SMSI 10-Q Released — Strategies For Trading The Stock

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

I wrote most of this yesterday, so forgive any pricing data that is now out-of-date.

SMSI’s 10-Q for Q1 has been released. I’ll spare you the boredom and tell you that there wasn’t much new information to glean there. Here’s the summary…

Revenues broke down like this:

3/31/2018 3/31/2017
Wireless:
Platform 4,227 3,601
Services 494 690
Contract 95 68
Total Wireless 4,816 4,359
Graphics Software 647 1,217
Total Revenues 5,463 5,576

Management commented that “Wireless revenue of $4.8 million increased $0.5 million, or 10.5%, primarily due to increased revenues from Sprint, our largest customer associated with growth in both the CommSuite and Safepath products.”

I discussed this in my Q1 recap.

They also said that “Graphics revenue decreased by $0.6 million or 46.8% over last year, primarily related to the termination of our reseller agreement with Japanese software developer Celsys, which permitted us to market, license and provide support for the English-language version of Clip Studio Paint (formerly Manga Studio), in 2017.”

I discussed the new products SMSI is now ramping-up on their site. It’s too early to say if they will bring in more, less, or the same revenue, but the products look quite promising. At the very least, I think its safe to say that Graphics will be growing from this low-water level.

OK, let’s move on to more interesting things…

 

Strategies For Trading The Stock

For those interested in investing in SMSI (I’m not an investment advisor, so I can’t help with that decision), there are a few good ways to do it, from what I see:

 

1. Buy The Stock – Duh. Very obvious. Just be careful about how many shares you try to buy at once, especially if you place a market order.

If you place a limit order, it’s probably wise to break it up into chunks (so the whole world doesn’t see that you’re interested in X number of shares — it shows up in “Level II quotes”!).

If you’re going to place a market order, be sure to check the Level II quotes to see how many shares are available at various prices on the “ask” side. The only trick I’ll provide is that 100-share orders are often 1,000+ share orders being masked.

If you don’t understand any of these terms or concepts, Google it (and speak to your registered investment advisor)! It’s a simple lesson to learn, especially for how much money you can save by optimizing your entry price!

 

2. Buy The Call Options – As I write this, the Oct 2.50 call options cost 40-cents to buy. Be careful though! For each ONE “option” you buy/sell, you’re actually buying/selling a contract for 100 shares.

In other words, buying 1 is actually buying 100. Confusing, I know, but that’s just the way it is. Anyways, buying an Oct 2.50 call option gives you the right to buy SMSI for $2.50 anytime between now and the date of the option (in this case, October 19th).

This limits your loss to the 40-cents you pay for the option. Of course, if SMSI doesn’t get above $2.50 before Oct 19, you’ll lose 100% of your investment. However, if something goes wrong and the stock falls 50% to $1, you’ll only lose 40-cents instead of $1.

Of course, the stock has to reach $2.90 before you start making profits ($2.50 + $0.40), but if it goes to $3.50, you’ll make a 150% profit (vs. 75% if you buy the stock at $2). If it goes to $4.50, you’ll make a 400% profit (vs. 125% if you buy the stock at $2). If it goes to $6.50, you’ll make a 1,000% profit (vs. 225% if you buy the stock at $2)… and so on.

Again, if you don’t understand, you should Google this and speak to your registered investment advisor.

 

3. Buy The Stock and WRITE (Short) The Call Options – If you think that SMSI is a little too risky and would like a way to cut your downside (even if it means cutting your upside), this is a good strategy to investigate and review with your financial advisor.

Basically, you buy the stock and simultaneously “write” the call options (which is the same as shorting / betting against the call options). You can currently get about 30-cents for the Oct 2.50 calls. So, if SMSI never reaches $2.50 by Oct, you keep 30-cents per share. Effectively, it lowers the cost of the stock you bought by 30-cents (to $1.70 based on today’s price).

The downside is that you won’t participate in any upside in the stock beyond $2.80 ($2.50 + $0.30), but that might be a favorable trade-off for cutting your risk. Personally, I think the stock has $1 of downside. I think the upside is amazing, but cutting 30% of your risk (from $1 to $0.70) is nothing to sneeze at.

 

4. Write The Puts – With the same financial advisor caveat, writing the Oct 2.50 puts is another good way to play the stock. You can get 75-cents for them right now. In other words, someone will pay you 75-cents for the right to force you to buy the stock for $2.50 anytime between now and October.

In effect, you’ll be buying the stock at $1.75 ($2.50 – $0.75).

 

5. Trade It – SMSI is volatile. It whips around hour-to-hour, day-to-day, and week-to-week. If you’re nimble, you can use any of the above strategies to make some extra money on the side.

 

So, what have I been doing?

As my disclosure / disclaimers state, I own the stock, but reserve the right to trade it at will, regardless of what I say (or when).

That being said, I don’t trade in and out of it frequently. It’s important to me to maintain a clean record that shows that I’m not attempting to manipulate the stock for trading purposes. Since I write most every day, I’m careful about my trading, especially around major updates.

However, I am opportunistic at times and have been doing a combination of things. Specifically, I own a core position that I don’t touch (a good chunk of that is in my ROTH IRA account and hasn’t been touched at all).

I also opportunistically hold more or less (mostly more) than I really want to own, seeking a near-term profit by buying when it’s weak and selling when it strengthens. I don’t do a ton of this, but for the record, I think that traders and day-traders serve a positive role in helping to take some of the volatility out of the stock by being there to buy when it’s falling (to stem a free fall) and sell when it’s rising (to stem an unhealthy spike).

Finally, I also use “buy-and-write” as a trading strategy. When I buy extra shares of the stock, I may also write the Oct 2.50 calls to hedge my risk and/or effectively trim my trading position (hopefully at a profit).

I won’t ever tell folks (short of an SEC request) how much I own or how much I’m trading, but giving you an idea of my trading activity is fair play, so…

1. I haven’t sold a share of SMSI since May 9. On that day, I decided to test day-trading the stock (not to be confused with making short-term — for days or weeks — trades). It didn’t pan out for me. I made six total transactions which net-net reduced my total position by about 1%. I would have been much better off just holding (not to mention the waste of time staring at the screen).

2. Aside from that, I haven’t sold a share since March 5, a day when I reduced the exposure in my regular account by an amount equal to about 2% of my current position, which helped to make room for a tenfold+ larger purchase on that day into my ROTH account. Net-net, I added big that day.

3. Prior to that, I was also primarily buying, but quiet during February, due to my NDA and knowledge of the funding round to come.

4. Many of the shares I accumulated in the March time frame were trading shares (to go along with my core position). Because of the increased position-size risk associated with those shares, I have also been selling calls along the way (though not necessarily simultaneously) to lessen/hedge my exposure. Basically, a form of the “Buy The Stock and Write The Call Options” strategy discussed above.

 

Of course, I’ve tried to be opportunistic about my trades (and will continue to do so, as my disclosures / disclaimers always state)! However, if you saw my trades, you’d see that there’s very little correlation between my publication schedule and my trades.

In fact, I often wait until after my posts are out to make my purchases. I’m under the SEC’s watchful eye, know what they like / don’t like and have no aspirations to deal with them again (as I detailed months ago). I use my real name and am easy to find (unlike folks like Richard Pearson) for a reason — to give folks some confidence that I have nothing to hide.

Of course, there are those who take what they see on the Internet at face value instead of researching the circumstances. That’s their prerogative. Frankly, I’m happy to have detractors. What better way for me to know who does their research and who doesn’t?

After all, I started this blog to attract research partners :^)

I hope this helps to dispel some myths and shed some light on my activities. Please don’t ask for additional info or updates. As a retired guy doing this for free, I have the benefit of writing at will, not on request ;^)

Speaking of which, tomorrow AM’s update will feature my latest round of findings, including an assessment of Safe & Found’s latest update. Stay tuned…

Cheers!

 

More Research:

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Disclosures / Disclaimers: I am long SMSI. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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13 thoughts on “SMSI 10-Q Released — Strategies For Trading The Stock

  1. Your efforts to educate retail and also be transparent are insanely admirable. You are earning yourself a lot of cred and a lot of loyal followers. I hope all this good karma comes back to you and you get a lot of additional non-retail respect as well!

    I’ve learned a lot since I first watched your HMNY live coverage months ago 👍

    I hope you keep this up for years to come and I hope I can contribute a tiny amount!

    Liked by 2 people

  2. Mark. Have you talked to SMSI about IP protection for their software? If so, do you have a sense of how cumbersome the protection is? Also, do you happen to have any examples you might point to of other publicly traded companies that would be comparable to SMSI in terms of how you might value the company? Finally, do you have any thoughts on sustainability of this product and business model and how R&D might play into that answer? Thanks

    Like

    1. There’s little they can protect. But their advantage is their reputation for developing carrier-grade apps that scale and integrate to their back-end systems. That’s a lot less ez to replicate than software.

      As for valuation, I value each company one by one because they’re almost all unique. DCF is the gold standard, but if they end up doing 50-cents next year, I’d gone that a lazy man’s valuation of 15-20x, but only because of their reliance on one customer (for now). If they sign another big carrier, that multiple can go to 20-25x, then closer to 25-30x with a third big win. You get the picture.

      When a small company ramps, the multiple expands as they evolve beyond a one trick pony (though they do have many “tricks”… product lines).

      Like

  3. Thank you very much Mark for providing these various options. It’s been quite a while since I’ve bought any options so I really needed this refresher course on possible strategies. I really appreciate your generosity in discussing this.

    Liked by 1 person

  4. Very informative article with some great things to think about. My question relates to your downside risk. You said the downside risk is $1 which would put the stock around its 52 week low. What factors are we looking at for the downside risk? I’m seeing more dilution, SafePath completely flopping, or Sprint kicking them to the curb. None of which are probable but all possible to an extent. I just wanted to know what you think could be catalysts for a big drop in Stock price.
    Thank you for all the great info and for helping me become a more knowledgeable investor.

    Like

    1. You’ve got it right. When thinking about downside, it’s best not to dismiss possibilities. Better to be prepared for the worst so you don’t buy too much and get yourself hurt… especially if you plan on blaming me for it 😂

      Like

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