Shadow Stocks - Investing, with a focus on small stocks

Alloy Steel International (OTC BB: AYSI.OB) filed its 10-Q today. Earnings for the quarter were ~8.7 cents. Prior to this, the company’s highest quarterly earnings were the 6.8 cents it reported in Q2 of 2008.

That today’s earnings would beat the previous record wasn’t a surprise after the company announced record revenue and pre-tax profits last week.

The management discussion & analysis section of the 10-Q included this:

The Company is actively reviewing options to raise additional capital through debt and/or equity financing. Although it currently has no commitment to do so, any additional capital raised would be applied to the research of nanotechnology and to an overseas manufacturing expansion. The Company is also considering a division of share capital of 5 shares for every 1 share currently held to improve liquidity in the market and promoting the trading of shares.

This is the first mention of nanotechnology I can recall from the company. I’m not sure what that’s about. The considered 5-for-1 forward split seems odd for a company trading at $3, but I think lower share prices are more common in Australia. Maybe the company will issue a press release elaborating on some of this.

I was going to blog about this last night, but I was too beat:
AP: BHP Billiton profit more than doubles to $6.1 bln. From the article:

The company said global economic conditions had improved over the past six months, as the United States and Europe lifted industrial output from previously depressed levels and China returned to double digit growth.

But BHP remains cautious about the speed and strength of the global economic recovery across the developed world.

“It appears that stimulus measures that supported the recovery have not fully addressed structural issues such as weak labor markets and excess production capacity in developed economies,” it said.

The company said a further variable would be the impact of any measures to control loan growth in China.

“It is evident that in the short term, the Chinese government will focus on containing asset inflation,” it said.

BHP said commodity markets will continue to be largely dependent on Chinese and Indian demand.

BHP Chart

I mentioned in a recent post that I had bought a few puts on BHP as a quasi-hedge against what I saw as the main exogenous risk associated with AYSI. Had BHP gone up on its earnings news today, and those puts gone down, I would have considered buying a few more of them.

“That” being shorting Brigham Exploration Co. (Nasdaq: BEXP) at $13.11 on 1/28. As I mentioned at the time, shorting BEXP was sort of a pairs trade in that I was already long U.S. Energy Corp (Nasdaq: USEG), which is participating in a series of oil wells with BEXP in the Bakken formation. After the close the following Monday (on 2/1), BEXP announced positive drilling results in two Bakken wells that USEG is not participating in.

In an attempt to limit my risk, when I shorted BEXP I had set a stop limit buy order with the limit price a little less than 10% above the price where I shorted the stock. BEXP shot through my limit price in after hours trading that Monday and made a new intra-day 52-week high the next day, trading as high as $15.80¹. Looking back at the last time the company announced positive drilling results (on 1/5), I noticed that it had spiked up in price on the news, only to give back those gains a few days later. So I figured I’d let the stock settle down a bit before covering.

Later last week, I got a little greedy and canceled my stop limit order, thinking general market weakness might give me a second chance to make money on this short before the company announced additional positive drilling results. Last night, I thought better of that and entered a new limit order. I covered BEXP today at $14.35 for a 9.5% loss. USEG is up 7.9% since I shorted BEXP, so had this been an actual pairs trade (had I bought USEG at the same time², and sold it today) it would have been for a 1.6% loss.

¹This highlights a limitation (no pun intended) of limit orders: you have no assurance of getting them filled at your limit price or better; only options guarantee you the right to buy or sell a security at a specified price.

²I first bought USEG about a year and a half ago, at $2.85. I bought more later in the $2.70s, making my average cost about $2.80.

Taking advantage of the up day today, I placed limit orders for puts on a couple of stocks with Altman scores in the distress zone. One of those orders got filled today: I picked up a few contracts of the $5 strike AUG 10 puts on Republic Airways Holdings (Nasdaq: RJET) for $0.85 each.

“Value Micro” asks questions about ROIAK and BAGL. I take stabs at answering them.

There are few stocks that I haven’t blogged about in a while. These aren’t big positions for me and they don’t interest me much now. They aren’t conviction picks for me now, just stocks I bought a few years ago and I had mostly held onto¹ since then. I went through my accounts late Wednesday night and put stop limit orders on my dozen-or-so non conviction picks (except for a couple of OTC stocks I can’t put stop limit orders on). Thursday and Friday I got stopped out of two of those stocks, Vaalco Energy (NYSE: EGY) and Exxon Mobil (NYSE: XOM). Good riddance. A pretty good company and a great one, respectively, but I’m glad to have fewer long positions.

¹I had sold about 10% of my EGY position between $7 and $8 per share.

On or about February 18th, we’re going to raise the membership fees on both Short Screen and Portfolio Armor; we’re doing some analysis now to determine the exact amounts of the increases. Current members of the sites will be grandfathered and will continue to pay the current membership fees, for as long as they remain recurring members.