Stock Gumshoe

This one comes to us from Christian DeHaemer at Taipan, whose “reliable source” tells him that this stock could go from $5 to $15 in a matter of months … sounds like something we ought to take a look at, eh?

This is an ad for his Volume Spike Alert, by the way — one of many newsletters under his name. It’ll run you $995 at the current sale price if you’d care to subscribe.

If you just want the name of this $5 microcap, however, just read on.

In his words, “A stunning breakthrough in laser technology could alter the online marketplace for years to come…sending 100 million video fanatics into a frenzy…and launching a tiny $5 microcap to as much as $15…$20…even $25 per share.”

Woohoo!

So what is this little company?

Well, they’re in the laser projection space, which they as much as say in the ad if we read between the lines — the promise is that this company uses it’s revolutionary green laser technology to help combine video, social networking, and cell phones, and make video on cell phones much more compelling by making it shareable without having to have your friends gather around a tiny screen.

So, this is something that leverages the cutting edge in video by cell phone, and appeals to that highly desirable young male gadget freak professional demographic.

There’s a quote in the ad, too: “One magazine called it a ‘movie projector you can fit in your cellphone’ and added ‘it’s the coolest toy you can’t get — yet.’”

So, clearly there’s a high gadget demand for cool stuff like this — how high is, of course, the $43 billion question.

Oh, wait, the $43 billion is the sales number for the big cell phone company that’s agreed to include their projector in their new phones, according to the ad.

So, what else do we know about this specific company?

Apparently, the green laser breakthrough is the big deal here — they’ve got some kind of cost or production breakthrough that makes it feasible (and you need green for the full color projection).

“By working with some of the biggest names in optics and electronics, this incredible $5 company has reduced the cost and size of the green laser so that it can affordably fit in a cell
phone.”

The CEO walked away from a managerial position at a Fortune 500 company to join this firm, and he has apparently telegraphed their future growth by mentioning that “…we’re currently in negotiations with several (cellphone) handset manufacturers, and consumer electronics companies. And we expect to enter additional agreements in the future.”

So that sounds pretty good, eh?

What’s the company?

Based on this information, the Thinkolator spits and sputters a little bit, but eventually reveals that the name of this laser microprojector company is …

Microvision (MVIS)

I’ve actually traded in the options of this stock a few times in the past, and I currently do hold near-the-money options … I think it’s an exciting business, but I’m interested in it because of the level of interest I think they’ll get from investors, not necessarily because I think they’re going to be a great big success in the future. This is a relatively short term guess investment on my part, going out 6-9 months.

What can I tell you about them? The green laser thing is a big deal — here’s the press release from the company announcing that they had integrated an efficient green laser into their display engine.

But there are two sides of this — several investors have argued that the company is getting far ahead of itself in its promise that this green laser is “cost effective”, including an anonymous hedge fund manager who wrote at SeekingAlpha the day after this announcement came out (he was short the shares, according to his disclosure, and that was certainly the right call from then to now as the price fell from $5 and change to $4 and change. I expect the $5 price in the teaser is from before earnings, which came out on November 1 and brought the shares down a bit.

I don’t personally know whether they’ll be able to develop a built-in projector for cell phones, with Motorola (that big cell phone company that’s their announced significant partner so far, though they also have an undisclosed asian manufacturer on board, too). It seems that their two main products will be a plug-in credit-card size projector for any cell phone, and an actual built-in projector for some high level new phones.

I get the feeling from reading up just a little bit on the business this technology may be a little bit perilous for investors — many companies have gone broke developing cost-effective laser projection technologies, and I have no idea whether Microvision will have the wherewithal to survive long enough to get some big deals on board and some actual manufactured products that people are excited to buy next Christmas (2008, not next month). But, I do think this volatile little company has some potentially significant short term upside in the coming year if they announce some exciting deals — that’s why I’m trading the options a little, but am not comfortable calling the shares a good long term investment for me.

For you, of course, the story may be entirely different. I’d check out SeekingAlpha, they’ve got a few contributors who have written heavily about MVIS (though one of the big proponents over the past year, Ant and Sons, was also a heavy booster of the worst Gumshoe stock of all time, GoFish, the one stock in the spreadsheet that seems desperate to somehow get below $0.)

And if you’re thinking about this as a real investment, where you’re committed to riding some ups and downs with the dream of long term riches, I’d read their filings carefully and try to get a real understanding of how cheap these projectors will really be to produce, and what kind of market you think they’ll really have. There’s a decent transcription of their July conference call that a blogger put up that might also be worth your time (that’s where the CEO quote above came from, by the way), and certainly a look at their latest earnings report (came out last week) would be worthwhile — the press release is here. The stock has been moving downhill since earnings, and this one really moves, like a biotech company, on deals and technological advancements more than on actual earnings (since they’re still losing buckets of money)

Personally, I think the technology is sort of silly, but I won’t make my investing decisions based on that feeling because I also though the idea of a camera phone was idiotic. Clearly, I’m no bellwether for consumer taste or interest.

MVIS has been pretty popular among individual investors all year — and it was also recommended by Investor’s Daily Edge (and sleuthed out here) back in May, at about the same price it trades for now. And maybe you’ve owned it, too — so whaddya think?

So, will the Gumshoe be wrong again? I was very skeptical of J. Christoph Amberger’s plan to buy in to stocks before they IPO in China, as a way of riding the wave of the Chinese stock market’s incredible growth. And the one time I saw a specific teaser that advocated this, I didn’t see the logic.

Still, it worked. Last time around it was Lenovo that they were touting, as the stock that was already publicly traded in the US and in Hong Kong, but should see significant gains once it also IPOd on the Shanghai exchange. You can refer back to my comments on that previous one, too cautious though they were, if you’re interested. Lenovo is one of the top ten performers in the Gumshoe Spreadsheet, just to reinforce the fact that I was wrong.

But a sample of one is, to be frank, uninspiring in its predictive power — so I wouldn’t guarantee that this second “pre-IPO” teaser is also going to outperform significantly. Still, it’s worth a look, don’t you think?

So what are we told about this “China IPO Backdoor Strategy” that could be, in Amberger’s words, the”Most Profit-Rich IPO of the Season?”

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Well, he also talks quite a bit about the most popular pre-IPO company, Alibaba, but that’s going public (in part, at least) only on the Hong Kong stock exchange. There is sort of a backdoor way to get in on this one, because it’s something like 30-40% owned by Yahoo, but it’s not what Amberger’s talking about here.

No, I’m assuming that this refers to a second teaser ad that’s making the rounds, this one for a company that, much like Lenovo, is already publicly traded but that is about to make an IPO offering on the domestic Chinese markets to raise more cash (and become exposed to mainland Chinese investors for the first time).

And this is a coal company. Amberger calls it China’s “premier coal company,” and says that they desperately need cash to expand and build capacity in time to supply all the electricity needs of the Olympic games.

The hyperbole is laid on with a trowel — this could “double or triple in the first day,” and “People are going to stand in line to get shares of the upcoming issues. Most will be turned away disappointed.”

So … are you ready for the bad news?

I suspect that this company, if I’m feeling charitable and want to give Amberger credit for catching the first one of these transactions, is probably …

Shenhua Energy (traded on the pink sheets at CUAEF)

The bad news? The Shanghai IPO already happened, last week — the ad is still circulating around, but the company listed in Shanghai a few days ago. On September 14, the day Amberger said he pulled his data, the shares were a little over $5 on the pink sheets, and they’re up over $7 now. This also trades in Hong Kong, which also saw a bump in the share price, and of course the Shanghai IPO had a dramatic return, from an offering price of about 36 to the current price above 90.

Of course, US investors can buy either the pink sheets or the Hong Kong shares, so those two are moving more or less in unison — the Shanghai shares are restricted, for the most part, to mainland Chinese, and therefore are trading at a substantial premium. As expected.

Now, it’s possible that this isn’t the stock Amberger was talking about — there is another substantial coal producer that has also filed to go public in Shanghai but has not yet gotten regulatory approval (as far as I know — haven’t dug too deep on this one).

This is the second largest coal producer, China Coal Energy (CCOZF on the pink sheets, 1898 in Hong Kong).

So, it’s quite possible that this is the stock Amberger’s talking about — it did file about a week before he started sending this email, and you can buy it on the pink sheets or in Hong Kong, substantially reducing the friction of getting shares.

But take a quick look at the recent charts (pink sheet prices for both, to be fair) of Shenhua, which has already had a Shanghai IPO, and China Coal Energy, which has just filed for one (that’s China Coal on the top, Shenhua on the bottom):

If you’re thinking the same thing I am, you might be wondering whether these two are just trading in tandem, and whether the potential Shanghai IPO boost is already baked into the shares of both. Do note that thanks to some oddities with Bloomberg, the two charts don’t cover exactly the same time period, which further accentuates the slightly steeper curve of Shenhua (sorry!) — the key, in my opinion, is that both have doubled in the past month, largely on the Shanghai IPO mania associated with Shenhua’s actual listing and China Coal’s application to list. Do they have further to run in the near term?

I don’t know, of course, what will happen — and my track record at predicting how non-Chinese shares will react to the IPO of shares in the same company in Shanghai is poor so far. But still, I’m a bit stubborn, and I’m not expecting a huge bump up in shares of the pink sheet or Hong Kong shares of China Coal in the days following their sale of shares in Shanghai.

I think it’s important to note two things, especially for those who aren’t already very familiar with Chinese investing and the strange setups of their various exchanges:

First, that the Shanghai and Shenzen markets (the domestic stock exchanges in China) are still separated from the rest of the world — most shares (the A shares … there are also B shares that are available to some foreign investors) are available almost exclusively to Chinese citizens, and on the flipside, Chinese citizens generally don’t have the legal right or ability to invest overseas.

And second, that this framework might be changing — gradually. The Chinese government is trying to slowly open up a trial program whereby qualified Chinese investors will be able to send some of their money abroad to invest in the Hong Kong stock exchange. And there is also some talk, albeit probably very nascent talk, about merging the Hong Kong stock exchange with the Shanghai and Shenzen exchanges and creating a true pan-Chinese market (well, as long as you are one of those people who still considers Taiwan a separate country … meaning, essentially, that you’re not in the Peoples’ Congress).

My opinion is this, and it is based on my feelings and intuition as much as anything else: In the long run, the disparities between the mainland and Hong Kong/US markets will probably erode. But the long run might be many, many years — the Chinese aren’t likely to open the spigots quickly and let a lot of money leave the country, or do anything to cause a crash in their domestic exchanges; and on the flip side, the Hong Kong regulators, though extraordinarily dependent on Chinese companies for growth, probably don’t want to sacrifice the integrity and listing transparency that enabled them to build a stock market that is often compared favorably to New York and London.

There is also no way of knowing now whether the Shanghai A Shares premium will disappear because of falling stocks on the mainland, or of rising stocks in New York and Hong Kong.

And all of this also assumes, of course, that individual Chinese investors want to leave the country — and it ignores the fact that the government holds a majority of the shares of many of the firms that are listed domestically.

I’ve written before about the A Shares market and the possibility of a bubble bursting over there, but if you’re counting on the bubble bursting because domestic Chinese investors want to diversify overseas, you’re also, in part, counting on investors making a decision to leave a high performing investment and enter a lagging one. Did Nasdaq tech investors yearn to invest in Europe or South America in 1999? Or even in US insurance companies, oil companies, or REITs? Maybe they should have, but they could have and did not.

Oh, and just FYI: these companies might be great values in the long run, and Amberger say’s he’ll guarantee that the shares will double in the next year (of whichever one he ultimately recommended, of course), but they’re already priced, in all markets, for the extreme growth that many expect. One analyst boosted his HK$ price target for China Coal from 16 to 26 less than two weeks ago, but within a couple days the shares were over that target price again. I have no idea what is reasonable for these shares, to be sure.

But anyway, if you were looking for the next “backdoor IPO” company, it looks like China Coal Energy is likely to hit the market before too long — whether it will have a post-IPO runup in Shanghai that also influences foreign shares to move significantly is, of course, a matter for you to judge. I recommend fish entrails and tea leaves.

Happy investing — and if I’m wrong on this one, too, feel free to let me know.

full disclosure: I do own shares of the Morgan Stanley China A Shares closed end fund, which is one of the only ways for US investors to buy A shares (my past writings about this are on my other blog, here, though I’ve also bought more since the last writing in that space, when the discount went over 20% again recently), and I own several other Asian and Chinese investments not mentioned here by name, but that trade on the broader markets I’ve written about.

This one is from Chris DeHaemer at Taipan’s Red Zone profits, and it looks like it circulated pretty heavily on Friday and over the weekend.

It’s for a company that uses momentum, in Dehaemer’s description, to store electrical energy, and essentially runs a big “momentum battery” that they use to buy up electricity at low rates overnight, then sell it again back to the grid at higher rates during the middle of the day. This is in the unregulated, auction-based energy markets, of course, which are available in many states.

The idea, according to the teaser, is that this company can make a killing without ever having to generate any electricity on its own — and it makes sense on a basic level, since we all understand the “buy low, sell high” business plan. Many of us, in fact, try to follow it.

So … what is this magical company that can store power and instantly re-sell it to the grid when demand spikes?

Well, when DeHaemer talks about “momentum” it’s pretty clear that he has to be talking about flywheel technology — giant heavy wheels, often running in a vacuum, that regulate and, in some cases, store energy with, hopefully, minimal loss. This is not too different from the concept that provides some of the power to the Toyota Prius, though in that case the actual wheels are “flywheels” — when you step on the brake, it sends that kinetic energy from the wheel back to the battery to use for running the engine.

And in a flywheel power plant I imagine it must work similarly (in case you can’t tell, I’m NOT an engineer) — the plant pulls energy off the grid to get the flywheels rotating, tries to develop an environment that allows them to keep spinning without losing much energy, and then, when the power is needed again, the momentum of the flywheel is attached to a generator that can spit electrical power back to the grid.

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OK, so I’m not going to win any technical writing awards for my delightful and colorful description of the flywheel power plant, but I think I get the basic idea. Hopefully you do, too.

So, what is this flywheel power plant company, trading at $1.50 at the end of August, according to the teaser (though as far as I can tell, the teaser didn’t start circulating until Friday, September 14, when the shares were appreciably higher)?

Well, the other clues should help us to sleuth this one out:

Insiders have bought heavily this summer, since July 6, 2007.

And DeHaemer tells us that “it could produce the highest profit margins in the history of the utility industry.”

So … figured it out yet? Maybe so, but I’ll tell you anyway … loyal reader Stonecutter and I both agree that this company is …

Beacon Power Corp. (BCON)

And it has had a wild couple of weeks, during which big news came out about several things: a $10 million cash infusion, testing success for their product, and news about preparing for manufacture and the launch of the actual power plant by early next year.

And, being an occasional sucker … er, investing enthusiast … myself, I actually thought about dabbling in shares of this one with my own cabbage when the press releases were flowing from the company last week. Don’t worry, I don’t actually own any shares, but I’m always tempted by interesting technologies like this.

Unfortunately, I’m a bit of a sucker for innovative electrical power companies — one of my larger mistakes, which remains in my portfolio at a huge loss so far, is MMC Energy (MMCN), which is a more conventional electricity generation company, albeit one with it’s own special niche (unfortunately, a niche that they’ve grown much more slowly than I was hoping).

So I certainly wouldn’t consider my interest in the shares to be at all significant, except perhaps as a contrarian indicator.

As with most startup companies and projects like this, it’s very hard to get any idea of when they might become profitable … if they ever will. Of course, since they’re starting up their plant probably over the winter, and winter is a generally low rate and low usage time for electricity, this is not perhaps the time to build wealth through an eletricity rate arbitrage scheme like this … or get attention from the media due to high electricity rates.

But what about this company? Well, if you want to know more about them one thing to really focus on that newsletters almost never cover well, and certainly almost never note in their teasers, is competition — and BCON, as you’re probably aware, did not invent the flywheel. There are a few other power companies of varying focus who sell or manufacture or use flywheel products for electricity storage, they did a quick overview of a few of them over at Stockerblog a few months ago that might help you go get started.

The company is, to get down to brass tacks, a long way from being profitable. These are expensive installations, and I have no idea what their plans are for a second plant, or for expansion. While the Northeast is an appealing place for electricity companies due to the utilities’ inability to build new plants very easily thanks to NIMBY concerns, it’s not the most taxed electrical grid in the country — usually southern California gets that nod, especially in the Summer, so that’s where most of the energy traders of the last, scandal-ridden school got their chops (Enron, et al). It would be nice to see the company try this in other markets, too, which may already be in the plans for all I know.

In my mind this ends up looking risky in a few ways: It’s a bet on a technology that hasn’t yet proven itself on this scale and in this kind of real world usage; it’s a bet on continued high energy rates and a continued open auction market for electricity; and it’s a bet that these guys are better than and/or ahead of their competitors. I’m most sanguine about that last one, since this is a new product/service and, if it works, there may be plenty of room for it to grow even if several companies get into the game. The other two, I’m not so sure.

If anyone else is an expert on flywheel energy storage … or has looked at Beacon or any of the other companies in any detail, please feel free to share. I do see potential, but that doesn’t necessarily mean much … potential without earnings can only last so long.