Individual Stocks Showing Life

If you missed my last live broadcast, be sure to check it out here… and as always, be sure to read my disclosures/disclosures below. Cheers!

Last week, QQQ hit a fresh 6 month low. The other major averages aren’t far behind. Oil stocks, pott stocks, cryptocurrencies, and even FAANGs have been particularly pummeled. I’ve been outspoken about the pott stocks and cryptocurrencies this year. Being short in those areas have provided investors with great profits in a year when nearly nothing has.

For the record, I believe a bounce may be coming, but remain cautious on the market and continue to hold large short positions (particularly in ETFs like the Russell 2000 (IWM) and the China 25 ETF (FXI).

Due to the influence of ETFs, almost every stock with a market cap above $30 million experiences selling pressure when the indexes get hit. That creates a great opportunity for investors who can separate undervalued names from overvalued ones.

Techprecision (TPCS) is one of the few stocks that isn’t a part of a major ETF / index. Perhaps that’s why it’s quietly been among the year’s best performers.

Things keep getting better there. TPCS typically generates less than $4 million in revenue per quarter. However, by my estimation, they received about $14 million in orders between July 1 and October 1. As expected, it appears that government contracts are starting to roll in.

If that continues, I believe this 90-cent stock could be producing 30-cents of annual EPS before too long. The shares and chart indicate that investors are waking up to this:

TPCS

One of the things I love most about this story is how many of my readers are contributing to the research effort. Check out some of the data shared by “Sub Guy” from our comments sections:

Here is an interesting link from General Dynamics Electric Boat to its suppliers that explains the nuclear submarine order flow. It clearly states that Block V Virginia Class Subs will be released late this year or early next year and that construction will start the first quarter of 2019.

http://wwws.gdeb.com/suppliers/2_supplier_alerts/attachments/SIB_Issue_2_2018.pdf

 

To date there has been about 8 Billion dollars of submarine orders for Virginia Class Block V and design build of the first Columbia Class Sub. TPCS has received advance orders for both classes of submarines. This is a quote from Alex Shen on the August 13, 2018 earnings call transcript:

“The path forward with our core customers remained clear and our drive towards top line growth and bottom line profitability. This path is validated with the recent sourcing activity in both Virginia class and Columbia class submarine programs. In the first quarter of fiscal 2019, Ranor successfully secured initial contracts for select Virginia class Block 5 components as well as select Columbia class components.”

The Navy awards advance material orders to keep the submarine build moving forward in between Blocks. The balance of Block V should be in the 30 Billion range and hit late this year or early next year.

 

My best guess on revenue for TPCS for fiscal years ended March 31:

2019 $20,000,000
2020 $28,000,000
2021 $35,000,000
2022 $47,000,000
2023 $67,000,000

If you use a DCF analysis the stock should be trading substantially higher than it is now. I believe Mark has a near term price of $2.5-$3.00 per share. I agree.

When the Columbia Class Submarine program hits it’s stride, TPCS will need to add plant capacity and labor force. I would not be surprised to see them doing over 100 million in revenue 5 or 6 years from now. What is really exciting is the submarine program is strong for the next 30 years.

TPCS remains the best risk reward stock I have come across in a very long time. AND, very few people know about this story.

FYI, if he’s right, that should enable 2019 EPS of about $0.07 and 2020 EPS of about $0.15.

Their operating leverage is about .01 per $1M in revs until they max out their capacity, so that gives us $0.22, $0.34, and about $0.50 for 2021-2023.

The market tend to discount next year’s earnings in the middle of the preceding year, so put whatever P/E you wish on the .15 and that gives you a lazy man’s (non-DCF) valuation for the end of this coming June.

A real (DCF) valuation with a 15% WACC and $1 limit of EPS yields a current valuation of $3.60. Its current technical channel is rising by about 50% per 6-months (125% annualized), which can get the stock to $5 by the end of 2020 if it holds, FWIW.

 

In Other News, many of my top investments did very well last week. Investors are searching for bargains in the rubble, so this many be have been a contributor. Here’s a rundown on some of my most notable holdings…

 

GAIA — After speaking bullishly on its earnings call, GAIA’s CFO stepped in and bought $40,000 of the stock. I spend part of the weekend reviewing their content (including their new Alternative Healing channel) and came away bullish on their prospects.

At current levels, the company is valued at just 5-cents per video per subscriber. It’s not hard to profit with the kind of metrics they’re showing. The only reason they’re not profitable is the investment they’re making into growing their subscriber base.

I agree with that strategy 100%. I believe GAIA could be one of the winning channels of the Internet era (just as channels like MTV, ESPN, and BET emerged in the cable era). Accordingly, I believe the company has a great chance to provide strong capital appreciation to shareholders (either on its own or as an acquisition target).

 

USATP — There should be virtually no correlation between USAT and its preferred shares (USATP). In fact, weakness in USAT will often correlate with increased odds of bankruptcy or buyout — either of which would be great news for USATP shareholders.

Unbeknownst to most, USATP shareholders are entitled to the first $20 million that comes from either event. That’s about $44 for each share of USATP (which is currently going for $17). Given USAT’s customer base and other intangible assets, it is widely believed that a bankruptcy would easily bring that $20 million.

To be clear, I don’t expect USAT to go bankrupt anytime soon, but the odds of that (and a buyout)  have increased, which should be bullish for USATP. In the meantime, USATP’s intrinsic value increases by $1.50 annually (via an unpaid dividend, which accrues). That’s a big yield for a $17 instrument.

Interested investors should read USAT’s last 10-K to fully understand how USATP works. I personally view this as a classic Buffett-type investment. Accordingly, it’s one of my largest holdings.

 

HEAR — NPD data for October showed that Turtle Beach continued to gain market share. Growth actually accelerated from already-incredible levels. HEAR experienced 100%+ growth during the month, as gamers continue to buy their specialty headsets for multi-player / battle royale games like Fortnight.

With a slew of new games coming out, I expect demand to remain robust through the holidays (and likely a bit beyond, as gift card get used in January). Of course, we should expect things to moderate in 2019, but analysts are still expecting $1.00 of earnings next year and over $1.20 in 2020.

Considering the substantial improvement in HEAR’s balance sheets / capital structure in 2018, investors should not expect much more downside risk for the stock. In fact, I think the risk/reward looks as good as it has since June (just prior to its big run). Accordingly, barring a deepening of the recent market correction, I remain an advocate of being short HEAR’s January put options.

That strategy has proven best thus far. The stock is down about 20% since June, but shorting the puts has delivered a 30% profit. This just goes to show that learning more about investment methods and strategies can make the difference between profit and loss, even among like-minded investors.

 

FUV — As I predicted, the company announced that it is raising money. IMHO, they did it in one of the worst possible ways, exacerbating an already-bad situation. The stock is down more than 30% since I first mentioned them in one of my Live YouTube videos.

 

Final Note: Coming up this week, SMSI will be appearing at an investor conference in Chicago. The shares have been strong since their NYC appearance (where they impressed attendees, by all accounts), so we’ll see whether the Chicago conference keeps the momentum rolling.

 

Last week, I wrote…

As Thanksgiving approaches, investors are starting to take note of the various catalysts that may spur Smith Micro’s (SMSI) share price in the coming days, weeks, and/or months. Here’s a quick run down of what/s being said out there:

Dave Andaarson on Yahoo Finance — One of the key aspects of this most recent offering was the amendment of previous warrants, allowing them to be reclassified as equity. In other words, the company expects the share price to soon rise faster than the assets, leading to huge liability/decrease in equity without this amendment/reclassification. The amendment allows them to increase equity by around $9 million from current liabilities.

In addition, I’m expecting some type of M&A activity to be announced shortly. I’m not sure what yet, but the PR statement of “maximizing flexibility to execute QUICKLY on strategic initiatives” seems to be a tipping of the hand. I’m looking forward to finding out what this means.

There is an outside chance they will be acquired, but I think it’s more likely they will be acquiring a company that will be immediately accretive.

Verdict: Agree on all counts. There were many reasons SMSI did the most recent offering. Prior to the offering, the company turned profitable and already had $8 million of cash on the balance sheet. So, we know they didn’t need cash.

Anyone who had followed my lessons knows that offerings can be bullish or bearish. The most common deliminator is whether the money was needed (bearish) or not (bullish). Those who acted on this lesson were treated to a “risk-free” trade this month:

  • Long SMSI: The lack of need classified its recent offering in my book as bullish. Those who bought SMSI on the news have been rewarded with a 10% gain in just two weeks (the NASDAQ collapsed by 8% over the same period).
  • Short FUV: I recently predicted that Arcimoto (FUV) would need cash before December. Sure enough, the company announced an offering on Friday that send the stock tumbling more than 30% — a big profit for those who were short. FUV has now fallen 50% in just 2 months.

The best thing about this situation is that buying one and shorting the other effectively insulated investors from a market crash, since one was short and one was long (thus, any market-related movement in one would presumably be offset by a near-equal and opposite move in the other). In other words, it was virtually risk-free.

 

diogenese19348 on Yahoo Finance:
Google Play November 20th – 6 days
82 new reviews – 13.6 per day
43-five star 11-four star 7-three star 5-two star 16-one star
App Annie rank: 65, high for period was 58, Family Locator 209
Estimated total downloads: 548,500
November estimated downloads: 46,250
Date Crossed 500K downloads: Not Yet

App Annie rank is back up, review rate is up…and still hasn’t crossed the 500K mark. We are now up against that 10% cushion I set, if it doesn’t cross in the coming week then I was overestimating things.

Diogenese has done a great job of tracking Safe & Found downloads with one of several different methodologies. Each one has its flaws, so I can’t put my full endorsement on this work. However, I do believe that he’s close to the mark.

According to my personal methodology, they ended the quarter with over 500,000 total downloads (Google Play + Apple Store). Since then, they’ve been on track to end this quarter with about 200,000 more. That adds up to about 700,000.

Now, from what I’ve heard, somewhere around 70% of downloads are on Google Play which gets us very close to 500,000 Google Play downloads, which will be a publicly known event (Google displays if an app is over 100,000 downloads, 500,000 downloads, etc.). That approaching event is causing some excitement out there, as it may draw new investor attention to the stock (which has already been building on Yahoo and StockTwits).

 

Dave Andaarson on Yahoo Finance — I’m hearing Sprint has a pilot program rolling out region by region to do a conversion from FL to SF and it should be completed by mid year of 2019.

I’ve also heard this from a different source. The rumor rings true because it triangulates well with information suggesting that SMSI will soon (within days or weeks) release a new version that enables the app to reside on their childrens’ phones without them knowing it. This is expected to catalyze a full-blown sunset / migration of the Location Labs product over to SMSI’s.

The rumor of a rolling conversion program rings true, since this has historically been Sprint’s modus operandi. If the timeline holds true, I estimate that SMSI’s SafePath subscription revenue will rise by upwards of $1.5 million in Q1 and then another $1.5 million in Q2.

That would get SafePath close to $5 million in quarterly recurring revenue, matching the recurring revenue coming from its CommSuite product. By my math, that would produce about $0.15 of EPS (and rising) per quarter. That’s $0.60 annualized for a company with a current (as of Wednesday morning) enterprise value of just $1.60 per share.

That’s a P/E of 2.7.

Given a P/E of 10, the stock would reach $6.50 per share. At a P/E of 20, it would trade at $12.50. I’m not going to speculate on which (if either) it will achieve. That speculation is best-suited for each individual to ponder.

 

Of course, this is all additive to information I provided via my most recent live broadcast:

* The Spanish version of SafePath is expected to be announced before the end of Q4. This will expand its appeal in Europe and Latin America, where SMSI has told investors it has a robust pipeline of prospects, along with existing customers.

* The IoT (Internet of Things) version of SafePath is also expected to see an announcement before the end of Q4. This will greatly expand its total available market (TAM) and leapfrog most (if not all) of the competition (due to SMSI’s long and independently-validated reputation for world-class IoT expertise).

It will also expand its image among investors to include those who are hot on IoT technologies. With carriers reportedly clamoring to add IoT-location services in 2019 (to protect their businesses from encroachment), SMSI appears poised to serve as the arms dealer to the warring factions.

* SMSI’s first IoT device in expected to be announced in Q1. SMSI management cryptically shared this information on their last earnings call. Adding a device to the mix would add yet another new revenue stream at a time when the revenue from SMSI’s product lines are finally all poised to move in the same direction (yes, “up”).

* A new major SafePath customer is expected to be added anytime between now and the end of Q2. This is widely expected to be T-Mobile. Either way, Sprint is among the smallest major carriers in North America, so any new “major” customer would likely spur a doubling in SafePath TAM (and revenue) in relatively short order.

So, there are many ways for the company to win. In the meantime, the SMSI story is spreading rapidly this month, via sell-side analyst coverage and management’s coast-to-coast investor conference appearance schedule.

The shares have responded by coming to life, with more conferences and news still to come. With a little luck, I’ll be seeing them at the LD Micro conference in two weeks.

Stay Tuned…

If you missed my last live broadcast, be sure to check it out here. Cheers!

SMSI

 

More Research:

To get my posts in real-time, just follow/subscribe to my free blog.

If you only want to receive my most critical reports, simply sign up for my MailChimp mailing list instead. If you’re on that list, you will only get key articles and occasional recaps of all the work I’ve recently done.

 

Disclosures / Disclaimers: I am long GAIA, HEAR, SMSI, TPCS, and USATP, and short FUV, IWM, and FXI. 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.

Advertisements

38 thoughts on “Individual Stocks Showing Life

  1. Based on how they announced sprint and Bills words, T-Mobile is likely already signed. Which means they’re just waiting for the official product to actually be released/designed. Any ideas on how long it would take to get a product like that ready to go?

    Not that we can time it exactly but based off Bill’s “conservative” 1st half of 2019 — im thinking Q1 has a good chance of seeing the product released. But I suppose it’s entirely up to T-Mobile.

    Like

    1. Actually i’m assuming the product is probably already ready to go and just waiting for T-Mobile to officially release it. Prior to signing, from what I’ve seen the carriers get a prototype trial product — i’ve read over some of the documents regarding the trial products.

      Like

      1. Over a month ago, if I’m not mistaken, they said the new product is already working and being demo’d in customer sales meetings.

        Need to re-read the earnings transcript (again). It’s like putting a puzzle together. Pieces that didn’t seem useful before will fit right in as the picture unfolds.

        Like

    2. Let’s not forget that these carriers act at a very slow pace. The roll out of Safe and Found and the sunset of Location Labs’ product are some examples. I think Bill is correct to be conservative. It’s a great time to add and one could consider more time to add at these prices beneficial.

      Like

      1. Very true, but 1) SMSI has been working on these deals for years and 2) the carriers are anxious to implement IoT services to protect their businesses against oncomers.

        The AT&T news re: its Time Warner content is the latest proof that carriers are moving aggressively to defend themselves and maximize the value of their customer bases.

        Like

        1. Well, AT&T has some catching up to do if the Tiger vs Phil event is any indication. Not sure I see Time Warner content scaling the content outside of HBO. It will be interesting to see how 5g affects their satellite tv service and traditional cable connected tv as well.

          Like

  2. Mark,

    Regarding the G20 meeting this weekend, an ‘agreement in principle’ or some kind of truce may or may not be reached.

    In case it may be reached, i’m curious to know how you would play it.

    Like

    1. I don’t. Things like this get gamed by pros and computers. I don’t like to punch above my widget class.

      I buy individual stocks (mostly smaller ones, where I can know more than others)… and I buy them based on what they are worth vs. what they are selling for.

      Trading the market (except at extremes) is just that — TRADING… and 90%+ of traders get killed. The richest people in the world are INVESTORS, NOT GAMBLERS (and with good reason).

      Liked by 2 people

  3. I am considering selling the April $3 puts as either an entry into the stock at $2.15 (puts selling for .85 at the moment) or to collect the premium. Any one have any thoughts they want to offer?

    Liked by 1 person

    1. Just my two cents here WKF, but the price has gone down under $2.15 already. Do i think its a great entry, yes. But i think anything under $3 is a great entry. Don’t see much risk to it, could potentially pocked .85 cents of premium, or at worst pick up the stock at $2.15 — seems like a good bet to me.

      Like

  4. Mark, not much has been said about Smith Micro exploring “Strategic Options for the QuickLink IoT Product Line”, which of course would include a possible divestiture. What is your take on this?

    Like

    1. Nada. Business doesn’t happen at the speed of sound. Most things get measured in several quarters to years.

      I know this answer might be tiresome to hear, but SMSI’s CFO is great and the CEO is its largest shareholder. They know what they are doing, so I’m fine with letting them do it.

      Those who watch their stocks every day are doomed to being tortured. Those who just let the companies do their thing get rewarded over time.

      I for one LOVE the returns I’ve received on this stock. If anything, the volatility just provides trading opportunities. 💯

      Like

  5. Mark, have you looked at SDI and TPB? TPB owns a large vape distribution business in addition to Zig Zag rolling papers and a moist snuff business. TPB is trading at about 15X next years EPS but SDI owns 52% of TPB and trades at a big discount to its NAV. This seems like one you would be up on and I was wondering if you had any thoughts on it.

    Like

  6. Today it is the second time my partial filled order at TD Ameritrade cannot be cancelled. I see the expired data changed to 04/02/19, from a day trade to filled until type.
    Previously a partial filled order is expired automatically.
    It looks like TD wants to get as more trade commission as possible. Have you experienced this kind of thing? What stock dealer do you recommend?

    Thanks,

    Like

  7. Been a few weeks but just bringing up some more data points.

    https://www.t-mobile.com/apps/t-mobile-apps — FamilyWhere no longer being promoted at all on the t-mobile website.

    https://support.t-mobile.com/community/plans-services — even here not included (although Family Mode is promoted)

    But also they haven’t sunset FamilyWhere subs yet to Family Mode — and no real indication they’re planning on doing that either. I’m assuming they believe Family Mode just caters to a different breed of customers. Bet again is that SMSI’s safepath product would pick up the tab here and provide that solution.

    Just some datapoints although not very significant.

    Liked by 1 person

    1. Great research. FamilyWhere not being promoted is a great sign for us. Thanks!

      Heck of a day on the market. SMSI acted as I would have expected considering the 4% drop in the Russell, so nothing to read into there IMHO.

      Like

  8. Assuming Smith Micro really did intend for the offering to be used for an acquisition – why would they not delay the equity raise until after finalizing such a deal, presumably after any NDAs expire? The fact that management continues to dilute without explanation points to Smith needing the cash for short-term spending, such as sudden increase in capex.

    Also, I don’t really follow your assertion that a Tier 1 customer can essentially leverage Smith micro into cleaning up their balance sheet, in order to sign up a deal. Unless they want to buy the company – why would they even care, when they are simply licensing white-labels?

    Like

    1. As I’ve said many times, the CEO is the largest shareholder and he did this to himself just as much as he did it to us.

      People want to micro analyze why they did it instead of focusing on that statement (which is the most potent fact of this matter). 🤔😉

      I trust management. That’s how investing is done, unless you are an activist investor (which I am not).

      Like

      1. I’d rather micro analyze what they are doing with our money over putting all faith into management – otherwise it may end up being someone else’s money.😉

        Liked by 1 person

        1. I’m with you about micro-analyzing, but we may have different views on how to do it. For me, time allocation is critical to efficiency… and that makes it critical to determine the key factors and focus on those.

          On this particular issue, the person who stands to lose the most is the CEO, so I see no ulterior motives behind the financing… so I move on to other issues or companies (which enables outperformance, especially during downturns like this).

          Of course, everyone has their own method. As long as your banking lots of money, and nobody can knock your way! 😎

          Like

        2. The problem with that is that no one is going to know what they raised the money for until they announce it. The only factual statement that can be stated is what Mark has already stated that the CEO diluted himself in this process. Everything else that we talk about in regards to this raise is all hypothetical and really gets us nowhere.

          Like

          1. BINGO 😎

            We can’t know everything… and the things we can’t know needs to be let go.

            As someone who tends to micromanage and loves certainty, I hate that fact! However, for the sake of success/performance I’ve learned to except it… and it’s made a big difference.

            Like

    2. A Tier 1 customer cares about a company’s balance sheet because they don’t want to start promoting their product only for them to go out of business. They want to know a small company is going to be around a long time if they’re going to promote their app for sale.

      Liked by 1 person

  9. As a Supply Chain Manager/Operations Manager for several telecom companies, one of the first things I look at is the balance sheet of the suppliers I do business with. I once worked for a company who sole sourced a part that was like the CPU of the enter circuit card. That supplier went out of business. Not a happy moment for the engineering team. You’d be surprised at how naive some small companies are when qualifying their suppliers. Unfortunately, the company hired me about a year after they specced in the chip. You can bet your bottom dollar that any Tier I company that is doing business with Smith Micro will be sticklers about them having a decent balance sheet.

    Liked by 2 people

    1. Other than leverage, Smith’s 60%+ customer concentration poses a bigger risk to LT solvency. Would this also be something companies generally tend to avoid in their suppliers?

      Like

      1. Not when they’re acquiring that customer. 😂

        Seriously though, you have a real point and the answer is yes. In this case, if the next customer is as big as Sprint, they know that SMSI will be very profitable with two major customers, but still profitable if the other one goes away.

        But T-Mobile is the expected next win, so my first comment is likely valid, albeit flippant. 😎

        Liked by 1 person

  10. The hint is in the offering announcement — money being used to help in strategic initiatives! (And they think thats more bullish then what they had already). I’m sure a t1 could and would force them into doing an offering. But again a variety of things it could be, all potentially bullish (since Bill risked his shares to)

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s