the second half of 2019."

One may believe military interest attests to the not-yet-realized value MagneGas has the ability to provide. A sense sociopolitical risk is constantly looming in today's society. MagneGas is definitively an environmentally friendly company. As of 2015, over 30% of their employees were veterans. In other words, the potential of scrutiny from a political standpoint, at least in the United States, is minimal. It's appealing regardless of political affiliation, making future public funding appear easily attainable.

MagneGas Holds Permitting Meeting with North Carolina Department of Environmental Quality, U.S. Army Corps of Engineers

Potential Internal Confidence

It would be hard to justify placing confidence in an entity not willing to place the same, if not more, confidence in themselves. SEC form 4 shows eight trades within the past 12 months, zero of these are sales.

Sector & Sector Performance

Perhaps your first question is "what sector are they even apart of?" To be very precise, MNGA is perhaps best classified as part of a peculiar yet very promising sector entitled "Pollution Control". A recent Yahoo Finance article elaborates this sector with the following:

"The Zacks Pollution Control industry, which is a 14-stock group, has outperformed the growth recorded by its broader Zacks Industrial Products sector and the benchmark S&P 500 group, over the past year.

While the stocks in this industry have collectively rallied 30.4%, the Zacks S&P 500 Composite and Zacks Industrial Products Sector have gained 16.7% and 4.9%, respectively (the green line in the chart below represents the industry)."

Ratio Analysis

Despite outstanding sector performance metrics, finding an appropriate equity to use as a comparison is not exactly a walk in the park. Furthermore, MGNA is not yet profitable, rendering traditional Price-To-Earnings and similar valuations either invalid or not possible. Can more in-depth, albeit obscure analyses be performed? Of course. At the same time, so much of said analysis contains an implicit acceptance that a firm's growth rate is stable. In performing such projections, one would also be errantly implying that MagneGas is far into their life cycle. To believe this equity may be a sound investment, one must believe MNGA is still very early in their life cycle.

The closest appropriate comparison, I believe, would be Donaldson Company, Incorporated (NYSE:DCI). While surely an ambitious comparison, I would like to believe you see the same potential value as myself at this point. Donaldson manufactures and sells filtration systems and replacement parts worldwide. Donaldson is also 1 of 14 of the aforementioned Zacks Pollution Control industry equities. The closest appropriate comparison, I believe, would be Donaldson Company, Incorporated (DCI). While surely an ambitious comparison, I would like to believe you see the same potential value as myself at this point. Donaldson manufactures and sells filtration systems and replacement parts worldwide. Donaldson is also 1 of 14 of the aforementioned Zacks Pollution Control industry equities.

EBITDA-based projections would be unfair to MGNA on account of not yet being profitable, leading to use of even further limited evaluation metrics. Price/book, Price/Sales, and Enterprise Value/Revenue all favor MagneGas. Said favorable metrics are due to the minuscule amount of debt currently carried, along with the surprisingly strong government backing.

MNGA has a 3-year historical beta of -0.14, implying a minor inverse correlation with the market. Although extenuating circumstance may very well be the cause of said negative beta, it is evidence of MNGA as a potential hedging option for any portfolio following market trends.

DCI Key Statistics | Donaldson Company, Inc. Stock - Yahoo Finance

MNGA Key Statistics | MagneGas Corporation - Stock - Yahoo Finance

In Conclusion...

Equities presenting this small of a market capitalization tend to be volatile (to put it mildly) and more susceptible to manipulation. For those unfamiliar, there is no rational reason to believe any equity with this small of a market-cap is a sure-fire bet with long-term exponential growth. No, MagneGas will not be a large cap juggernaut tomorrow and a company not turning a profit is surely an intimidating notion, to say the least. However, could you rationally see it being one in x-amount of years?

If none of this has remotely convinced you, maybe this video will. 

10/08/2018 11 PM EST Update:

Given the very short amount of time that has passed since I had posted the findings of my (mostly qualitative) research, I was shocked to see brand new developments in biofuel after just one full market day.

It is speculated that President Donald Trump will be announcing, on Tuesday 10/09/2018, measures to lift restrictions on E15 biofuels.

E15 is as follows:

"(15% ethanol, 85% gasoline) is a higher octane fuel available in 28 states at retail fueling stations. E15 was approved for use in model year 2001 and newer cars, light-duty trucks, medium-duty passenger vehicles (SUVs), and all flex-fuel vehicles (FFVs) by the U.S. Environmental Protection Agency (EPA) in 2012."

E15 - Renewable Fuels Association

"The move, expected sometime around 3 p.m. on Tuesday, is aimed at helping Republicans in competitive elections in the nation’s farm belt. Iowa is the largest U.S. producer of ethanol."

Trump to announce pro-ethanol measure on Tuesday ahead of Iowa...

What are the implications for MagneGas?

"Vehicles that may not use E15 are model year 2000 and older cars, light-duty trucks, and medium-duty passenger vehicles. All motorcycles may not use E15 as well. For more information on E15’s use in motorcycles, please read RFA’s Fact Sheet. Engines that may not use E15 are all off-road vehicles, including boats and snowmobiles, all off-road equipment, including lawnmowers and chainsaws, and vehicles with heavy-duty engines."

E15 - Renewable Fuels Association

At this time I would like to reference a February 2015 study regarding the effect of Magnegas on the internal combustion engine (or traditional automobile engine) from Magna College of Engineering, India:

"Magnegas can be produced in any desired quantity and any desired location while being cleaner, safer and cheaper than gasoline.

1. It is renewable.

2. Magnegas burns cleaner than gasoline, bio-diesel, ethanol and natural gas.

3. Magnegas costs less than Fossil fuels.

4. It has been proved to be very reliable and can run for 24 hours a day.

5. It is non-explosive and hence it is very safe...

1. The quality of MagneGas exhaust is dramatically better than that of natural gas and gasoline. MagneGas exhaust is much lower than EPA requirements; has about 50% less green gases (CO2) than gasoline exhaust, and contains 9% to 12% oxygen. Based on these measurements, it is postulated that MagneGas fuel can be used as an additive to fossil fuels to improve their exhaust characteristics."

I will now repeat for the sake of emphasis: "Based on these measurements, it is postulated that MagneGas fuel can be used as an additive to fossil fuels to improve their exhaust characteristics."

Laissez-faire economics is an economic theory or plan in which a government does not have many laws or rules to control the buying and selling of goods and services.

The former statement is the backbone of the capitalistic society we are apart of in the United States. This "easing of regulations" is a "laissez-faire approach". The generalized idea of this is to allow superior products to outperform inferior, or "let the cream rise to the top", to use a cliche about 3 generations too late.

If consumers are not satisfied with the price of gasoline, or quality of E15, they will naturally seek a superior alternative. While I am implying that said product is, in fact, Magnegas, an outstanding question arose from an anonymous individual when looking for flaws in my persuasion:

Q: "When will Magnegas products be available for sale?"

A: Fortunately, right now, as far as I am aware.

Their list of distributors is below.

Addressing Rumors of MagneGas Illegitimacy

In 2015, an anonymous blogger presented an article, on SA, that was later removed titled "MagneGas (MNGA): Insider Enrichment And Paid Stock Promotion; -92.9% Downside"

1. It was published anonymously.

2. There were no verified or even unverified sources.

3. There were some colorful graphs.

4. MNGA's stock price has never recovered.

Here is CEO Ermanno Santilli's response to such baseless accusations:

The worst part about these claims? This article spoke such downside into existence when it led to the above -20% avalanche, ending all stability & causing continuous short positions. Yearly revenue, amongst other but not all quantitative measures, have improved since this plunge. Also, they have continued to innovate while the world becomes further acclimated to the presence of fossil fuels. (Please reference sources listed throughout the original part of this blog.

On that note, I will leave you with this blatantly unrelated and out-of-context quote as a form of intellectual nourishment:

“It requires a better type of mind to seek out and to support or to create the new than to follow the worn paths of accepted success.”

- John D. Rockefeller, Sr.

10/09/2018 8:30 AM EST Update:

Due to time constraints, I would have loved to give everyone reading a more articulate update on my findings coming somewhat to fruition, last night. However, less than 12 hours later, I have another considerably more important update.

"MagneGas...a leading clean technology company in the renewable resources and environmental solutions industries, announced today the successful closing of a €6.0 million ($7.0 million USD) European Commission grant together with its partner Infinite Fuels, GmbH, an emerging biofuels company based in northern Germany."

“Completion of this grant, not only through receiving the funding in hand but also the associated impact of the grant’s credibility and support of our mission, is a major milestone for us as we introduce and build commercial opportunities for MagneGas in Europe,” commented Ermanno Santilli, Chief Executive Officer of MagneGas. “First, this demonstrates the viability of gaining access to large European government-backed grants and funding for alternative energy projects and clean technology solutions similar to our technology.”

Santilli continued, “The grant writing process was extremely well managed by our advisors at Ernst & Young, and is encouraging as we seek out similar non-dilutive grant opportunities for our sterilization technology in Europe. Lastly, this project is expected to provide a steady source of scalable revenues to MagneGas as we expand our relationship with Infinite Fuels in Germany.”

I am not placing these updates in the same October 7th post because I had forgotten anything in my thorough research, but rather because of how quickly a couple of my reasonable speculations have begun coming to fruition. The original October 7th article consists of all information up to and including the Youtube link. I would like to thank everyone for your support and kind words, as it is beyond appreciated.

10/11/2018 1:30 PM EST Update:

Shortly after trading opened today, investors holding would have seen a massive short-term sell-off that has since begun rising once again.

The reason?

"The combined purchase price for one share of common stock and each warrant will be $0.23. Under the terms of the purchase agreement, MagneGas has agreed to sell 21,800,000 shares of its common stock. In a concurrent private placement, MagneGas has agreed to issue warrants to purchase up to an aggregate of 21,800,000 shares of common stock."

To be brief, this caused a panic which sent the equity far lower than what could have been projected. Please reference the following SEC document for context and a more complete picture:

Between the European government grant and this secondary offering, Magnegas has acquired roughly, before expenses and fees, 12 million dollars worth of funding. Despite the widespread (very) short-term panic, this maneuver should, barring any extenuating circumstance, be in the best interest of the development and expansion of Magnegas.

Disclosure: I am/we are long MNGA.

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.