Here is an interesting article since the nays are stating the Value of the stock... Now since I never discount a nay say and they typically tip their hand and their agenda is known:
What is the Value of this Stock?
by LeRoy Stockman
In this essay, I want to discuss a way of looking at the value of a stock. I will use a simplistic example, but I think you'll see how the pro's look at the value of a stock. At every juncture I will ask the question, "WHAT IS THE VALUE OF THIS STOCK?"
Let us use a software stock as an example.
John Jones (CEO and chief programmer) has been working tirelessly writing a program. He thinks he's got it so he starts a company.
He goes and incorporates himself called XYZ Inc.. He sets up the company with 1,000,000 shares at .001 par value. In effect, he has a million shares that are worth NOTHING.
So he goes to his friends and family and says I will give you each 1 share for $1. (This is a private placement PP). So he places 100,000 shares at $1. He tells the investors that he will not sell any stock for 6 mos (restricted stock). So what is the value of each share of stock?
100,000 shares = $100,000 divided by 1,000,000 shares, the book value is $.10/shr. But since 900,000 shares are restricted, then the free float can arguebly be said to be worth $1/shr +/-.
Now, John Jones uses the money to buy this or that, and at the end of the first quarter there is only $25,000 in the checking account and say $25,000 of assets (though they may have a tag sale value of $5,000), we can argue that the stock is worth .50/shr off of float.
Now shorters know this and are willing to short naked (if they can get away with it) the stock down to $.50 and not feel too uncomfortable. Now let's say, John Jones kept his 900,000 shares at a brokerage house that he trusts. Guess what, his brokerage house can use that 900,000 shares to short against him and his friends. Remember, there is only $50,000 in assets agains 1,000,000 shares, the stock value is really only worth $.05/shr.
Whoaaa, did we start out with $1/shr and now it's only worth .05? Yes we did, and yes it is, even though the market is trading at .50. Effectively, that $.50 is way over priced. Now are you getting the idea why shorters like this play?...
Now, John Jones needs more money, and 6 mos have gone by so he goes to the market to sell some of his 900,000 shares left. Let's say he sells 100,000 shares at a PP for .$50 cause that is all the market (his assets were worth) is willing to pay.
So now he has 200,000 shrs in the float, and that 800,000 shares is still at his friendly (yes they are shorting him) stock brokerage house.
So John's company has $50,000 in new money, $25,000 in old money and $25,000 in assets ($100,000 total assets). The share value is assets = $100,000/200,000 float so the book value off of float is .50/shr but the real book value is .10 (Assets=$100,000/1,000,000 shrs). So do shorters have some more room to short. You bet they do... and have a lot of shares to do it with (some 800,000 shares left).
Let's assume John Jones is a good business man and actually has a good product and now he sells it and actually MAKES MONEY (profit).
And let's say John Jones got a $2,000,000 contract that nets him $300,000 profit....
OK, John Jones says, it is time to play hard ball. He calls up his broker and says, please send me my 800,000 shares to my house. I want it out of the market (remember brokerage houses were using that stock to short with).
So how much is this stock really worth....Let's look.
At this point, there are still 200,000 shares in the float, and now XYZ is worth $2/shr (assets $25K old money, $50K new money, $25K furniture and $300,000 profit) = $400,000/200,000shrs = $2/shr off of float.
But...really it is worth $400,000/1,000,000 = .40 off of book.
But...that profit...hummm, that is the real value...OK, how much do we value profitablity? 10 times?, 20 time? (this is called a PE ratio).
Let's say we value it at 10 time so now $300,000 * 10= $3,000,000
If we divide the $3,000,000/1,000,000 shares we can argue that the share price is now at $3/shr.
So the market value can argueably range from .40/shr to $3/shr. If the whole 1,000,000 shares goes into the market, the share value is diluted down to .40/sh. as explained above or to $3 if we capitalize the income.
Shorters know that and assume the public is too stupid to understand that. Well that is not the case here, is it friends?....We know...
If the owner pulls that 800,000 shares out of the brokers float, and if investors are not willing to sell their stock, this is called a short squeeze and who knows what the stock price will be worth?
This is a very typical scenerio. This is one that is played out time and time again with small cap companies. So the real value is based on EARNINGS, EARNINGS AND MORE EARNINGS. Book value helps, of course, but if the earnings are not there, forget it....
So if you plan on analyzing a stock, use the above model to work thru the numbers and see what they look like. Get to know the major share holder. Where does he park his stock? How much can really be used for valuation? What is their profitablity, and what do the next two years look like, profitability wise? Who is shorting? How much are they shorting?
One problem is that these are hard questions to answer and the regulatory agencies do not help us. In my opinion, certain information should be known to us on a daily basis. There is no reason, with today's technology that we do not know, on a daily basis, who is, and how much stock is being shorted. Right now, the best we can do is find out at the end of a month....THIS IS RIDICULOUS AND INSULTING....
Can this be changed? ...Yes, but needs a PAC to do so. Remember it is the Pro's you are going against (Merryl Lynch, Canaccord, Hedgefunds, etc) and this is their bread and butter ...
Who knows, maybe in time we'll get so organized as to develop a PAC but that means contributions from the peanut gallery...
Or maybe we'll start or own stock exchange? Let's see what the future has to offer?
Well, that's today's lesson.
Hmmm..
:-)
GB
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