Just found this board today and am trying to scroll through all the posts.
I have a theory about reverses so let me bounce it off all of you.
Scenario 1(by far the most typical): XYZW has a 100,000,000 shares outstanding trading at .02. They do a 100 for 1 reverse, announced just before opening bell. For a pico second the stock may actually trade at $2.
Since there is still a lot of headroom under the Authorized Number, which is rarely reduced, XYZW is issuing shares in the float. This issuance, coupled with the panic sell off from knowledgable investors, starts tanking the stock.
As it persists over the next several days/weeks, it is not uncommon for the stock price to fall 60, 70 or 80 %. The principals of XYZW have gotten some ready cash, by dumping at $ 2 on down, and more than if they had done the dumping without a reverse.
They also accomplish something else; they essentially take out the value of the shares owned by the orginal investors. If not on this reverse, on the one they do later...after the stock has fallen to a quarter or less, they can come back and do ANOTHER reverse at .10, say at 50 for 1, with the price stable at $5.
So, a shareholder with 1million shares bought at .02 to start, drops to 10,000 shares after the first reverse, and then 200 shares after the second reverse, valued at $5 per share, $1000, down 95%.
From here on, company XYZW may actually thrive, but make no mistake, that original investor has a slim chance of ever getting even.
They would need a 20 BAGGER just to get even.
Scenario 2: A small company, ABCD, with a large share base but profitable...rare but they do exist. Say 100,000,000 share trading at .12, That's a $12 MM market cap. They meet NASDAQ reqmts for listing!!!The company is profitable, earning a modest 3 cents a share. That's a P/E of 4,but nobody notices them...that dang 100,000,000 shares thing.
Now, if ABCD were to do a reverse split, a 50 for 1 for example, they would then be at 2,000,000 shares trading at $6. Now they meet NASDAQ requirements completely!
Unfortunately, initially there would be a sell off because they did a reverse split and we all know 99+ % of them are bad. But here, I feel, the sell off would soon stop. Because someone would soon figure out that little dilution has occurred, because it wasn't needed. This company needed its share price UP, it didn't need cash from issuing shares at post-reverse prices. At a price of $4, they are still earning $1.50 per share and that's a P/E of 2.7. Maybe this reverse split was just a math recalculation? And the stock turns around and the price recovers from there...quickly.
Bottom line: If the company has the fundamentals BEFORE the reverse split, but just not the stock price, a REVERSE will ultimately benefit them. CCEE and MDRX come to mind.
If the company sucks before the reverse split, it will still suck after and probably get worse. Too numerous to mention here.
TG
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