Last week the third quarter results for the defensive portfolios were released which sprung up a few surprises including two stocks from the US Asset Value Portfolio returning 241% (Broadwind Energy – BWN) and 231% (Skystar Bio Pharmaceutiucal Company – SKBI) respectively.
Today’s post takes a look at the main reason behind the dramatic share price rise from Skystar.
The reasons behind Broadwind’s share price rise has already been covered and can be found here. If you remember, the rules of these defensive portfolios state that I’m unable to sell (or buy) stocks except for once a year.
How Bargain Basement Stocks Can Shoot To The Stars
Here’s a 2 year share price chart of Skystar Bio-Pharmaceutical Company (SKBI):
Skystar 2 Year Share Price Chart
Image From Yahoo! Finance
The blue dot represents when and at what price this stock was added to the US Asset Value Portfolio.
It appears from the price chart that at around the time of August 2013 that this China based manufacturer and distributor of veterinary medicines and products fortunes changed in some way due to the way the price just suddenly moving dramatically higher since this time.
Just to keep you in the loop, I’m writing this post and reverse engineering this investment at the same time in an attempt to get to the bottom of why a stock would suddenly jump over 200% in price to see if the research process can be fine tuned.
I’ll start by gaining access to the Edgar database through a third party supplier ADVFN.
Let’s Dig A Little Into Skystar…
- Second Quarter Results dated 14 August 2013 showed revenue to be up 27% YOY – they are selling more of the stuff they make and that EPS more than doubled from $0.23 to $0.49 from the previous year on a diluted basis.
- On 22 August 2013, RENN Universal Growth Investment Trust PLC (pursuant to Rule 13d – 1(c) requiring anyone with a %5 or more position in a US listed company to make that position known to the SEC, who then conveniently publicize it) announced a 7.4% position which they initiated on 15 August, the day after Skystar released it’s second quarter results.
- What is important is not the minutiae of securities law, but the fact that RENN took such a large position (7.4%) in a company at the time that had a $20 million market cap. The fact they did this a day after Skystar’s quarterly results means that they pounced on this stock.
- What is even more important is the latest annual report that shows RENN’s 16 year price appreciation to be 236% verses 180% for Russell 2000, not too shabby considering that the Russell 2000 has significantly outperformed the S&P 500 over the same time period. We can safely say that these guys know what they are doing.
- Over a series of similar filings by Renn about it’s position in Skystar dated 4, 13, 23 and 24 September, they slowly begin to unwind their 7.4% position in Skystar down to 4.9% – these small cap stocks can be illiquid so once a significant capital gain is for the taking, it is sensible to take profits in a series rather than all in one go, especially if you’re holding a large position.
- Skystar’s share price on the day RENN took their large position (15 August 2013) was circa $3.00 a share. Just 5 weeks later on 24 September (the last 13d filing by RENN), the share price was circa $5.00 a share – a rise of 66%. My view is that at the time of writing this post, RENN are still holding a small position in Skystar.
How To Value Stocks Using Public Filings
Just read them.
They’re free and they can tell you an awful lot about the investment merits of any stock you’re researching.
Reading – man’s gift to man
The only caveat is to read them with sceptical eye.
What that means is that you should assume that managements are about as trustworthy as a politician and so anything they may say in public (announcements, annual reports) should be taken down in evidence by you and against them.
In a twist of fate, Skystar’s public announcements since it’s rapid price increase had nothing to do with management but all to do with what the smart money was doing with this stock, at least as far as finding evidence to support an investment thesis is concerned.
Skystar’s management can very well take the credit for doubling earnings per share and increasing revenue.
The fact is that the smart money was buying and buying heavily, then nimbly dumping the stock so as not to raise too much awareness about what it was doing – realising a 66% capital gain on a little under half of its position in the process.
This is great work from the guys and girls at RENN and it can be copied by staying in touch with the public announcements of small cap stocks that have been out of favour (hit 52 week lows) to see if any suddenly announce a doubling of say EPS or an increase in revenue 🙂
And if you see smart money piling in, well at that point you will have an investment decision to make if you’ve not already 🙂
All the best
Disclosure: I have a position in Skystar but not RENN.
- Testing Benjamin Graham; Second Quarter Results
- Testing Benjamin Graham; First Quarter Results
- 3 Benjamin Graham Screeners Put To The Test – Part 2
- 3 Benjamin Graham Screeners Put To The Test – Part 1