This article was originally posted on October 5, 2016 — the ad has been circulating very heavily again and driving a lot of questions our way, so we took another look today. The original ad is still going out with a October 2016 date under Moors’ signature, and seems to be otherwise unchanged, so the substance of what is below has also not been changed.
The stock has risen substantially, probably in large part because of the attention from Kent Moors and, to a lesser degree, from the Game-Changing Stocks pitch from StreetAuthority that also hints at this stock as one of their ideas… that’s a lot of attention for a microcap company to absorb, and it almost doesn’t matter what the fundamentals of the company are like if a few thousand new investors are getting excited about it because of a newsletter ad campaign. Arotech’s fundamentals don’t appear to have changed markedly to me, but the stock is certainly higher… the company did beat expectations and show some growth when they reported their last quarter in November, but the only big news recently has been that the relatively new CEO is stepping down after about two years.
But anyway, on to the piece from October — most of this is completely unchanged from 10/5/16:
Dr. Kent Moors never goes small or understated with his investment promises… this is the intro to his latest teaser pitch for Micro Energy Trader ($3,500/year):
“I have, in my possession, a document containing shocking details about what may be the most important energy innovation of the past 100 years.
“This disruptive invention, partially funded by the military, is in the final stages of development by a small U.S. defense contractor.
“As soon as it’s released it will almost instantly disrupt nearly every aspect of a $6 trillion global energy market.”
Don’t get out your checkbook yet, though, we’re going to sniff around, use the awe-inspiring power of the Mighty, Mighty Thinkolator to figure out what company he’s talking about, and give you a chance to think for yourself a bit (and, I hope, share your thoughts with us). After that, if you’ve got an extra $3,500 laying around and want to subscribe to his letter… be my guest — but I think you’ll have a better chance of thinking through the stock dispassionately if you don’t pay up front for the privilege (teaser stock ads like this fuel two big biases for many investors: if you pay for information, you’re more likely to believe it and act on it; and we are all more inclined to overweight the first piece of analysis we read about any investment, so I think it’s better if that first bit of info comes at no or little cost and with at least a little cynicism to balance the “buy” sentiment of these overhyped newsletter ads).
So let’s dig into it, shall we? Moors indicates that it’s a tiny defense contractor that has the potential to grow to rival giants like Boeing…
“Now look at a microcap company like the $75 million defense contractor I’m about to introduce you to.
“If, as I expect based on their incredible new development, their value jumps 38,901%…
“They’ll still only be a third of the size of Boeing today.
“And I’m confident they’ll grow to at least that size.
“Because when you find the right defense contractor at the right time, the profit potential is truly historic.
“The federal government has already vetted the company, paid for their research, tested their technology’s effectiveness…
“And they’re awarding them more contracts than ever.”
OK, having the Feds as a customer is good — particularly if the number of contracts is rising. The government, particularly the defense department, is not terribly cost-conscious… all else being equal, your profit margins are probably safer if you’re trying to sell jet fighters to the government than if you’re selling sensor chips to Apple.
Moors says that the government is looking for energy solutions for the military, and he says the promising development that cuts down on the huge demand for diesel fuel (for generators) is what he’s calling the “nano grid” — apparently, fuel is a big logistics challenge for the military as well as a real risk factor:
“One out of every 24 times a fuel convoy is deployed to refuel a station, someone in that convoy will die.
“While new technology is helping, the casualty rate isn’t coming down fast enough.
“And that loss of life is unacceptable.
“And Congress knows it.
“They’ve granted the military $7 billion to find a new way to get the power our military needs to the places we need it.
“They’re investing in renewable energy, biofuel, and more efficient generators.
“As Col. Peter Newell says, the purpose isn’t to save energy, it’s to save lives.”
Apparently this “Nano-grid” is an improvement on “Micro-grid” technology… more from Moors:
“… one of the most promising developments is something you may have heard of called the Micro-Grid.
“It’s a simple solution.
“The Micro-Grid collects energy from different sources. It can harness solar, wind, as well as traditional sources like diesel generators.
“It feeds all this energy into a central hub, then distributes it to the rest of the base as needed.
“This gives a forward operating base two main advantages:
“First, by using alternatives to supplement the generators, a base can reduce the amount of fuel they burn every day, which cuts down on the need for transports.
“Second, it eliminates one of the biggest threats in any conflict: the single point of failure.”
But since “Micro-grid” wasn’t enough, apparently the military threw money at improving that concept… more from the ad:
“To truly ensure our troops have all the power they need without risking the casualties that come along with fuel transports, they need these grids to be much cheaper and much faster to install.
“So for the past decade, the Army has been investing in dozens of companies – both large and small – to develop a solution.
“One of those companies was the small defense contractor I’ve been talking about today.
“In 2007, the Army granted them an R&D contract for $1,594,283.
“They awarded them another R&D contract in 2008, this time for $1,689,061.
“Now, after almost a decade in development, they’re in the final stages of testing…
“The ‘Infinite Energy’ Nano-Grid.”
So what the heck is a “Nano-Grid?” From what I can tell from the ad, it’s just a combination of a small solar power array (that’s the “infinite energy” part), a high-density battery storage system, and a power controller that regulates the use of the electricity. Which is probably functionally quite similar to a home with solar panels, an inverter and power management system, and a backup battery (though, obviously, a portable system for the military would be as small and ruggedized as possible).
More on the product:
“Unlike Micro-Grids, the Nano-Grid doesn’t take a team of engineers 90 days to assemble. Anyone can have it up and running in less than 20 minutes.
“And instead of the 10 years it takes for a Micro-Grid to reach break-even, the Nano-Grid pays for itself in just months.”
What other hints point us to a specific stock?
“Over the past 12 months, they’ve been granted 93 Federal Contracts with the Army, Navy, Air Force, State Department, and more.
“Last year, the government paid this Microcap Defense Contractor $49.68 million.
“And this year they have $63 million more in orders they’re working to fulfill.
“That’s over $112,680,000 of federal contracts in just two years’ time…
“Which is why, based the military applications of the Nano-Grid alone, my projections have this company’s stock surging 1,026%.”
I’ll confess that I jumped down to see the Thinkolator results so I could think rationally about this part of the tease, but I can tell you that this “secret” company (don’t worry, that secret is almost out of the bag! You can do it! Just a few more paragraphs!) has been around for many years, and over the past decade it has mostly traded at a price/sales ratio ranging from about .2 to .8 — they have bumped up over a price/sales ratio of 1 a couple times, first in 2014 and then just a few months ago, and each time the market cap has come down quite sharply. Today, with the stock getting a bit of a bump from Moors already, the P/S ratio is about .85.
That means they might need real revenue to grow 1,000% for the stock to surge 1,000%. That doesn’t happen very often, or very quickly.
What other clues do we get about this company, so we can wrap this up in a neat little bow for you?
“This defense contractor’s CEO has publically stated, “The growth strategy is to continue in the military, but look for activities in the municipal.”
“And starting January 5 of this year the Department of Energy implemented Standard 90.1. That requires all new federal buildings lower their energy consumption from the grid by 30%.
“That’s an enormous drop for a single year.
“But it’s not out of reach, because this defense contractor has now released a commercial version of their Nano-Grid technology.
“It uses the same three components as the military version, but designed specifically to power residential and commercial buildings…
“… over the past year, this company has secured contracts with the U.S. Immigration Office, NASA, the Federal Acquisition Service, the Parks Service, Veterans Affairs, the TSA, and more.
“These contracts alone tell me this stock is about to take off…
“And by all appearances, even high-level government insiders agree.
“Earlier this year, a Director of the U.S. Department of Energy’s ‘Energy Policy and Systems Analysis,’ acquired a stake in the company worth more than $680,000.
“Why would a public official want so much equity in a small defense contractor?”
OK, so now we’re getting clear enough — the Thinkolator has plenty of data, what’s our answer? This is Arotech (ARTX), and Andy Obermueller must be doing a little happy dance over at StreetAuthority because he teased this stock starting at least as far back as February in ads for his Game-Changing Stocks letter, so if he and his followers are still holding it they get a little pop today thanks to Dr. Moors.
Arotech is a tiny little defense contractor. The market cap is about $86 million today, and they have two divisions: Power Systems, and Simulation and Training. Their power business is by far the smaller and the less profitable of the two (43% of sales, and gross margins of 18% — about half the gross margins that the Training division earns on its 57% of the sales pie), and it includes a variety of programs… one of which is, indeed, that “Nano-grid” product that Arotech calls the Ground Renewable Expeditionary Energy Network System (GREENS), which they describe in their product brochure (you can see it here, from two years ago):
“GREENS saves fuel, money, and reduces the frequency of resupply missions. GREENS is the first viable solution to replace traditional fuel-fired generators. GREENS was developed as a USMC Program of Record, but has applicability to both civilian and military customers. The system collects solar energy and converts it into useable power. Excess solar energy is stored in the array of high energy density battery systems (HEDBS) for use when solar energy is insufficient. The system is light-weight and man portable. The GREENS HEDBS is safe, and has been approved as UN/DOT Class 9 tested for commercial shipment.”
“GREENS HEDBS” just rolls off the tongue, doesn’t it? I can see why the ad copywriter for Kent Moors decided to call them “Nano-Grids.” In a fairly similar vein, there’s also their MEHPS, the Mobile Electric Hybrid Power Sources for the Marine Corps.
I don’t know what the real commitments are to the GREENS HEDBS program or MEHPS in their Power Systems division, or what the eventual potential might be, but they are not massive just now — MEHPS is very small at $2.6 million, GREENS HEDBS apparently is under a $40.8 million IDIQ contract (indefinite deliver, indefinite quantity), but I don’t know how much of that has been used so far (in the latest conference call they said there confident they would get the full value of that contract, but didn’t say anything about timeframe).
There’s also a push in the ad about insider buying by “in the know” government insiders…
“So far this year, a Naval Advisor to two U.S. presidents…
“A former Chairman of a White House Task Force on Defense….
“And a current Deputy Director in the U.S. Department of Energy…
“That’s just three people…
“Have scooped up over $4.7 million worth of this company’s stock.”
It’s really just that “former Chairman of a White House Task Force” who “scooped up over $4.7 million” worth — that’s the current Chairman of Arotech, Jon Kutler, who was elected to that role after his private equity firm, Quarterdeck, bought up about 1.5 million shares earlier this year. That task force was at some undisclosed point in the past, it was the White House Small Business Task Force on Defense Conversion, and I don’t know what they did (usually “defense conversion” means converting defense capacity to civilian use, whether that’s turning a tank factory into an auto factory or whatever, or converting defense technologies to civilian use).
The other two “insiders” are small — the “Naval Advisor” is Rear Admiral James J. Quinn, USN (Ret.), he owns about 6,000 shares (roughly $20,000 worth) and was put on the board earlier this year to replace outgoing CEO Robert Ehrlich, whose contract has now been bought out. There’s no indication that he bought the shares, perhaps he owned them prior to his appointment or was granted them as director compensation (the latter is more likely, I’d wager, but the SEC filings as reported by Yahoo are unclear and I didn’t dig further).
And the “current Deputy Director” is Carol Battershell, Deputy Director for Energy Systems in the Office of Energy Policy and Systems Analysis (EPSA) at the Department of Energy. She holds about 25,000 shares and, again, there’s no indication she bought any of them — she was put on the board this year as well, as part of the shakeup in the board and management following a proxy battle.
So yes, technically those three people together own or control roughly 1.75 million shares, so that’s more than $5 million worth of shares now, and they all acquired those shares over the last twelve months — though the only one who’s really been buying shares this year is Kutler, who acquired the vast majority of his holdings early in 2016 in the $2 neighborhood and has made a few smaller buys more recently (there have been a couple buys by Director Kenneth Cappell as well, though much smaller and only one in 2016… essentially all the other insider transactions appear to be stock grants for directors or employees offered at $0 per share… which doesn’t tell you much).
And, in case you haven’t already surmised this, every defense contractor of any size has people who are retired from or connected to government service in management and on the board of directors. So don’t get too excited about those connections, though Moors does say that he thinks a “recent insider buy” is a sign of a breakout to come (that would presumably be Kutler’s recent purchases, he bought about 50,000 additional shares over the past few months at about $2.70/share). Maybe the shakeup and reorganization of the company will bear some fruit, maybe not — but having connections and new board members certainly doesn’t guarantee anything.
What else does Moors say to get us excited?
“… there’s another little known initiative that the Department of Energy is pushing hard this year.
“It’s called the Zero Energy Ready Home Program.
“It’s a set of standards that would move 60% of new construction to a hybrid, off-the-grid power system.
“Exactly the kind of accomplishment that only technology like the Nano-Grid can accomplish.
“And the market for this application is immense.
“In the U.S., construction is one of our biggest industries.
“We spend $48.8 billion each year just installing electric systems alone in new buildings.
“If this Nano-Grid simply replaces the electrical systems in the 60% of new construction that will have to meet this standard…
“That will drive their revenues to more than $37.9 billion a year by 2020.
“That’s 38,901% revenue growth in just over three years.
“And that’s an extremely conservative number.”
Seriously? Going from nothing to replacing the electrical systems in over half of all new construction in three years is “extremely conservative?” I’m always curious to see what stocks are being touted, and I keep an open mind when I look at the actual company’s materials… but for God’s sake, don’t take these kinds of statements seriously. It’s far too easy to “model” massive growth for a company based on it taking some theoretical percentage of the revenues of a massive industry.
Is the assumption that we’re going to have a huge new push in backup power, batteries and electrical controls for new buildings, but that somehow the current dominant companies in the electrical equipment or solar/battery space (Eaton, Schneider, Emerson, Johnson Controls, etc. etc. etc.) will just back away and give it to some new little company?
That’s just dumb.
It doesn’t mean this “secret” little company Arotech is necessarily a bad investment… but I’ll go out on a limb and say that it’s not going to have anything close to 38,901% revenue growth in three years.
When it comes to Arotech’s actual financials, they have shown decent but unspectacular growth over the past five years — the compound annual growth rate for revenue is about 10%, and some years they’ve been profitable (2013 and 2014, specifically). Revenue declined a little last year and is expected to pick up again a little bit this year, but it’s roughly in the $100 million neighborhood. They do talk a lot in their calls about being ready for more meaningful orders in 2017 and 2018, particularly in Power Supply, and they do announce relatively small contracts that have indefinite timing with some regularity — but currently the backlog in orders is about $52 million, which isn’t particularly huge.
This is what the CEO said about the state of things in the last quarterly press release:
“Strategically, we are not satisfied with the current pace of our operational turnaround, and we are working collaboratively with our new Chairman and our entire Board, including the independent members, to accelerate progress. In response to our year-to-date results, the board has begun an intensive review of our businesses, procedures and strategies, utilizing their diverse areas of expertise to help Arotech advance growth initiatives and further enhance operational efficiency, Under the board’s direction, we are also exploring ways to augment our organic long-term growth strategy by leveraging our public company infrastructure, industry relationships and experience to increase value for our shareholders.”
Which sounds to me like “we’re going to be buying some more businesses.” The balance sheet is in fine shape, they have room on their credit lines and $10 million in cash to offset their $15 million or so in debt, so they could buy some other small companies to “leverage their public company infrastructure” if they so wished. That seems to be an admission that organic growth is not going to be rapid or inexpensive, so, again, I would cool your jets on any expectations of growth rates in the thousand percent plus neighborhood, but that doesn’t mean the company can’t grow or that they’re in any kind of serious trouble at the moment — there is growth potential if their turnaround makes them more efficient or they identify some new revenue growth sources (there are hundreds of small defense suppliers, many of them private, so perhaps there are some acquire-able gems out there, I have no idea), but I have no idea what kind of revenue (or margin) growth potential they believe that these purported 2017 or 2018 larger-scale orders might bring, or what level of certainty we should have that any such orders will come.
I went back to see what I wrote about this stock when Andy Obermueller was pitching it, and this is what I said:
“They are profitable but have not been growing recently, and they seem to have a fairly steady backlog and have announced orders several times this year for both their training and simulation business and their power management business. The stock has had a few big swings in the last five years or so, I don’t see any reason why they should suddenly see the kind of revenue growth that gives you 10,000% returns (right now they’re talking about cutting costs and operational efficiencies, which is not what you hear from companies that are expecting sales to skyrocket), but neither is there anything that looks disastrous in their books. They are forecasting adjusted earnings of between 18 and 23 cents per share this year, so that’s not terrible for a $2.80 stock even if they’re not growing fast (and they do think growth is resuming).
“I don’t know if they stand out as being particularly unique in the ‘military battery’ business, there are a lot lot lot of small defense contractors and subcontractors, and Arotech is not the only one focused on power systems… but it is one of the few publicly traded ones.
“Can’t get excited about that one, I’m afraid — it looks pretty reasonable, but will probably also be very dependent on fluctuating project funding so I’d want to really understand their backlog and their future prospects. Maybe when you check it out you’ll see something exciting.”
Unsurprisingly, I still agree with myself on that. It may be the distributed energy generation and storage in general is the “most important energy innovation of the past 100 years,” but I don’t see any reason why this little defense contractor should have the inside track on being a big part of that innovation. Technology improves every day for solar, batteries and other storage and energy management technologies, choosing long-term winners is probably a fool’s game at this point even if you’re going with big companies that already have a degree of dominance in the sector and are effectively spending a lot of money on R&D — laying those kinds of expectations at the feet of a $100 million microcap company with a small military power supply business probably won’t do you (or them) a lot of good.
That’s not to say that dreaming about 38,901% gains isn’t fun — it is, just like gambling is fun.
And you might disagree, of course, or see huge growth for Arotech where I see a decent company with some prospects for growth but a really high degree of uncertainty and a history of tepid growth — please, feel free to share your thoughts with a comment below… it is, after all, your money.
P.S. Moors also mentions another small “contractor” that he says he has recommended in the past, a firm that makes an innovative “H-arc generator” that will save the Navy money — he boasts that the stock soared 118% in the first 18 days after he recommended it, and that roughly gibes with reality (though the soaring probably had at least as much to do with the fact the he was calling attention to such a tiny stock as it did to the actual attractiveness of the company… and it’s now down by about 30% from where it was when he says he recommended it (and down 60% or so from that peak). If you’d like a trip down memory lane, we covered that one here last December when we saw the ads that boasted “there’s never been a moneymaking situation quite like this in the entire history of energy.”