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Bizarre Nano-Cap behavior ?


DTEJD1997
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Hey all:

 

I bought in a real nano-cap company a month or two back.  I just took a starter position as it was a bit more than I wanted to pay, but I saw an opportunity to pick up some shares.  I took it.

 

The company has decent earnings, a good dividend, and an absolute fortress balance sheet.  An incredible product & company...

 

So a bit of time passes...stock starts to nudge up just a bit.

 

Bear in mind that on any given day, there is a good chance the stock will NOT trade.  Volume is extremely small.

 

So one day it spikes up maybe 12% or so.  No news.  Towards the end of the day I check the bid/ask.  Both have jumped tremendously.  Ask is up nearly 100%.

 

So I place an order for the next day at $.50 below the ask of $5.  So my $4.50 sell order is almost 100% higher than when I bought a month previously.

 

There is no news that I can find out.

 

Next day, the most shares trade that I've ever seen.  Maybe 10k shares!  That is maybe 20X normal volume.  My order is executed just before lunch.  By the end of the day, ask is down mid 3's.

 

I could not have timed the order better if I had written it.  I was very happy!

 

Volume dries up, but still trading a few hundred shares. 

 

A week later, it is just about the same price as when I bought it.

 

So what explains this crazy price movement?

 

Only two things I can think of:

 

A). Somebody wanted into a position BAD, real bad, and would pay almost anything to get it....

 

B). Some possible computer driven program gone awry? 

 

Neither one makes any sense to me.  Market cap is to low & small to attract "traders".

 

As to somebody having to establish a position, why pay 100% above market?

 

Anybody got any experience with this?

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could be a newsletter, a chain letter type tout, an influential message board post, a rumor or "tip" overheard by an unsophisticated trader who didn't know any better on how to get in, or the ever popular Biglari revenge position (see ISIG, AIRT)

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Is it possible there are some price manipulation? Say people are "trading" with multiple accounts or their friends' accounts to pump up price/volume. Although it's illegal but do authority monitor such behavior? I couldn't figure out any rational reason for owning some of the penny stocks I was looking at. Yet the price could go up 50-100% on a given day. Some of them are clearly fraudulent if people take 10 minutes to read their filings.

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could be a newsletter, a chain letter type tout, an influential message board post, a rumor or "tip" overheard by an unsophisticated trader who didn't know any better on how to get in, or the ever popular Biglari revenge position (see ISIG, AIRT)

 

Yeah, pretty much this.

 

And now you can buy back the position again. ;)

 

And it's not a real nano-cap if it's trading couple hundred shares a day. Real ones don't trade for weeks. :P

 

But yeah, happens. Sold most of my positions in two nanocaps recently. One ~100% up in two days. One maybe 25% up. The second one back down (I'm not rebuying since I don't like it that much). Was small positions and even with that it took effort to sell close to ask in reasonable size.

 

I kinda see how oddball likes these.  8)

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In the super illiquid nano-caps I don't think the market price (last trade) really means much. Like global said, a retail investor reads something and wants to buy at any price, or alternatively, someone wants to sell their 100 shares at any price and tanks the "market" price. I have one position that my original purchase was a limit order 40% below the "market" price and it got filled. In that same stock I've seen several trades done that are either 50%+ above or below the previous trade.

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could be a newsletter, a chain letter type tout, an influential message board post, a rumor or "tip" overheard by an unsophisticated trader who didn't know any better on how to get in, or the ever popular Biglari revenge position (see ISIG, AIRT)

 

Yeah, pretty much this.

 

And now you can buy back the position again. ;)

 

And it's not a real nano-cap if it's trading couple hundred shares a day. Real ones don't trade for weeks. :P

 

But yeah, happens. Sold most of my positions in two nanocaps recently. One ~100% up in two days. One maybe 25% up. The second one back down (I'm not rebuying since I don't like it that much). Was small positions and even with that it took effort to sell close to ask in reasonable size.

 

I kinda see how oddball likes these.  8)

 

Yes, I can get back into the position.

 

HOWEVER, you are most assuredly wrong about it being a nano-cap.  If this is not a nano-cap, I don't know what is....It's market cap is under $5mm.

 

It is about 15 miles from where I live, I've seen it.  It is a real company.  Has earnings, no debt, cash in the bank, and has been paying a dividend for YEARS.  Also has a very highly regarded product with lots of history.

 

So I'll be looking to trade in & out of it in the coming years.

 

HECK, I wouldn't mind owning the whole company outright!

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Just to be annoying, he lives in or around Detroit, Michigan or Houston, Texas based on his other posts. So it's a publicly traded company with a market cap under 5m within 15 miles of Detroit or Houston. Anyone have a good screener?

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Assuming it's Bonal, how would you go about financing the deal? I'm just curious.

 

Say you buy it for $5m, use the $1m cash on the balance sheet to pay down part of the debt, that leaves $4m more to come up with. Then raise $1m cash and then borrow $3m. The company makes (averaging the last three years before income taxes) 361k/yr. The debt load for $3m at 4% for 15 years (those may not be realistic terms) per year would be ~254k leaving 107k/yr before taxes.

 

As a theoretical investor putting money into the $1m fund, the company making only ~100k/yr after the buyout, seems quite low. Particularly as the volatility in the earnings in the last five years or so. A change in the revenue by a small percentage or earnings would have pretty drastic effect on the net income and returns.

 

Not long ago, it was trading for about $2.6m in market cap. Currently it's at $4.54m market cap. The earnings have been quite volatile, having gone from $4k (yes $4,000.00 - not $4 million) in 2010 and 510k in 2011 and then a more reasonable 132k to 443k in 2014 and 2015.

 

Is there a better way to structure the deal to reduce risk and increase the profits? A better question to ask may be, is $5m a good price to pay for the company?

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And it's not a real nano-cap if it's trading couple hundred shares a day. Real ones don't trade for weeks. :P

HOWEVER, you are most assuredly wrong about it being a nano-cap.  If this is not a nano-cap, I don't know what is....It's market cap is under $5mm.

 

Was a joke. ;)

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Yeah, Bonal is interesting for sure.  I've written about them in the past.  I know someone who inquired about buying the company outright.  There are some family politics that prevent it.

 

You need to be prepared to take advantage of crazy price actions.  If it drops suddenly on no news, buy.  If it suddenly increases then consider selling.  I've made money in some flat stocks this way.  I made around 50% on Titanium Holdings doing this, the stock hasn't really budged, except extraordinary days, you buy and sell those and do well.

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