Ino.com’s trend strength formula values FONR at +90 (see details below).  Get updated trend analysis for FONR.

The break came from news that its largest shareholder, Diversified Lending Group, offered to buy the remainder of the company for $5/share cash without any financing or due diligence contingencies:

We believe that we are the largest shareholder of FONAR. By letter dated October 3, 2008, I submitted a proposal to acquire all of FONAR’s capital stock at a significant premium of $5.00 per share and requested the courtesy of a response by October 10. To date, no response has been received. This is inexcusable. Indeed, the premium offered for the Company — in cash and without any financing or diligence contingency — is even more generous now based on the Company’s closing stock price of $0.67 per share at the November l3 close.

This offer was made to build on Dr. Damadian’s genius in the scientific field. Indeed, once we own all of FONAR’s capital stock, we intend on infusing the Company with sufficient capital to move forward with developing its innovative MRI technology so it can be made available nationwide and, soon, worldwide.

Curiously, Fonar rejected the buyout offer without explanation.  I’m not sure Fonar’s board can justify this decision. Certainly, if the offer was legitimate, shareholders would be much better off with $5 per share cash than shares currently valued at $1.10.  That’s a huge gap.

I’m not playing the stock now for two reasons.  First, as with Zica, I don’t think this is the environment to be an arbitrageur.  Second, I’ve seen a lot of bounces like these in microcaps.  If they give back 50% of the bounce, which FONR already has, they usually fill the gap.  At that point it might be worth another look.  However, like Zica, this stock is a money loser and is interesting only as a buyout prospect.

DISCLOSURE: No position.

But the pitch was just plain bizarre.  Not Sith Lord weird, but strange nonetheless.  I’ll reprint it in its entirety:

The “shock” of the financial meltdown has passed, now comes, the “awe,” and with it plenty of questions.   Primarily, “What’s next?”  Is there another bubble brewing?  What happens if millions of Americans begin to default on their credit card debt?

Overstock.com chairman and CEO Patrick Byrne, says we are less than 50% of the way through the mess, he predicted the coming of this current crisis many times before, starting 3 years ago, Watch this montage to see Byrne’s predictions beginning in 2005:
http://www.youtube.com/watch?v=SIHw7C73s3E

Today Byrne is suggesting one of the following scenarios could occur in the coming years:

*Reagan Recession:  A deep retraction reminiscent of the recession under Reagan in the early 80’s.
*The lost decade:  A protracted recession similar to the one suffered by Japan in the 90’s.
*Great Depression: A severe economic dip on par with the Great American Depression in the early 30’s.
*Mad Max:  Not likely, but still possible, a catastrophic breakdown of society with mass shortages of energy, food, and water.

Dr. Patrick Byrne has learned at the knee of Warren Buffett, the greatest investor of all time.  As a child Byrne’s parents would allow him skip school so he could spend time and get an education from the “Oracle of Omaha.”

He survived cancer, to go on to get a Bachelor’s in Philosophy and Asian studies from Dartmouth, a Master’s of philosophy from Cambridge, and a Doctorate of philosophy from Stanford.  He founded Overstock in 1999, and in 2007 the company generated nearly a billion dollars in revenue.

Byrne is an experienced and pithy commentator, if you’d like to speak with him I’d be happy to arrange it.

Thanks for you time and have a great week.

Chris Jones

Two questions:

1.  Does anyone really believe that Patrick Byrne “learned at the knee of Warren Buffet”?

2.  Why has Overstock.com hired a “”consultant” to promote Patrick Byrne personally as a market guru?  Look at the chart below…hasn’t the Wrath of Byrne already hurt shareholders enough?  Seriously, OSTK would shoot up 15-25% if Byrne resigned.

Get trend analysis of OSTK from Ino.com

DISCLOSURE: No position.

UPDATE (11/19): It looks like Chris Jones spammed a lot of bloggers with the same email.  Gary Weiss wrote about it over the weekend in his blog.  Thanks for the heads up Gary.

Get trend analysis of NTWK from Ino.com

I should have taken profits.  Soon after, the bottom dropped out.   On November 10, 2008, NetSol filed 8-K’s revealing that its CFO had resigned and that it would restate its financials to eliminate a good part of its earnings.  The company blamed the discrepancy on “computational errors in connection with the allocation of appropriate amounts to minority interest in the statement of income (operations) and calculation of minority interest ownership.”

Departing CFO Tina Gilger gave a little more color on the conference call:

At the timing of our IPO firm, our Pakistan subsidiary we conducted in August 2005, we made classified certain purchases, including officers and directors as affiliate with the parent. As they were classified as affiliate, we included their ownership as part of the parent’s ownership for purposes of calculating the minority interest adjustment and subsidiaries. In recent discussions with our auditors, it was determined that although these parties were affiliates, the affiliate ownership should not be included in the parent’s ownership. Together with the auditors, it was determined that minority adjustment involved from this changing ownership percentage of 9.26% was material and necessitated a restatement of the fiscal years ended 6/30/06, ’07, and ’08.

In fiscal ’08, the subsidiary issued bonus share dividends to shareholders. In calculating the amount of the minority interest adjustment, the net income of the subsidiary is multiplied by the minority interest percentage. The calculation had inadvertently reused the net income after the bonus dividend rather than before it. It was only after filing of our 10-K and during the preparation of our 10-Q that this formula error was detected. We immediately took measures to correct the error, and as it was material, a restatement was necessary. The only changes in the restatement relates to the change in the ownership percentage of the parent versus all of the holders and the miscalculation of the minority interest dividend. There was no effect on all other amounts in the income statement. Please refer to our detailed finances as provided in our recently filed amended form 10-K for additional information.

This explanation troubles me.  If they miscalculated share count, that’s sloppy but not a sign of long-term problems.  However, a stock dividend by a subsidiary should not change the ownership percentage of the parent.  Typically, stock dividends are distributed equally to all shareholders of a given class, so the percentages should remain stable.  The only way they change is if NetSol allowed NetSol PK to distribute shares to all shareholders except the parent (in other words, diluting NetSol’s ownership for the benefit of Pakistani holders of NetSol PK).  Is that what happened?  Until I find out, I want nothing to do with this company.  I have sold all but a few hundred shares, which remain only because of a partial fill on my sell order.

DISCLOSURE: Long NTWK (until my sell order fills completely).

is not particularly interesting, but: Trident is actually trading with a negative Enterprise Value of $135.92 million dollars. The company has $230 million dollars in cash ($3.763 per share), and zero debt; forget about the fact that the company has a stated book value of an additional $3.643 per share. The company has no meaningful expenses in its horizon, and given the massive amount of cash on the balance sheet, I simply do not see how Trident doesn’t move higher—at least in line with the cash on hand?

Get trend analysis of TRID from Ino.com

As usual, I like the way Altucher thinks.  MF Global is another stock trading well under liquidated cash value.  The trend is just plain awful, and business is not good.  However, MF Global (NYSE:MF) remains the #1 independent (not bank-affiliated) futures commission merchant in the US, and just got a legitimate CEO.  I think he leads MF Global through the abyss and into recovery.  In a conference call earlier this month, CFO Randy MacDonald said:

So said another way, if we take all the assets and liabilities and we liquidate the balance sheet, we would immediately return to our shareholders approximately $900 million in cash. Assuming 120 million of diluted shares, that’s $7.47 a share.

Get trend analysis of MF from Ino.com

I bought both this afternoon.

DISCLOSURE: Long TRID and MF.

Until now.  Something has changed, and until I get a better sense of how severe the change is I am staying away from China stocks.  Today I sold my last positions, HQ Sustainable Maritime (Amex:HQS) and China 3C Group (OTCBB:CHCG), even though both posted good numbers.

China itself is going through a massive transition from breackneck growth to….I’m not sure what.  As Kevin Depew explained on Minyanville:

I saw this morning where Nouriel Roubini has said he believes growth in China could slow to 4 to 5%. I believe that may be too optimistic. China is already experiencing massive deflation.

* According to a recent report from Mitsubishi UFJ Securities (MTU): the Toyota (TM) Corolla, which was selling at 250,000 yuan last year is now selling at 90,000-130,000 yuan, a drop of about 50%.

* Mercedes C Class cars prices have declined from 800,000 yuan to 350,000 yuan.

* Audi A4s from 300,000 yuan to 50,000-60,000 yuan.

* While official government figures show the average price for housing sales (in 70 large and medium cities) rising at 6.2% year-over-year, in Shenzhen’s Jini Mieda district (an expensive residential area), the average price per square meter has declined from 18,000 yuan in autumn 2007 to 11,000 yuan (finished) recently.

* Steel-related prices have seen a marked decline.

* Iron ore prices started the year at $250/tonne, fell to $100 in July and now stand at $83

Incidentally, Mitsubishi UFJS notes that 65% of bank lending in China is secured by real estate.

These deflationary trends should have the greatest impact on Chinese retailers like China 3C Group and LJ International (Nasdaq:JADE), and manufacturers like China Precision Steel (Nasdaq:CPSL).  Biotech/pharma companies like American Oriental Biosciences (NYSE:AOB) and exporters like HQS might be less affected, but at times like this I’m inclined to step back from the whole group.

UPDATE: Some commenters on the syndicated version of this post on Seeking Alpha indicate that the pricing figures above are inaccurate.  Perhaps–they are quoted from Kevin Depew of Minyanville, not something I have independently verified.  That said, I have read him for years and he is solid.  Just take the particular figures with a grain of salt until verified.

DISCLOSURE: No positions

Chinese tilapia producer HQ Sustainable Maritime (Amex:HQS) is swimming against the tide.  While most microcaps are in the red today, HQS is up almost 40% on blowout earnings.

Sales were up 42% year-over-year, and up 55% sequentially.  Net income grew 62% year-over-year to $5.6 million, or $0.43 per diluted share.  That’s up from $0.38 per diluted share last year.

The balance sheet looks good too.  Cash increased to $50 million, with long-term debt of less than $5 million.  Shareholders’ equity is up 18% year-to-date at $81.2 million.

“I am very pleased with our performance during the third quarter, which represents the best third quarter in the Company’s history. Our success is a direct result of the expanded capacity of our aquaculture plant, which has increased from 20,000 metric tons live weight flow through to 30,000 metric tons, and the significant progress we have made in establishing solid relationships in the fast food industry during the quarter. We intend to double our current production capacity by the end of the next calendar year, and are confident that doing so will help us to take advantage of what we see as a strong growth opportunity for the production of ready-to-eat meal products with tilapia as the main protein component,” said Norbert Sporns, CEO of HQ Sustainable Maritime Industries, Inc.

“The current turbulence in the global financial markets, while not necessarily good for consumer based companies, provides us with an opportunity to separate ourselves from our competitors. Unlike many companies that are currently reducing their marketing budget, we are expanding our branding efforts and pushing into new regions. In essence, the Company is poised to benefit from the current recessionary conditions. Our Tilapia products offer consumers an affordable, high-quality alternative to low-quality, fast food, and more expensive and less convenient family style restaurants. HQ Sustainable offers an appealing middle ground during the current downturn,” continued Mr. Sporns.

China concerns: Although this quarter was very solid, I decided to exit all China stocks today for reasons I’ll explain in a separate post explained here.  HQS will remain on my watchlist.  As I return to China stocks, this will probably be one of my first purchases.

DISCLOSURE: No position.

Peak-to-trough, the market meltdown lopped off over 50%  from the Russell Microcap Index (see weekly chart of ETF above).   The charts look even worse for many individual equities, particularly on the OTC BB.  Remember that OTC BB stocks are excluded from the Russell Microcap Index, which is really a blend between microcaps and smallcaps.

There are three reasons why a bottom may be in for the Russell Microcap Index and the IWC ETF:

1.  during the meltdown, the severe drops in individual issues suggested that a lot of traders were willing to get out at any cost, or were forced to sell due to margin calls.  At some point, and I think we may be there now, most who would consider selling are already sold out.   The new buyers have a much lower cost basis and are more likely to be patient as the market and individual stocks fluctuate.

2.  the index is already stretched far below its 50-week moving average, a sign that it is severely oversold.  This never means it can’t get worse; but it does increase the odds that the next sharp move is up towards the MA line.

3.  seasonally, November and especially January are strong months for microcaps.  December is traditionally negative, but in light of the selling we have already seen, this year may be an exception.  Here are the annualized microcap returns by month from July 1926 to December 2004, courtesy of Dartmouth’s Kenneth French and University of Chicago’s Eugene Fama:
January………159.82%
February………25.10%
March……………1.21%
April…………….12.86%
May……………….6.85%
June………………6.57%
July……………..22.64%
August………….8.16%
September…….-7.75%
October……….-14.60%
November……….7.97%
December………-1.94%

DISCLOSURE: many microcap positions.  No position in IWC.

• ARI Reports Record Revenues and Increased Net Income for Fiscal 2008 - Hard to believe that ARI (OTCBB:ARIS) is trading under a dollar after posting $.20 in earnings last year. I may buy ARI this week.
• Littlefield Corporation Announces Q3 2008 Results - Another disappointing quarter from Littlefield (OTCBB:LTFD). Guess the hard times have hit the bingo halls.
• Ballantyne Reports Q3 Results Reflecting Growth in Digital Equipment and a Contribution from Cinema Screen Sales - Remember the old saw about movies doing well in a recession? Cinema equipment provider Ballantyne (Amex:BTN) has an EV/S ratio of under 0.4, and a strong balance sheet.
• ATSI ends fiscal 2008 with double-digit revenue growth - I looked at ATSI (OTCBB:ATSX) last year and decided to pass due to negative cash flow. Its time for another look.
• MF Global Appoints Bernard W. Dan as Chief Executive Officer - This personnel change is a big upgrade for futures broker MF Global (NYSE:MF).
• US Gold Cortez Trend Drilling Intersects 0.07 opt Gold Over 50ft. - Mildly favorable drilling results from US Gold (Amex:UXG) on its Gold Bar property. That’s the one in Nevada, south of the Tonkin project. Its not a core property, but could be upgraded when a new reserve estimate is released.

DISCLOSURE: Long UXG.

Reese writes:

With a market cap of only about $50 million, HQ is a micro-cap stock, which means it may be more susceptible to volatility than larger firms. It is growing quickly, though — the firm’s long-term EPS growth rate is about 25% (based on the average of the four- and five-year EPS figures), and its sales have been growing at almost 65% over the past five years. The firm’s performance has garnered strong interest from my Lynch-based model. HQ’s P/E ratio is just 10.36, which, in combination with that 25% long-term growth rate, makes for a P/E/G ratio of just 0.41. That falls into the best-case category of the Lynch model’s most important test, a sign that this fast grower is selling on the cheap.

Full article here (subscription req’d)

DISCLOSURE: No position.

Efficient market hypothesis posits that liquid markets will quickly price in all known information.  The knock on EMH in this environment is that the prices are so different from six months or a year ago.  Most companies will have a worse year in 2008 than 2007, but for the majority the performance difference will not be as great as the decline in stock prices.

But its a leap of logic to assume that current prices are inefficient.  Maybe last year’s peak was inefficient, and current markets are spot on.  How many times have you heard pundits in recent days complaint that xxx is priced as if it is going out of business?  Well, what if that is exactly what happens…what if the market is accurately foreshadowing a massive wave of corporate bankruptcies?

Gun to head, I don’t believe that will occur in the near term.  In fact, I think we are likely to see a sharp rally beginning sometime in the next 10 trading days.

However, it is possible that the today’s dismal prices are telling us precisely what is around the corner.

If that’s the case, one stock that may be a big winner is Epiq Systems (Nasdaq:EPIQ).  Epiq provides software and back office support to bankrputcy trustees.  Business is booming.   In August, Epiq announced record retention levels for large corporate bankruptcies.  And that was before it got the Lehman bankruptcy business.  Analysts following EPIQ predict that it will earn $.60/share in 2008 and $.74/share in 2009.  The $420 million company has over $40 million in net debt, so it is not cheap.  However, if you believe that large bankruptcies are about to skyrocket, EPIQ could be a huge beneficiary.

DISCLOSURE: No position.