Where is the selling coming from?
Here is a list of possible reasons why we might be seeing a sell-off at this time, and I will post my views on each:
Reason for sell-off #1:
The company fundamentals have changed dramatically in the last eight weeks, and/or competitors have commercialized competitive batteries.
It is true that the company has not publicly announced a large commercial POs for their battery cells. I am disappointed that we haven't seen that at this point. Its clear from the way the initial CC deal was structured that the company expected to have significant OEM POs for their batteries by now. Yet, none of the competitors that were expected to challenge Valence has done so in a significant fashion. The delay in the customer acceptance was already discussed in the May and June conference calls, and the stock didn't really break down until late July. Also the information over the last eight weeks has been relatively positive, with management forecasting in the August 12th call, that they expect to hit at least a $70 million annual run rate sometime in the next 12 months on their way to a higher revenue rate. Also insiders have bought heavily in the decline at a price 35% higher than the current price.
On another fundamental issue, for over 18 months now, the skeptics have forecasted that the company would run out of cash…. First by the end of July 98, then by December 99, then by the end of March 99, and now by next month. Yet the company continues to draw in capital, and continue to expand their operations and employee base. The recent financing terms of the debt, uses a conversion of only an 8% discount to the stock market price; this is far better than the variable conversion financing they took down last summer (I believe Brubaker has been the leading critic of that variable financing package). And the company announced in the August 12th call that they expect to get significant funding soon from the IDB of NI that will fund further expansion.
Its hard for me to believe that the market perception of the company's fundamental business has changed enough to cause the steady sell-off over the last 8 weeks… I think something else is causing the sell-off. The pattern of the selling and the timing suggest some shorter term factors are really setting the stock price. Of course, it is in the interest of bears and short sellers to suggest that the decline is due to a change in the business fundamentals, but I don't buy it.
Reason for sell-off #2:
Margin selling and tax loss selling.
Last year, we had a significant sell-off in this stock, starting in early August and ending the first week of September. This sell-off was marked by an unrelenting wave of selling, and then carried on through a series of margin related drops. I wrote a fair number of posts at that time, pointing out how the margin selling carried the stock to a set of new lows. The selling ended when the margin selling abated, and insiders jumped in and bought heavily.
The selling a year ago, appeared to be triggered by the August conference call, when it was revealed that no OEMs had begun to test production samples, or to even start design in work on products using Valence batteries (contrast that to the fact that now one OEM has a product using Valence battery cells in beta tests, which is well past the design phase). Also last August and early September, many institutional accounts had taken big capital gains, and where looking for tax losses to take prior to the close of their year at the end of September. Many of these funds liquidate micro-caps early to capture the tax losses, and still be in a position to buy back shares after 30 days have passed, or to pick up other attractively priced micro-cap stocks.
This year the selling seems to be much different… we have had a moderate amount of margin selling, but a lot of the really big margin players were eliminated last year. Also, aside from the one day (August 19) following the drop below 5, we haven't seen the kind of blow-out margin sell-offs we saw last year.
We may also have seen some tax loss liquidation this year. But again, the selling pattern seems to be concentrated from just a few market makers, and appears to be coming from just a few players. Since VLNC stock doesn't have large institutional owners (beyond CC or the insiders), the selling should be more widely distributed among market participants if it was tax related selling.
Reason for sell-off #3:
Fear of floorless selling, and short selling.
The pattern and timing of the selling this year is consistent with this reason. The stock began to trend down several weeks before the date the variable conversion kicked in. This was probably due to some longs going to the sidelines. Around the effective date, we had several days of high activity with a slight jump in prices, that we now know was caused by Berg's insider buys offseting some significant selling. But the selling over the last 2-3 weeks is especially revealing. Every morning, about a half hour into the trading day, a few market makers start pounding the bid with fairly large trades, and take the stock down if they can. Then the selling lightens up; some days like Thursday and Monday, an entire hour passes with almost no trades whatsoever. Then in the last 30 minutes of most days, there is a late flurry of selling from the same market makers. (Interesting that the last two days, there wasn't as large late flurry of selling.)
It is curious that the stock doesn't break down more, with increasing volume, under the selling pressure, and then oscillate to an equilibrium price. This would be more normal price action. No, it seems as though there are two opposing groups here… the sellers are only commiting a certain number of shares per day. And whoever is buying appears not willing to support at a given price, but allows the stock price to drop slowly as they pick up shares from the sellers. A look at the price chart shows an orderly decline for the most part, with fairly predictable volume (August 19th was the exception). The chart is extraordinary in that the decline is almost straightline and seemingly predictable, and with fairly steady total volume day after day. This is unusual trading activity, especially for a microcap, and signals some sort of orchestrated decline.
Observing the trading pattern, it appears as though there are two strong hands out there, one selling and the other buying. The sellers are hoping to get a total price breakdown, that's why they use their hit and pause tactics, and the late day selling flurry. The sellers seem to be in communication. There are times that the selling completely dries up for an hour or two, then resumes again. It is pretty clear that a "selling coalition" exists.
The buyers seem to be trying to pick up 50,000 to 100,000 shares per day, and are just matching the selling pressure just enough to keep the stock price trending down slowly instead of allowing a free-fall. Its almost as the buyers are trying to strip as many shares as they can from the sellers. In order to do this, they can't allow a free-fall, and they can't hold the price steady… they need to keep the game going, enticing more and more shares from the sellers.
This looks like a battle of wits to me… So who will win in the end? To answer this, we need to see if we can deduce the answer to this question:
Who is doing the selling?
First, lets estimate the number of shares sold to this point in time. I estimate that it is likely that the sellers have dumped 50,000 shares a day since July 27. That is approximately 1.3 million shares by the close of trading on August 31. Even if the selling was only 35,000 shares a day , the sellers have dumped about 910,000 shares. OTOH, the selling could easily have been more than 50,000 shares a day. I estimate the weighted average selling price is around $5.40 a share since July 27th. The average price decline per day since July 27, has been about seven cents, or 1.16% per day.
What if it is Castle Creek selling?
Castle Creek could be shorting against their variable conversion preferred shares, but using the conversion price of 4.55 as of today's close, CC will get about 1,720,00 shares for the convertible preferred. They will have already dumped 910,000 shares at an average price of about 5.40, and will have only 810,000 shares net.
If we add the value of their shares at this point, it would be 910,00 sold at $5.40 plus 810,000 left valued at $4.3125 which adds to $8.41 million. This is versus the face value of the preferred at $7.83 million or so. This just doesn't add up to a lot of money, especially if you add commissions, management fees etc.
OTOH, if CC hasn't been shorting much, then they stand to make a bundle if they convert, and if we get a rebound to the stock price we had in early July. They stand to hold over $12.2 million dollars worth of shares if the price gets back to 7, versus the face value on the preferred of about $7.83 million at this time.
Last Wednesday, I talked to the Valence CFO, Mr. King. He admitted that they had talked to CC about the variable conversion. He told me that CC has denied that they had shorted the stock this month. CC doesn't want to surrender the variable conversion, and turned down a Valence offer in that regard. He did not tell me any of the terms that were discussed. CC told him they were bullish on Valence, and were mystified about who is doing the selling we are seeing.
I guess CC could be lying, but I don't believe that CC is doing all the selling we see. At most, they are probably only shorting only a few shares at opportune times.
If Castle Creek hasn't been selling, then who is?
This is where it gets really interesting. If I use the 50,000 shares a day estimate, then somebody out there has sold 1.3 million shares. It could be longs frightened out by the floorless, and it could be shorts who are trying to play the floorless. In any case, once CC converts, the shorts will cover, and longs on the sidelines will try to re-enter the stock.
The question is: Who will be selling the stock at that point?
According to Mr. King, the directors of the company are not prohibited from buying the shares at this time, only the officers. The key directors are Carl Berg, Bert Roberts, and Alan Shugart… any one of these individuals has the financial clout to end this sell-off if they decide to. We already know that Carl Berg was buying heavily for a few days at the end of July. Mr. King also mentioned that the insiders are prohibited from trading the stock in the last 30 minutes before the close.
The pattern of the selling suggest that one or more of these insiders are supporting the stock at this time, and if they aren't, then someone who has very deep pockets is. For example, today someone took a 41,000 share block and an 11,000 share block within minutes from the selling coalition, then bid the price up until the sellers appeared again, and then backed down.
It appears to me that shares are moving from the selling coalition to some very strong hands. These buyers aren't likely to surrender these shares soon, certainly not at 5, not at 6, and probably not even at 7.
This reminds of the rich guy who liked a stock, and directed his broker to buy 100,000 shares a day for 60 days. Everything worked fine, the stock rose every day for 60 days. At the end of that time, the guy decided to sell, and called his broker up. "Sell my shares" he demanded. His broker replied "To whom? … You have been the only buyer for the last 59 days!"
Well, the same thing seems to be happening in reverse here.
Imagine what is going to happen to the selling coalition when they decide to try and buy 1.3 million shares back, not to mention shorts tryiing to cover (who were already short prior to July 27). There simply won't be any significant sellers for the first point or two. There should be a significant snap back.
MGV has said the sell-off isn't over and that the stock will go significantly lower. But What will happen then?
In order to drive it lower for 10 more days will probably take another 500,000 shares from the selling coalition, and perhaps more. Then the sellers will need to replace 1.8 million shares. The rebound will be even sharper. In fact, I think it will take over a million new shares sold by the selling coalition to get and keep the price under 4 for six days out of the next ten. Then the sellers will need to replace 2.3 million shares, not to mention shorts covering (who were already short on July 27).
What will be the timing of the snap back?
If CC converts, then I believe this game is up, so I've been monitoring the conversion price changes. When the conversion price starts rebounding, I believe there is a significant chance that CC converts. At the current conversion price, they already get 50% more shares than originally.
Another possible trigger, is the report on insider trading for Valence for August, which must be submitted to the SEC by September 10th, and generally becomes public knowledge sometime between then and the 15th. This report could show some really large director purchases on the open market, and could spark a reversal. Thus this thing could run for another two weeks, but there is a significant chance that we get a reversal by the end of next week. Looking at the strategy of the buyers, it really is impossible to predict when it will end, because this depends on a decision by the selling coalition to stop selling… I just don't know how stupid they will be.
Well this is just all my analysis and opinion, and anyone is free to disregard it. But I felt some of this issues should be discussed on the board, instead of the endless name calling.
Paul
|
