The Microcap Speculator

A few quick weekend thoughts and notes:

1. The Russell Microcap Index: IWC looks like it is going to follow the larger indexes to record highs. Barring any major catastrophes over the weekend, the breakout could happen as early as Monday.
2. Air Industries: GLDS.OB announced that it received orders totaling $4.1 million from Goodrich Aerospace Canada Ltd, a division of Goodrich Corporation, for parts to be used in Airbus A-380 landing gears. The orders are part of a long term agreement announced earlier in the year. I see the announcement as an incremental positive, an early sign of success for the company’s attempt to diversify into commercial aircraft parts.
3. Heads up…Western Goldfields: WGDFF.OB has changed its ticker symbol.
4. China 3C Group: CHCG.OB marched to new highs this week. I bought shares just under $7.50. As several readers point out, shares have already moved substantially. I couldn’t agree more, but if the company’s growth projections are anywhere near accurate, we could still be early in this trend.
5. When I see a large move up in my portfolios, as I did this week, my first inclination is to take profits even if my sell targets have not been hit. The better tactic is to go the opposite direction. I did just that, selling my two weakest positions in AHOM.OB and NMKT.OB.

DISCLOSURE: Long GLDS.OB, WGDFF.OB, CHCG.OB. No position in AHOM.OB and NMKT.OB.

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• UBS upgraded Golden Star Resources (GSS) to neutral. I think GSS, and gold in general, have a ways to go.
• Considering microcap solar companies? Not me. The smart money is leaving solar energy, not entering it. By my count, in the past year at least ten solar companies have been sold to the public having an aggregate market cap. of over $20 billion (CSIQ CSUN FSLR JASO LDK SOLF SPWR STP TSL YGE). I’m sure there are more that I have overlooked. The problem here is that the market looks saturated. Only a few have decent charts and some are looking like broken IPOs. While there are plenty of microcap companies in this area, I’m staying away.
• Birch Mountain Resources (BMD) was up over 10% today on news that it signed a multi-year deal to supply aggregates to Suncor Energy. If it can clear resistance around $3.90, BMD could make another run.
• Haven’t heard a whole lot lately from the ZVUE (articles) Crew. This company needs to fold its money-losing hardware biz quick and put its internet properties on the block while it is still solvent. Investors have lost a lot, but they don’t need to lose everything.
• I’m taking another stab at Newmarket Technologies (NMKT.OB) (articles). Finally, the company appears to have settled on a strategic plan. While the partial spinoff and multiple listing of subsidiaries would not have been my approach, at least the company no longer looks like it is flopping in the wind. My buy may be premature–I expect the next few months will be tough for Newmarket. The strategic moves and restatement have diverted management resources and likely cost more than originally anticipated. Still, if the company delivers its projected $120M in revenues and increased profits for 2007, I think the stock will rebound solidly. And yes, I realize that’s a big “if.” I’ll keep this position on a short leash.

DISCLOSURE: I am long GSS and NMKT.OB. I have no position in the other stocks mentioned, except for a very short-term short in FSLR. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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Last week NewMarket Technology (NMKT.OB)  finally gave up on its misguided reverse merger plans with Action Products. It turned out that no matter how many puffed-up press releases CEO Phil Verges issued, he could not obtain the minimum $.50 per share he had promised to NewMarket shareholders. This comes as no shock to readers of this blog — I stated from the beginning that the math didn’t add up.

Verges was a little less straightforward in his press release:

“An accelerated listing on the NASDAQ exchange was certainly a primary objective in the consideration of a merger with Action Products. A beneficial opportunity to combine operations is also important in the consideration of any merger possibility. Technology is a common thread that runs through every industry. The potential to combine NewMarket’s emerging technology expertise with Action’s consumer products foundation included a compelling possibility well worth evaluating. However, the operational opportunity did not prove compelling enough in the final analysis.”

Its time for Verges to take ownership of NewMarket’s problems. The low valuation isn’t because the stock is listed on the OTC BB; its because he runs the company like an amateur. He jumps dizzyingly from one strategic plan to another. He hammers shareholders with a neverending barrage of letters and press releases, but the problem is investors don’t trust him anymore. His strategic vision one week is a discarded idea the next.

As I have said all along, NewMarket is doing exceedingly well operationally. It just needs more gravitas in the executive suite. Verges should be proud of the company’s growth to date, but he should also be responsible enough to bring in a stronger CEO.

DISCLOSURE: I am long NMKT.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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My email inbox is chock full of missives from readers who think I misunderstood the NewMarket (NMKT.OB) (articles)-APII deal. A few are quite hostile but most are along these lines:

i don’t think the toy biz matters. what does matter is the nasdaq listing.
They could have made this deal with any type of company and it would not
matter. Ted turner reverse merged cnn into an old milk company i think.The toy biz will either be spun off or sold IMHO.

This company is on the up and up and i think your article makes the deal
seem a bit shady.

I think the NewMarketonians are just plain wrong (and I am long the stock, hardly a bear).

First, nobody has been able to explain the math. How can a reverse merger with a company with a much smaller market cap (and the dilution by existing APII shareholders) guarantee a 50%+ increase in NewMarket’s valuation? That is financial alchemy. If the NewMarketonians think I make the deal sound shady, then I have accurately conveyed my sentiment.

Second, I don’t think we can ignore the problems at APII and treat this as just a reverse merger into a shell. The company made clear in its press release that APII’s operations will be ongoing and will be an important part of the company:

The existing Action Products operation is also a valuable asset. In the future, NewMarket intends to expand its business model for introducing new products and services to new markets beyond the technology sector. The possible transaction with Action Products creates consideration for accelerating that expansion.

Which brings me back to the questions posed Tuesday: (1) what is the possible strategic fit? and (2) how can NMKT trust any financials coming out of APII right after the CFO resigned?

Finally, and perhaps most importantly, why does NewMarket always have such a convoluted approach to every strategic move they make? If they were after a Nasdaq listing, why not just satisfy the listing criteria, fill out the forms, and work for approval, like Advocat Inc. (AVCA) (articles) did? If they wanted to spin out the China subsidiary to shareholders, why not just spin it out instead of engaging in another reverse merger, this time with a bankrupt shell company?

Occam’s razor suggests that the simplest explanation of a phenomena is most likely the correct explanation. The simple explanation here is that NewMarket did not obtain a Nasdaq listing or spin off its subsidiaries in the conventional manner because it could not do so.

If shareholders really want to see NewMarket skyrocket above $.50/share, I have a plan. Shift Verges from CEO to COO. Verges has proven himself capable of growing the company’s operations and would remain a valuable asset in that capacity. As a CEO, however, he leaves a lot to be desired. Time after time, he has raised shareholder hopes with lengthy press releases, paid interviews, etc. promising listings and spinoffs that either never materialize or carry far more conditions, hurdles and dilution than originally promised. NewMarket needs somebody with the gravitas to pull these moves off. Verges is not that man. With a respected CEO, I think this company could surpass $.50 easily.

DISCLOSURE: I am long NMKT.OB. I have no position in APII. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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