THE THOUGHT PROCESS BEHIND A NEW STOCK WE’RE CONSIDERING
Given that we're in the midst of researching a potential new stock for investment, I thought now would be a good time to detail some of the thought process.
As any of you who read this site in detail know, our stock investments come in the form of special situations. Special situations, for those of you who don't know, do not simply imply that we think our stocks are special because they sell a cool product or are going to go up 500%. Special situations is a term used to describe stocks that are undergoing a special or unique situation. This mostly comes in the form of some type of restructuring. These companies become special situations, a majority of the time, due to the fact that they are distressed.
We have been researching a potential new stock for the past few days. The company, we believe, has potential upside of some 200% from its current price. Everything seems to be falling in line. It's undiscovered, undervalued, has been troubled in the past, has an activist investor stepping in, market cap is below $50 million, management is competent. Everything seems to be in order. However, there is one thing that I am slightly bothered with.
While there is an activist investor stepping into the scene here, which provides somewhat of a catalyst going forward. There isn't the type of restructuring or sense of immediacy that comes with a fight. The beauty of restructurings - when a companies management and its primary activist investors are in court fighting it out, or restructuring debt in a number of creative ways, or considering different ways of bringing out the value of a company- is that it gives volatility and a sense of urgency to the stock price. It serves as a catalyst. That's so important.
Within the micro-cap sector, there are tons of stocks that simply float sideways...some for years on end. They do absolutely nothing. They are undervalued, under-appreciated...but it doesn't add up to anything. These are classic value traps. The restructuring angle turns a sideways floating row boat into a yellow cigarette boat, with all 4 engines roaring.
My primary concern with our newest possible candidate for investment is not whether it will eventually end up going up the 200% we expect...it will. It's not if we'll end up losing money in the stock over the long run...we won't. It's whether the stock will sit sideways for a year or longer, as the restructuring angle is not as defined as it should be.
Either way, we will be looking into the stock further today and if we do decide to release a research report on it and buy the stock, it will be released to current members. If you're not a member, you can join here.
