New trade for December 13th, 2010.
The venture exchange keeps powering its way up to the Point & Figure target of 2600 area.
My hunch is we will take at least the next six months to work our way up there. But hey, who's complaining. In fact, after two and a half years of almost no trading, penny stocks are back in vogue and we are going to take advantage of it.
CDNX Venture Capital Investment Model (VCIM) Trading Tip for December:
December is usually a great time to go shopping in the venture capital market. Why, you ask? One reason and one reason only, tax loss selling. This is the process where an investor sells a stock at a loss and is given a capital gains tax credit to use either now (to offset a capital gain elsewhere) or at some point in the future (to offset a capital gain at that time). Depending on jurisdiction, these capital losses can be carried forward for years so it is in an investors best interest to book a loss if capital recovery isn't realistic.
With most large cap stocks there is always a chance price will come back if earnings recover down the road. So while there is an element to tax loss selling here, it isn't as significant as elsewhere. By contrast, many venture capital stocks (that either didn't have earnings or never had any prospects for earnings) can go down and literally never come back. The way the market handles this situation is with the dreaded 'roll-back'. A consolidation of a stock is in essence the final defeat of a venture. Even the most conservative purchases prior to a roll-back can become disasters after.
This brings us back to December and tax loss selling. Those investors who had to endure a 'roll-back' over the course of the prior year have a lot of incentive to sell a stock & book the capital loss. Watching this kind of loss materialize is not only a financial blow but it can also be a psychological blow too. Investors will often want to get rid of dogs so they don't have to be reminded of their mistake and tax loss selling season was designed to do just that*. Out with the old, in with the new.
*Since they now have only a fraction of the number of shares they began with, their average cost on the position is usually much higher than current market prices. In essence, the stock will need to increase many fold just for them to get back to break-even. So, if they happen to have a capital gain tax liability (from the sale of an asset somewhere else) they can sell the remaining position (usually a small odd-lot) and offset the capital gain liability with the newly created capital loss.
This brings us to CRI's latest acquisition: BYM.V (Baymount Inc.)
1 year price chart
3 year price chart
This company first came to CRI's attention when it announced an intended 'roll-back' of its stock in August, 2010 (news link). Indeed, the stock was rolled back on a 20:1 basis which at the time left a little more than 8 million shares outstanding. After the roll-back, and a further slide, the company now trades at a very paltry 0.34 times tangilbe book value per share. This literally means for every $.34 you spend, you are buying $1.00 worth of assets. What a discount!
So what does the company do?
Baymount is in the horse racing business and operates in Ontario, Canada. The company's primary development is its new Quinte Raceway and Slots (“QRS”) racino facility located in Belleville, Ontario.QRS will combine the entertainment of slot machines and dining with live horse racing. The company has received all necessary licenses and approvals for the project. The company recently brought in a development partner who, at closing, will have invested $4 million ($3 million invested to date) for a 50% stake in the QRS facility. QRS will be the 18th and final racetrack and slots development in Ontario, which hosts one of the most successful slots-at-racetracks program in the world. The QRS facility is scheduled to open in Summer 2012. Additionally (an in similar fashion) they have the rights to build the new facilities for Wheat City, Manitoba (upon government concent) and they own the rights to proprietary software designed to help betters make more informed decisions. While I myself am not a gambler (I have way more fun in the market!) I can see how this company has quite a few assets behind it and is very well positioned going forward. Their 'philosophy [is] to create [an] entertainment destinations for consumers' (link) and I don't see how (with government and institutional backing) they can't do just that.
The $3 million dollar investment by the institution is an interesting deal in itself (news link). The company floated a convertible debenture. The conversion price is $.15/share and there is a proviso in the deal that says that if the company can get their stock above $.30 for 20 consecutive days, they can force the early conversion of the debenture into common stock. The deal has closed so it is not like this might happen......it has happened. This company now has $3 million dollars in working capital (to build the facility) almost no shares outstanding (5 million in float) and if they can move the stock into the $.30 area over the next 36 months they can literally wipe out the $3 million dollar debt.
What this means to purchasers at $.075 or better. The institution has basically said it wants in at $.15. If the IR firm the company just hired (most recent news) and the regular street crowd can run the stock up to $.30 (and with only 5 million shares in the float, I don't see that being a big problem) then this is a win for everyone. We (CRI-ODNT people) can sell half our initial purchase at $.15 for a nice little double and look to sell more up top. The company gets the institutional debt off its books, the institution has a double on its books ($.15 to $.30) and I am sure a few brokers will make a very tidy sum.
Now can you see why CRI is so excited about this trade from the fundamental perspective?
Technically, it is very appealing too. Refering to the charts above, the company's 1 year 50% level is currently near $.23 [(high of $.40 + low $.07) / 2 = $0.235] and its 3 year 50% level is currently over a $1.00.. Purchases in and around $.08 would realize an almost 300% return if a move back to the 1 year 50% level materializes and and unbelievable 1350% should the market move back to the 3 year 50% level. However, there is NO BOTTOM in price yet. We are still very much bottom fishing here. Considering the companies plan is to open the new facility some time in 2012, I wouldn't be surprised to see the stock 'pop' on that event. Nonethless, 1350% for a little more than 24 months of work, seems worth the risk to me.
Of course, once a double bottom comes in then we can start to expect higher prices but that may be afurther down the road. My hunch, we get our normal seasonal rally into May-June and at that time we will see $.15 area if not higher. This would give us a double in about 6 months time, which would be perfectly fine by CRI.
Summary
Baymount Inc. represents really good value in the eyes of CRI.'s VCIM. The stock HAS NOT bottomed yet but CRI feels small initial purchases are warranted at this time considering the very low share count, the 'guarantee' of being in the government authorized gaming industry and the circumstances surrounding this year's tax loss selling. Once a serious bottom comes in we can start to expect to see upside objectives hit but for now consider it an accumulator. Indeed, that is what CRI has done to today and will continue to slowly do into the end of the year.
Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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