Shadow Stocks - Investing, with a focus on small stocks

I picked up a few shares of this company today, Nanologix (Pink Sheets: NNLX.PK). I alluded to this company in a post on the old blog back in December (“The limits of ‘buy what you know’”). As I mentioned in that post, a fellow AYSI shareholder (“Barry B”) brought this company to my attention. He summarized the investment thesis like this:

They have a product that does what a petri dish can do, but it does it in 1/4 the time due to a patented membrane. There is an FDA mandate that testing for certain viral and toxic threats must occur in 24 hours not the days it takes now. They have designed and built a clean room and are installing the equipment to manufacture kits they have standing orders to fill. Like AYSI the main player has pumped [in] his own money rather than dilute shares.

Not knowing much about the Biotech 903, I turned to a friend who works in the field (and comments on Steam Catapult under the nom de plume Monkeypilot). This was his response to me (the second paragraph of which I quoted on the old blog back in December):

I took a look at their site, and the products seem solid. The claims they make are quite reasonable, and contrary to a lot of company/product statements I’ve read, this one isn’t drenched in hyperbole. Surprisingly, that includes their statement about capturing market share. They also acknowledge the competing technologies that are equally fast or faster. So, all of that builds a lot of credibility for me. As far as the business prospects, I can’t say anything about the FDA mandate, as I’m unfamiliar with it. However, if the statement about the 24-hr rule is accurate, it would obviously be a big boost to their prospects. I don’t know what kind of competition they face, either. NNLX doesn’t seem like it’s going to revolutionize microbiology, but it’s a big market they could potentially get a piece of.

I’m a pretty bad judge of stocks, particularly in the biology realm. a few years ago, I bought some shares in Affymetrix (AFFX) because they had the best microarray platform hands-down, and were about to acquire a big new customer (Merck). Then they made some bad business moves and got way behind the up-and-coming tech (next-generation sequencing, NGS). Their main competitor, Illumina (ILMN), with a much inferior microarray platform, did everything else better, and is now the biggest NGS company, I think. If you compare their stocks over the last few years, it’s quite disparate.

I filed that away and then bought a few shares of this at $0.485 today (after which the stock price promptly dropped 2.5 cents).

More stop limit orders were triggered since my first post about portfolio pruning, so the detritus of old positions I had in PFE, FTO, FIG, and another stock or two got shaken out. Now I’m down to owning 12 stocks, but I may have fewer than 10 soon. Here’s what I have now, in order of the biggest positions to the smallest:

AYSI.OB
USEG
BPT
NNLX.PK¹
KSW
TIRTZ.OB
HBM.TO
BRK/B
PNDMF.OB
TINY
HEM.TO
MO

AYSI.OB comprises about 45% of that, followed by USEG at about 12%, BPT at about 10%, NNLX.PK at about 5%, and then downhill from there.

¹Just picked up a few shares of this today. More details on this in the next post.

For financial professionals, later today. More details on Steam Catapult.

For a loss of 6.8%. I mentioned in a previous post that I had shorted USG (NYSE: USG) at $12.45. Initially, I had set a stop buy order a little less than 10% above that price, but when the stock dropped below $12, I tightened up my stop. I could have covered there for a single-digit gain, but my M.O. so far with shorts has been to aim for double digit gains while limiting losses to single digits.

First, John Authers in the Financial Times: How baby boomers lead bear market by the nose. In that column, Authers refers to a Barclays study about stock market bubbles, the gist of which was that equity market valuations were driven by demographics. Barclays found a strong correlation between cyclically adjusted P/E ratios and the ratio of 35- to 54- year-olds in the population (the peak demo, apparently for earning and investing). Authers’s conclusion was that we may have another ten years to go in the current secular bear market. That’s consistent with Vitaliy Katsenelson’s thesis.

Second, via GuruFocus, Vitaliy Katsenelson presents this PowerPoint slide show: China — The Mother of All Black Swans. Katsenelson argues that China’s economy is bubble about to burst. A few thoughts on this.

In first footnote to this post on the old blog, we summarized the positive and negative scenarios on the Chinese economy and its stimulus program.

On slide #4 of Katsenelson’s presentation, where he compares China to Starbucks, he ignores a material response by Starbucks to its “late stage growth obesity”: Starbucks raised prices — both directly, and indirectly. For a couple of indirect examples, ahead of Christmas, Starbucks used to sell its cards at a 20% discount to their cash value at Costco; it didn’t do that at the end of 2009. Also, Starbucks used to offer gold card members 10% off all purchases; now it just offers a coupon for a free drink every for every 15 drinks you buy.

On slide #10 there’s no mention (perhaps because it was written before the news) of China’s move to rein in bank lending yesterday.

On slide #17 there’s no citation for the claim of trillions of dollars in Chinese government-backed loans. This is a key point because while others (e.g., the FT’s Martin Wolf) acknowledge that the Chinese banking system probably has a lot of bad loans, they believe China can easily afford to recapitalize its banks, if necessary.

On slide #18, there’s a list of negative consequences of China’s economy going bust, but no investment prescription to profit from this.

I used a Star Trek: The Next Generation reference in an e-mail to my technical consultant about Portfolio Armor, and ran with that theme in this post on Steam Catapult: Star Trek: TNG and Portfolio Armor.

I mentioned on the Short Screen message boards a little earlier that I picked up some of the $12.50 strike SEP 10 Puts on Stone Energy Corp. (NYSE: SGY) today at $1.30 each. According to the Altman screener on Short Screen, SGY is one of the 50 most financially distressed companies among those with share prices at or above $4.