Monday, 17 April 2017

NADL: An 11th Hour Buyout Target?

Some life was breathed into North Atlantic Drilling Limited (NADL) last week when the company announced 10-year contract awards totaling $1.4 billion with ConocoPhillips (COP). The market reacted very positively with the stock price rising 270% from $0.74 to $2.70 on April 11 the day of the announcement, and hitting as high as $3.89 the next day. The stock has pulled back to $2.10 on Thursday and it may be an opportune time for an entry point around $2 pre-market Monday for those who like a volatile, news-based stock with a small float and a lot of upside potential in an industry that looks to be in recovery. According to Yahoo Finance the float is only 7 million shares (24 million total outstanding) with 1 million short so it's still a prime short squeeze target.

NADL is not without its risks. It wouldn't be trading this cheap if it didn't. It is a subsidiary owned by Seadrill Limited (SDRL) which is coming under fire for a need to restructure its massive $10 billion debt amid the struggling the offshore oil rig business. SDRL had warned the investing public earlier this month that a restructuring may be needed that will result in little value left to shareholders, while also announcing the positive news that the window for negotiation has been extended its creditors. As a subsidiary of SDRL, NADL may be dragged into this. NADL has $2 billion of a credit facility that was due June 30, 2017 but has since been extended to September 14, 2017 as part of the larger extension granted to SDRL. You just need to check a multi-year chart on either NADL or SDRL to know what the market thinks of the situation for these stocks. But with great risks comes great potential rewards. The $50 million market cap for NADL looks like a bargain to us given the new contract with COP. Perhaps it will also look like a bargain to those companies looking to expand their offshore oil drilling businesses by acquiring NADL at a discount.

Offshore oil drilling has been impacted greatly in the last few years thanks to the drop in oil prices and political pressure to reduce this activity. While oil prices have rebounded slightly into the $50's for 2017, U.S. President Donald Trump is preparing executive orders to increase offshore oil drilling, including moves to open the Atlantic coast to offshore drilling for the first time in more than 30 years. It's expected moves like these that may have helped to persuade COP to make such a large 10 year commitment with NADL in the first place. Prior to the contract announcement, NADL reported that its backlog was $300 million. This $1.4 billion contract will result in more than a 5-fold increase to that number. As part of the deal, $58 million of existing backlog is extinguished, so adding $1.4 billion to $242 million results in backlog of $1.64 billion.

A lot of this revenue is expected to be in the outer years so it may have little impact on near-term financials. However, NADL is trading at a deep discount even after the most recent rise in price thanks to the contract announcement. The EV/EBITDA multiple is only 7.5 which is quite low given the newly announced backlog. NADL's EBITDA is $310 million according to Yahoo Finance. Enterprise value (EV) includes a company's debt. NADL's enterprise value is $2.33 billion versus a market cap of only around $50 million. Needless to say, this company's stock is going to be highly volatile especially if a buyout does come at the 11th hour.

NADL actually has pretty good operating cash flow, reported to be $129 million in 2016 despite being in an industry under pressure. NADL showed a net loss only because of very heavy depreciation amounts for its rigs.

There is a rumor that Transocean (RIG) plans to purchase West Rigela project worth $568 million which is 23% owned by NADL. If such rumors are true and if there is a continued increase in offshore drilling activity, NADL as a whole may become a buyout target at the 11th hour. It would make sense for SDRL to try to sell its stake in NADL as part of a greater effort to stay afloat in its own right.

If NADL was to be sold for an EV/EBITDA multiple of 9, that would lead to a $2.7 billion dollar valuation. Subtracting the $2.3 billion in net debt that would leave $400 million left for shareholders, around $16.50 per share. This is just an illustration of the extreme upside potential for NADL if the offshore drilling industry improves over the next several months. The actual valuation could be higher or lower. What about SDRL itself? Well we think NADL has much more upside. $2 billion in debt is a lot easier to work around than over $10 billion in debt. So we believe NADL makes the better trade based on its move last week and the direct impact that the deal with COP will have on NADL's financials. If you buy in and the stock runs a lot and you have profits, don't forget to take some off the table. Do your own research and judge for yourself if NADL is appropriate for your risk tolerance. But we think the $2's are a good entry point for us.

If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We have 171 followers, which has increased from 138 less than three weeks ago from our last report. We believe that our good growth in followers despite the few articles we publish is indicative of people liking our picks and research.

Disclosure: We are long NADL

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Thursday, 30 March 2017

Cellect Biotech: Price target $20 on APOP, $12.50 on APOPW

APOP Price Target: $20
APOPW Price Target: $12.50

On March 16th, we called a buy on Cellect Biotechnology Ltd. (APOP) and recommended that people sell their position on Catalyst Biosciences (CBIO) after it finally achieved the heavy spike we had expected on February 13th in our article "The Next Reverse Split-Fueled Runner". Just prior to that call, we called KBS Fashion (KBSF), "KBSF: Undervalued Microcap Set For Post-RS Run Like DRYS, ETRM or IPDN" on February 9th and KBSF rose from a split-adjusted stock price of around $3 to as high as $18 in the following days. Note the timestamp of 8:35 AM U.S. Pacific Time or 11:35 New York time on the March 16th article. APOP was trading around the mid-$8's at that time and CBIO at $15 or $16. For a while on Wednesday morning the calls went against us, but by the end of the day APOP finished strong at $8.74 and CBIO sunk to $10.51.

We had seen what had happened to stocks like DryShips Inc. (DRYS), EnteroMedics Inc. (ETRM), Interpace Diagnostics Group, Inc. (IDXG), Real Goods Solar, Inc. (RGSE), Globus Maritime Limited (GLBS) and SAExploration Holdings, Inc. (SAEX) after their reverse splits in late 2016. So that's why we recommended KBSF and CBIO. Unlike KBSF, CBIO doesn't have the financial performance to support a strong stock price. We think that now that it has had its big move, a financing will come. We don't mean to trash the stock, but looking at DRYS, RGSE, ETRM, IDXG and many others, traders can see that all of those stocks fell mightily after their big spikes. KBSF has also pulled back significantly, but it's different in that it has over $14 per share in cash. It can fundamentally support a stronger stock price. Read our other articles on KBSF if you want to learn more.

If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 138 followers. At the time of the KBSF article on February 9th we had 83 followers. We have only released 6 blog posts on 3 different stocks (KBSF, CBIO and APOP) since that time. So our strong growth in followers despite not many posts should be indicative of the quality that people feel they are getting from reading our research. If you follow, you should get an alert on Google+ when we have a new report up (when you use Chrome). So keep your eyes peeled. We don't post a lot because we want to be 100% sure about our picks. There is no doubt a lot of crap in the small cap world on the NASDAQ that we have to skip over.

To understand why we like APOP so much, read the excellent news that the company released on March 27 regarding its successful first cancer patient stem cell transplant for its Phase I/II clinical trial using its ApoGraft™ technology.

Someone might think, well what's the big deal? Biotech companies start recruiting people for Phase I/II studies all the time. Understand that this is a stem cell transplant. Biotechs testing out drugs have to pass certain safety standards before they can start giving their drugs to people. But as far as the actual administration, it's as simple as swallowing a pill. The proof of efficacy doesn't come until the end of the study. APOP on the other hand is performing the following with ApoGraft:

"All of our research efforts to date have culminated in clinical trials that we plan to commence in the third quarter of 2016 related to a process we call ApoGraft. The ApoGraft process begins with the donor’s white blood cells being collected into a standard infusion bag using specialized equipment in a process called cell apheresis. The collected cells (the untreated sample - ‘standard of care’) undergo quality control tests, and upon confirmation of their quality, are then washed in an incubation medium and centrifuged. The white blood cells are counted and resuspended in the incubation medium in the appropriate concentration. These cells are introduced with FaSL and incubated. Following incubation, the cells are again centrifuged and washed and subsequently resuspended in Plasma-Lyte added with 5% Human Serum Albumin (HSA) or equivalent. A few cell samples are then taken for a second quality control test that includes sub-population characterization in the same manner as described above. The graft that contains stem and progenitor cells and graft-supporting T-cells is transfused to the patient within approximately 4 hours via filter."

The fact that the patient isn't already very sick from this transplant is an encouraging sign. Now it's just a matter of waiting to see if the patient remains in good health. From, we can see Cellect Biotechnology's study parameters under the trial record NCT02828878:

We see that the primary endpoint measure is the number of adverse effects on a patient in the first 100 days. Now the study is meant to be complete by September 2018, but data is expected before then and we know that the clock has already begun ticking on the first patient. So the stock could move well before then if stories of a "miracle process" get out.

Shorts are resorting to desperate lies - Could a short squeeze be coming?

There's nothing more telling about how desperate shorts are when they inundate social media sites with falsehoods. This short has nearly 30,000 followers on StockTwits and has led those followers down a wrong path based on this lie:

The claim that APOP hasn't made a dime in 15 years is completely inaccurate. Last year's F-1 statement confirms that Cellect Biotherapeutics was incorporated in Israel in 2011. Dr. Shai Yarkoni co-founded the company in 2011 and became its CEO in 2013 according to Bloomberg. So how can the company have not made a dime in the past 15 years when it has only been around for six? The CEO made mention of the drug being in development for 15 years, but anyone with any experience trading biotech companies knows that there is no expectation of revenue during the development stage, especially for stem cell research. The stock listing on Tel Aviv existed prior to Cellect but if the company got listed through an RTO whatever the previous company did that owned the stock symbol has no relevance to today.

Look at the balance sheet with the first two columns in Israeli Shekels and the final column translated to U.S. Dollars:

APOP is well cashed up with about $8 million U.S. in working capital. Take a look at the accumulated deficit. It's only $9.3 million even as the company has managed to get so far as being able to do stem cell transplants. This is very cheap by anyone's standard. The fact that someone is trying to point out that it hasn't made a dime in 15 years is intellectually dishonest. Shorts or potential shorts have been misled and now may have to cover on a very small float stock.

According to Yahoo, APOP's float is only 3.14 million shares. The short interest as of March 15 is only 42.7K shares but that came before the big spike on Monday which has no doubt collected more shorts. In a few days we will know the short interest for the end of the month. We can expect a squeeze at any time especially since we know that there is little near-term threat for financing.

Target: $20 on APOP, $12.50 on APOPW

There are 107 million shares outstanding on the Tel Aviv exchange. The ratio of shares to ADS on the NASDAQ is 20, meaning that there is about 5.4 million ADS outstanding on APOP on the NASDAQ listing. We can round that up to an equivalent of 6 million to account for existing and recently granted options.

As part of the financing and listing completed last July, 969,231 warrants with an exercise price of $7.50 and a term of 5 years started trading under the symbol APOPW. With an expiry date in 2021 these warrants are a great opportunity to buy into the company with leveraged upside. At $8.74, the stock price offers 129% upside to $20. At a closing price of $2.30, APOPW offers 443% upside because the warrants would be worth an intrinsic value of $12.50 - $20 on APOP less the $7.50 strike price of the warrants.

The warrants are under no threat of being exercised because they are publicly traded with so much time left to expiry. It makes more sense for warrant owners to sell them than to exercise them and will remain so until 2021 when there is little to no time value left. Including the warrants there are about 7 million fully diluted ADS shares outstanding. A $20 target leads to about a $140 million fully diluted market cap which we find a fair comparison versus other early stage biotechs in the $100-$200 million market cap range.

While our target is $20, we are not seers nor the gospel. The stock price could top out at $12, $20 or $50 for all we know. We recommend that if traders find themselves to be substantially in the money that they ease out of a trade with profits. For instance, if you bought 10,000 shares at $9, you can begin selling at random prices - say, 1,000 shares at $12.32, another 1,000 at $13.68, another 1,000 at $15.07 etc. Choose random numbers instead of $12, $13, $14 etc to avoid building sell walls at certain prices. KBSF ran from $3 to $18 with our target being $30. Imagine how foolish it would have been to have not sold a single share and watch is pull back to as low as $5. New traders tend to want to do an all-or-nothing scenario where they buy all their shares and sell all their shares in one shot. You will never win trading like that. You will do much better easing in and easing out of trades.

Disclosure: We are long Cellect Biotechnology

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Tuesday, 28 March 2017

CBIO scored huge, APOP is next

On February 13th we called Catalyst Biosciences (CBIO) "The Next Reverse Split-Fueled Runner" just like KBS Fashion (KBSF), DryShips Inc. (DRYS), EnteroMedics Inc. (ETRM), Signal Genetics, Inc. (SGNL), Interpace Diagnostics Group, Inc. (IDXG), Real Goods Solar, Inc. (RGSE), Globus Maritime Limited (GLBS) and SAExploration Holdings, Inc. (SAEX) have done. It took a little while and we were bagholding for a bit but today's move of over 200% shows that we were right. We recommend taking profits on CBIO and have moved onto our next play. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel.

It's an ideal time to get into Cellect Biotechnology Ltd. (APOP). It has pulled back to the mid $8's today after running heavily yesterday on excellent news, its first successful cancer patient stem cell transplant:

"TEL AVIV, Israel, March 27, 2017 (GLOBE NEWSWIRE) -- Cellect Biotechnology Ltd. (APOP) (APOP), a developer of stem cell selection technology, announced today that the first stem cell transplant procedure has been successfully performed using its ApoGraft™ technology in the Company’s Phase I/II clinical trial in a blood cancer patient.  

Up to 50 percent of stem cell transplant procedures, such as bone marrow transplants, result in life-threatening rejection disease, known as Graft-versus-Host-Disease (GvHD). Cellect’s ApoGraft™ technology is aiming to turn stem cell transplants into a simple, safe and cost effective process, reducing the associated severe side effects, such as rejection and many other risks.

Dr. Shai Yarkoni, Cellect’s CEO said, “After 15 years of research, this is the first time we have used our technology on a cancer patient suffering from life-threatening conditions. It is a first good step on a road that we hope will lead to stem cell based regenerative medicine becoming a safe commodity treatment at every hospital in the world.”

Based on the successful transplantation results, the independent Data and Safety Monitoring Board (DSMB) approved the enrollment of 2 additional patients for ApoGraft™ treatment to complete the first study cohort as planned."

This news is huge because usually these type of things take place in a test tube. APOP is actually in a Ph 1/2 setting and has had success and is trading at less than a $50 million market cap. The company has only 5.38 million ADS outstanding (1 ADS is worth 20 shares listed on the Tel Aviv exchange) and is well cashed up with no need to finance any time soon with $8 million in working capital and a low burn rate:

Not only does APOP have a good chance to run after today's pullback, traders can get a leverage opportunity because APOP has warrants trading publicly under the symbol APOPW. The warrants have an exercise price of $7.50 and expire in 2021. They trade around $2.50 right now, so they are pretty cheap considering there is more than four years left on their expiry.

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out

Learn to trade stocks, options, commodities and forex Profitably with Trader Review.

If you are interested in dividend stocks and return analysis, Then or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Ocean Of Gold Report are for you.

Monday, 13 February 2017

We Are Still Long On KBSF

Shortly after our report on Catalyst Biosciences (CBIO) came out, KBS Fashion Group Limited (KBSF) took a dive from the $15's to as low as the $11's. We suppose that maybe some traders thought that meant we moved onto the next play. We did not. We currently hold more than double the shares in KBSF as we do CBIO. We have sell limit orders in small amounts and in increments of a little over $1 between $15 to $25. A few orders got filled today as the stock raced to $18 and that gave us a chance to reload around $13. Open sell orders are from $18 to $25 and we will have plenty of shares remaining after that to place at higher prices. We are in since $3 so it's understandable to take some off the table on a volatile stock even if it's still highly undervalued.

Let's remind everyone of the results of the Q3. You can see more details in the post from yesterday.

Here is the link to the Q3 SEC filing

Key highlights:
  • Cash improves from $25.9 million to $26.3 million from June to September. Cash per share increases from $14.61 to $14.85.
  • Working capital improves from $54.5 million to $56.9 million. Working capital per share increases from $30.80 to $32.12.
  • Total equity improves from $99.6 million to $102 million. Total equity per share increases from $56.27 to $57.62
  • EPS for Q3 2016 was 6.13 cents pre-split, up 53% from 4 cents EPS in Q3 2015. Adjusting for the 1-for-15 split, EPS was $0.92 
Even though EPS was $0.92, notice that working capital per share increased $1.32 per share from June to September. So the quality of earnings is strong through the increase in cash and accounts receivable being greater than the EPS number itself.

CBIO: The Next Reverse Split-Fueled Runner Like KBSF?


If you don't know the KBIO story click here to see how a short caught in a squeeze destroyed his account and had to go e-begging.

Before we get into this report, we encourage you to follow our blog by clicking on the follow button at the top of the left hand panel if you like our stuff and want to be alerted on our next picks as soon as possible. At the time of this writing we have 121 followers. This has grown from 83 since we first picked KBS Fashion Group Limited (KBSF) on Thursday, an indicator of the success of the pick. This pick is for free and it only takes a few minutes to read. If you are interested in subscription services we have links to a few at the bottom of this report. Look at our 2016 year in review to see that the bulk of out picks made our readers money last year. We still hold a substantial portion of KBSF shares even as is surpasses its cash per share value today. It's still trading at about a 50% discount to working capital.

Catalyst Biosciences (CBIO) just went through a 1-for-15 reverse split, reducing its shares outstanding to a mere 868,000. Based on the action of KBSF as well as many other companies like DryShips Inc. (DRYS), EnteroMedics Inc. (ETRM), Signal Genetics, Inc. (SGNL), Interpace Diagnostics Group, Inc. (IDXG), Real Goods Solar, Inc. (RGSE), Globus Maritime Limited (GLBS) and SAExploration Holdings, Inc. (SAEX), we think CBIO has a good chance to spike hard. A lot of haters out there called our reports on KBSF a pump. We are not pumpers and will call it like it is. We raved on KBSF because there was a lot of fundamental value to rave about. In contrast, CBIO is a typical Phase 1 biotech and it will do what all Phase 1 biotechs do - have a cool story, burn through a lot of cash, and hope to have a story that's good enough to navigate through the FDA process and/or get a partnership deal or buyout before the money tap runs dry.

CBIO focuses on the treatment of hemophilia, for which there is no cure, but for the purpose of this trade this is not too important. For those who are interested in the merits of CBIO's drug pipeline we suggest that you browse through company presentations or relevant papers in medical journals. As with any other early stage biotech there could be news that lifts the stock at any given time. Whether CBIO will time news to the reverse split remains to be seen. Here is a summary of the similarities and differences between CBIO and KBSF:

Similarity: Both CBIO and KBSF traded at a substantial discount to cash at the time of our reports.
Disadvantage: Unlike KBSF, CBIO is cash flow negative so it's burning through its substantial cash balance.
Advantages: CBIO's float is smaller and it has higher short interest than KBSF, making it susceptible to even wilder swings.

Let's start off by looking at CBIO's balance sheet from the Q3 SEC filing:

Total cash and equivalents is $49.2 million as of September 30th. Subtract the $32 million in liabilities and net cash is $17.2 million, or $19.82 per share. There are convertible notes on the balance sheet but those are not toxic in nature so we don't have to worry about death spiral dilution like RGSE or GBSN. Net loss for the first nine months of the year was $13.2 million, or $4.4 million per quarter on average. Continuing that burn rate for another 1.5 quarters would leave CBIO with $10.6 million in cash to this point of time in mid-February. If our estimate is accurate that means cash per share is $12.21. If the company was to dissolve operations today, shareholders would get paid out that much in cash, less any restructuring and lease buyout fees plus any money CBIO would get for selling the company's intellectual property. So there is some inherent value in CBIO. It's just that there is a risk of financing at some point in the future if it maintains status quo.

While CBIO lacks the strong fundamental case for a huge spike like KBSF, it does offer advantages on the float and trading side of things. First, it has only 868,000 shares outstanding, about half of KBSF. Institutional and insider ownership combine to own over 50% of the shares, so the tradable float will be less than half of that. Short interest was 214K on January 31st, or the equivalent of 14.3K now adjusting for the split. Not a lot, but a higher short interest than what KBSF had going into its split. So it could be part of a short squeeze along with anyone else who shorts the stock at a bad price.

What we think will happen to CBIO

Here is our prediction on CBIO. We think that the spike in KBSF which helped us gain many more followers as well as increase the market's sensitivity and interest to these extreme low-floaters will cause an original buying frenzy on the stock. It will then capture the attention of the Twitter and chat room daytraders, who will add to the buying pressure by recommending it to their followers. The dumb first-mover shorts will then pile in early, adding fuel to a short squeeze and next thing you know the early entrants into the trade have a nice profit. Our CBIO position is much smaller than our KBSF one, and we expect to be selling for less percentage profits. Our take profit process will be the same, to scale out with many small sell orders at different price levels. Make sure to pay close attention to the date at the top of this article and time stamp (PST) at the bottom so you know who called CBIO first. 

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out

Learn to trade stocks, options, commodities and forex Profitably with Trader Review.

If you are interested in dividend stocks and return analysis, Then or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Ocean Of Gold Report are for you.

Saturday, 11 February 2017

KBSF Q3 Results Improve Value Proposition


  • Cash per share is $14.85
  • Working capital per share is $32.12
  • Q3 EPS (split-adjusted) is $0.92

We have good news and bad news for our followers and buyers of KBS Fashion Group Limited (KBSF). The bad news is we made an embarrassing oversight that we were alerted to by one of our followers. KBSF had released a set of financials in its SEC filing documents on November 7th, 2016. That set of financials was for Q2 and we assumed that was it. Turns out that the company had also released its Q3 financials on the same day and we just missed it. We aren't happy about the oversight but the good news is that Q3 significantly improves the value proposition of KBSF.

Here is the link to the Q3 SEC filing

First we will go through the balance sheet data:

For reference here is the Q2 balance sheet data that we posted yesterday:

Key highlights:

  • Cash improves from $25.9 million to $26.3 million from June to September. Cash per share increases from $14.61 to $14.85.
  • Working capital improves from $54.5 million to $56.9 million. Working capital per share increases from $30.80 to $32.12.
  • Total equity improves from $99.6 million to $102 million. Total equity per share increases from $56.27 to $57.62

While the balance sheet improvements increase the per share figures, it's the income statement that should get investors excited:

Revenue declined *only* 14% for Q3 which is good news considering that Q2 revenue declined over 40%. Q2 2016 revenue was $7.9 million and Q3 2016 was $11.1 million (compared to $13.5 million in Q2 2015 and $12.9 million in Q3 2015) so there was a substantial lift quarter-to-quarter in 2016 that wasn't there in 2015. Net profit improved to 6.13 cents per share versus 4 cents per share as the company has really decreased its costs from the closure of corporate stores. Gross margin took a hit because corporate stores have gross margins over 50%, but that higher gross margin isn't worth it if it costs a lot to run the store.

Remember that the 6.13 cents EPS is prior to the reverse split. Multiplying that by 15 leads to a $0.92 EPS for one quarter. In the Q2 statement the CEO made a promise that profit would in excess of $3 million or $1.69 per share. Q3 shows that is well on its way to happening with $1.6 million in profits. Retail clothing is highly seasonal so it's not a simple matter of multiplying the Q3 number by four and assuming that EPS will be nearly $4 per year going forward. However, at a closing price of $10.87 on Friday, the stock is still cheap fundamentally and should be worth at least $15 to $30 per share.

For those who are in KBSF early like us, you might be wondering about an exit strategy. Here is our advice. Fundamentally we know that this company is sound and worth at a minimum $15 to $30. Even more if the company shows growth and increases communications to the North American investor. However, right now the stock price is controlled by day traders. It's hard to say how high KBSF will go, but a run to $30 like ETRM is definitely possible. Our recommendation to the people who got in early at $3-$5 is to take profits in very small amounts by placing limit orders at unusual prices all the way up to $30 or higher. This is what we will be doing. Don't pick price levels like $15, $17.50, $20, $25, $30 etc., because if everyone did that this will create walls of shares and slow the potential short squeeze (we know short interest is low prior to the reverse split but it must be higher after yesterday). Use random numbers like $15.28, $21.92 etc. as your take profit levels. Don't try to pick a top to sell all your shares either. You will absolutely fail at doing this. ETRM's price history is posted below for reference.

Those people who tried to pick a top on day 2 of ETRM's run on January 6th might have been happy that they sold at $9.50 by the end of the day and very unhappy they did that by the next trading day. Anyone who had a limit order sell on all their shares at $31 on January 10th would be kicking themselves two days later and selling for half that price. The ones who left the trade happy are the ones sold small increments from $10-$30 and when the stock price started coming back down either held their remaining position for the longer term or existed completely.

No one can predict what will happen with KBSF with exact precision. At least us longs know that the financials are strong and justify a much higher stock price. Shorts are playing with fire because they mindlessly see a stock go up 200% without trying to figure out the dynamics behind the move and are secretly jealous that they missed such a profit so they try to trash the stock and push it down. That is ok. They will be the ones who help fuel a violent short squeeze.

Friday, 10 February 2017

Up Over 100% Since Our Call On KBSF Yesterday Morning And We Continue To Hold

We are up over 100% on our call on KBS Fashion Group Limited (KBSF) from yesterday morning at $3 and will continue to hold. For those who followed us and read the report and got in early yesterday, they are also enjoying quite the ride. If you want to get notified of our reports as soon as they come out, make sure to follow our blog by clicking the follow button on the left hand panel. Yesterday morning we had 83 followers. Now we have 92. Likely from another 9 smart people who are enjoying a big win today.

The spike in KBSF smells like the start of an ETRM type of run which ran from $2 to as high as $30 from January 4th to January 10th. What makes KBSF so special is that it has the fundamental value to support a share price of $15 to $30.

How is KBSF worth $15 to $30?

We can start off by looking at the Q2 results and audited 2015 20-F. Links to these filings are here:

Q2 results filed with the SEC November 7, 2016

Audited 20-F filed May 2, 2016

Something we would like to note is that KBSF changed its auditor from BDO to WWC in 2015 (do a CRTL-F search on the 20-F for the terms WWC and BDO if you want to read all about it). Why did the company do this? Because Ms. Lixia Tu was hired as the company's CFO in 2015 and she worked at BDO previously. The company switched auditors so as to not have any appearance of a conflict of interest. Now that shorts are foolishly betting against the stock, they will try to reach for things like an auditor switch as a sign of potential foul play. Rest assured that this is not at all the case with KBSF. In fact, it's the opposite. The company took a proactive approach in cutting ties with BDO because it hired one of BDO's former employees. This should give shareholders extra assurance that KBSF's CFO has experience with a respected global auditing firm such as BDO.

Why do we care so much about the audit? Because that will prove that the $21.2 million in cash as of December 31, 2015 is an accurate balance. And if the company has a history of reporting trustworthy financials, the results ending June is likely quite trustworthy as well, particularly a very transparent line item such as cash. Here is a summary of the important line items on the balance sheet, the Jun-Dec variance and the per share amount of June balances based on the new shares outstanding of 1.77 million:

Cash per share is $14.61. That's $14.61. KBSF has more than doubled from our call at $3, but is still trading at a 50% discount to cash. It has 100% upside just to get to its cash value, ignoring all of the other assets on the balance sheet.

Total current assets per share, which is very liquid with cash and A/R comprising the bulk of it, is $35.33. The A/R balance is high, but notice that it fell nearly $4 million in the six month period and cash grew over $4 million. The company is slowly collecting on the balances that are owed and converting that to cash.

Total liabilities is $4.52. That means working capital, which is current assets less liabilities is $30.80. Just to get to a fair net liquidation value, KBSF is due to rise another 300% to over $30.

We haven't even gotten into the total net equity which adds another $25 per share to the equation from long-term assets such as property and leases, two very vital types of assets for a branded retail line like KBS Fashion, but at this juncture what's the point? The company is very clearly undervalued at $7. Trading at 50% discount to cash. Whether it's worth $30 or $55 is an argument to debate once it gets to those prices.

Something we would like to point out is that KBSF was once trading over $10 in 2014, or over $150 per share split-adjusted (use Google Finance to get an accurate split-adjusted history). So the company wasn't always trading at such a deep discount. It just got sold off by investors because revenue was declining as KBSF was looking to exit its corporate store business. Now that this pivot is over, the company looks to be back on track for growth. In our piece from yesterday, we made mention of the CEO comments on Q3 and Q4 expectations. Here it is again (check the Q2 SEC filing to verify it yourself):

"With these advantages, we also expanded our sales department by employing international sales staff. So we expect our revenue to grow in the second half of 2016 and we believe we are on track to deliver profits in excess of $3 million for 2016, excluding the provision of the change in fair value of warrants and our non-recurring fees related to our recent transactions."

The CEO believes that KBSF will be on track to have at least $3 million profits in 2016. That is $1.69 per share EPS. So not only is KBSF trading at a discount to its cash, an EPS multiple of 10 implies a stock price of $17. Adding together the per share cash value to the price implied by the P/E ratio to come up with a fair enterprise value metric and you would once again get a fair value stock price of over $30. KBSF is set to run further now that this undervalued gem finally has enough eyeballs on it. For anyone stupid enough to short this extreme value play, we need you in order to ignite a short squeeze. So thank you.

**We erroneously stated that EPS was $2.56 yesterday, not $1.69. But at this juncture it doesn't really matter if EPS is $2.56 or $1.69, the point is the company is highly undervalued.