Monday, April 8, 2013

TBOW: The problem with penny stocks

Trunkbow International Holdings Inc. (TBOW) on Friday broke above its 20-day price channel, sending a Turtle Trading bull signal. The breakout was confirmed on Monday as TBOW continued to trade above its $1.37 breakout level.

The move was the first significant departure from a sideways trend that has been in effect since late February. TBOW has been in an uptrend since mid-September 2012, coming off of a low of 77 cents.

TBOW met my criteria for better than even odds, with two third of its eight or so breakouts having produced a profit. The average yield was 10%.

But none of that matters.

TBOW is a penny stock. Actually, nowadays they're mainly dollar stocks, but the penny stock name has stuck.

And penny stocks have a problem, one that TBOW is in the thick of.

TBOW was the lone stock out of 64 bull and bear signals that survived my screening process. Under my rules, even penny stocks get further analysis if they surive my rigorous gauntlet of tests.

Trunkbow International, headquartered in Beijing, China, develops applications for mobile phones, focusing on non-voice services such as instant messaging and switching among cellular service provides from the same SIM card. It also has developed a mobile payment system.

The last earnings announcement was Nov. 14, 2012. Twelve days before that,  company executives made a buyout offer of $1.46 per share to take Trunkbow private.

And since then, silence, until April 2, when the company gave notice to the U.S. SEC that its annual report would be filed late because the company couldn't "obtain the necessary review" of the earnings report, presumably by the accountants.

The company also told the SEC that it anticipated the report would show a 19% gain in revenues and a 29% gain in profits compared to the prior year.

Is the buyout deal still on? Has the price changed? When will the earnings be released?

What's really going on behind the high-rise doors of Gemdale Plaza on Jianguo Road?

The problem with penny stocks is that information about them isn't easily available, and often not available at all. The Apples and Exxons are followed by armies of analysts fed by platoons of PR people. When things happen to the company or the market, the news gets out quickly.

Not so with the Tekbows. So as a trader, I'm reduced to guesses, tossing the stalks of the I-Ching and a general state of anxiety as I inevitably fail in my efforts to make rational decisions about the stock. I don't even know what I don't know.

What I do know is this:

TBOW on average trades 45,000 shares a day.

Since the buyout offer was floated, the stock has traded as low as $1.02, a 30.1% discount to the buyout price, and as high as $1.58, an 8.2% premium.

With three hours plus change left in the trading day, TBOW is at $1.38,  a 5.5% discount.

So in theory, there would be a profit if I, as a trader, bought my shares at this level and hung on into the deal went through.

The SEC filing suggests the possibility, at least, that the offer will be raised to account for the higher revenues and earnings, and that no doubt is what lies behind the current price increase and breakout.

Decision for my account: The question of whether to buy TBOW shares hinges on trust. Do I trust Chairman Hou Wanchun and CEO Li Qiang? Do I trust the regulators in China's highly regulated economy? Do I have the least understanding of the market and political considerations that lie behind the buyout offer?

My answers are maybe, maybe not and no. Messrs. Hou and Li have a motive to be honest brokers. They want their company to continue to operate and prosper. For that, they must engender trust. I'm less able to evaluate the motives of the regulators. And my knowledge of China's telcom apps market and politics is next to zero.

So TBOW is a not-crazy speculative play. But it's not a play for me. No trade.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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