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?

KBSF + CBIO = KBIO :)

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. 

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

Saturday, 11 February 2017

KBSF Q3 Results Improve Value Proposition

Highlights:

  • 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. 

Thursday, 9 February 2017

KBSF: Undervalued Microcap Set For Post-RS Run Like DRYS, ETRM or IPDN

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 83 followers. They get an alert on our reports first. We think this pick will be an absolute monster, a potential 500-1000% gainer for those who get in and out at the right time, and likely a double or more for most other early investors. While that might sound like pump and dump talk, read the rest of this report and you will see it is based on reasoned financial analysis and analysis of peers that made big moves in the market. 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 have talked about KBS Fashion Group Limited (KBSF) before, wondering if it was the most undervalued stock on the market. Despite that, the stock has sunk to a low of $0.19 on February 8 just prior to a reverse split set to take effect February 9. The 1-for-15 split will cause the float to shrink from 26.5 million to 1.77 million. Two months ago the stock was trading at $0.40 and was undervalued back then.

Reverse splits on stocks 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), SAExploration Holdings, Inc. (SAEX), among others, where the float has been reduced to just a couple million shares, have caused some incredibly violent swings and short squeezes over the past couple of months, sometimes on the order of 1000% or more in a few days.

What makes KBSF stand out from these other stocks? 

KBSF actually has financials to sustain it so it is not at risk of a rally-killing financing like those other stocks have been. Have a look at the Q2 results filed with the SEC on November 7. The company has $25.9 million in cash. That is $14.61 per share in cash.



The first thing you might think is ok, well they must be depleting cash at an alarming rate or have a lot of debt. No. The cash balance has increased by $4.7 million since December 2015. The company attributes the increase in cash as being "mainly due to the collection of account receivable and the profit of the past year". Total liabilities are only $8 million against current assets of $62.5 million for a working capital of $54.5 million or over $30 per share. As of February 8, KBSF is trading at merely 10% of its net liquid assets. That's not even accounting for the $45 million in long-term assets.

On the income statement side of things, it's a little bit of a mixed bag. However, if the company didn't have any bad news over the past year, how could it possibly get so cheap in the first place? The bad news is that KBSF has had declining revenue as it seeks a pivot in its business. EPS is $0.02 for the first six months of 2016 versus $0.07 for the same period in 2015. Still, the company is profitable even with this decline in revenue. Taking into account the 1-for-15 split, EPS is $0.30 for the first six months of the year. KBSF management has been smart to cut costs alongside revenue declines so that the company still shows black ink even in tougher times like these. That's a sign of a competent management team being proactive with hard choices.
























KBSF's CEO has explained the revenue decline as such:

"Mr. Keyan Yan, Chairman and CEO of the Company commented, because our clients order most of their spring and summer collections in the first quarter of year 2016, the second quarter of the year is considered a slow season of our industry, so the performance of second quarter has decreased as compared the same period of last year. We have also closed some corporate stores in year 2015 and made an effort to access the new and faster growing smaller regional cities instead of the larger cities, as well as efforts on sales to online shop and multi-brand stores. We expect to have a better performance in the third quarter of year 2016.

Starting in 2015 we have also developed a new channel of sales involving wholesale to online shop and multi-brands stores, and we have made progress on this part of our sales strategy starting from the first quarter of year 2016. We have spent considerable time to demonstrate our products on some of the internet platforms as well as setting up international sales group. These channels will be a key driver for our future growth in next and following periods.

Additionally, in year 2015 we have expanded our R&D department and established a strong design team. Our current design team is able to capture fashion trends and product designs, transforming design concepts into commercially viable products with quality and reasonable cost.

Finally, we just moved in to our new office building and factory in the first quarter of year 2016. Our factory currently has an annual capacity of producing five million articles of clothing, which will allow us to best position the Company for taking advantage of the rising demand for the provision of third party manufacturing services from regional and international customers.

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."

If the company makes good on the forecast of $3 million in profits for 2016, that would lead to an EPS of $2.56 per share. The fundamental value of KBSF on both its balance sheet and its income statement implies a stock price of $15-$30 per share. 5 to 10 times higher than where it is now.

The reverse split is a sign that KBSF could spike at any given time 

At the start of this article, we gave several examples of stocks that did reverse splits in excess of 1-for-10 which then spiked several hundred percent days or weeks later. Professional Diversity Network, Inc. (IPDN) is a perfect example that is dear to us. We called IPDN a buy at $0.72 on August 15th with a target of $1.20 (split-adjusted $5.76, target $9.60). For a while people were mad at us calling it a pump and dump because the company announced a 1-for-8 reverse split. Well here is the price history of the stock immediately following the reverse split:




One day after IPDN's split on September 27, the stock price moved from $5.60 to a high of $11.50. IPDN is $9.91 right now, aligned with our original $1.20 target pre-split. We believe that KBSF has the potential to run even harder and just as quickly after this reverse split because its value proposition is so much higher than IPDN. Notice the timing of the financials. Q2 came out on November 7th, three months ago. That means Q3 is due to come out at any time. If KBSF shows good results like the CEO is promising, the move on it could be massive. If you wish to share this report on various social media outlets, keep in mind that 'blogspot.com' is often blacklisted. Use other country suffixes like 'blogspot.mx' or 'blogpost.it' if you are having problems posting it. 

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Friday, 3 February 2017

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Tuesday, 31 January 2017

After A Double on DRYS, RGSE Could Be The Next To Soar

On Monday afternoon, we gave an alert to buy Real Goods Solar, Inc. (RGSE) as we saw similarities between it and EnteroMedics, Inc. (ETRM). We suggested to take profits by putting staggered sell orders starting at $6.00 which is a good thing because RGSE closed down 16% to $3.87 after starting the day well over $6.00. That allowed us to take profits on some of our position and reload at lower prices.

DryShips, Inc. (DRYS), a similar stock to RGSE with a very small float and a perpetual need for financing ended up doubling on Tuesday. With the market primed for small float movers like ETRM, DRYS, GLBS and SGNL post-reverse split, we think it's only a matter of time before RGSE has the same kind of pop.

As mentioned previously, RGSE appears to be very similar to ETRM. On December 28, ETRM had a 1-for-70 reverse split, taking the stock from 4 cents to $2.80 equivalent. It sunk for about a week, but then from January 4th close to January 10th it rocketed from $2.09 to over $30 before settling in the $6's, where it is today.

On January 25th RGSE closed at 19 cents. A 1-for-30 reverse split the next day took it to a $5.70 equivalent. For the past two days it has had a huge increase in volume with very volatile trading from the $3's to the $6's. If it follows a similar pattern to ETRM, it could spike as high as $20. RGSE has only 1.3 million shares outstanding so it is very susceptible to incredible short squeezes like DRYS and the other aforementioned stocks have had over the past few weeks.

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