Playing the Pennies! (Stocks)

INTRODUCTION

As we all know, casinos all around the country have spent a good portion of this year closed, even in Las Vegas. You might be able to take the gambler out of the casino, but it’s not quite so easy to take the gamble out of him.

For some players, particularly in states with legalized and regulated online gambling, they might have turned their attention there to get the gambling fix. For others, it was a, “No time like the present,” situation for trying their hand at stocks trading.

The good news for novice traders, and even amateurs getting back into the game, is that it would have been tough to pick a better market...especially those who started in the later part of March.

Where paper money was lost, there left plenty of paper money to be gained if you did your studying and made good picks. For those traders who took their time to properly research fundamentals, it was a tougher affair to make a bad pick than to make a good one. In the face of an across-the-board economic recovery, picking winners isn’t quite as hard to do.

This was even more true for casino stocks than it was for anything else, but we’re going to cover the economic impact (that happened, is happening and is yet to come) in a future article.

In any case, make sure to check out the, “DON’T PLAY THE OTC’s,” section.

WHAT ARE STOCKS?

Stocks essentially represent nothing more than a piece of ownership in the company. If there are 1,000,000 outstanding shares of stock, no company-owned shares of that stock and you own 10,000 shares...you effectively own 1% of that company.

When a company’s ownership is determined by stock ownership, it is a corporation when those stocks are publicly traded.

Private companies can also have stocks. The primary difference with private companies is that the company must approve of any sale or purchase of the company’s stock. Effectively, it almost ends up being more of a partnership (just large-scale) with different employees, investors or insiders owning a certain percentage of the company.

Therefore, when people talk about, “Trading stocks,” they are referring to stocks in publicly-traded companies. The most well-known companies are listed on various stock indices such as the DOW (Dow Jones Industrials), NASDAQ, S&P 500 and Russell for smaller businesses. Essentially, it is the index along with the Securities and Exchange Commission (to whom the companies must file certain reports and disclosures) that manages and regulates stock trades...which are still transfers of ownership from one person/entity to another.

Another key difference between corporations as opposed to partnerships and sole-proprietorships is that the underlying company basically expects to exist in perpetuity, bankruptcy or get bought out at some point. With partnerships and sole-proprietorships, you could simply decide to close (such as a restaurant, for one example) and then just split up whatever positive assets (after paying debts and divesting themselves of the company) according to the ownership percentages.

The main difference in stocks is that companies don’t just arbitrarily decide that they don’t feel like doing business anymore. Could you imagine if WalMart just announced that they were closing everything one day? I could tell you stock in Kroger and Target (among others) would shoot up in a serious hurry!

Stocks are typically only, “Resolved,” in the event of a buyout or a bankruptcy, and sometimes not even completely then.

For instance, Sears Holding Corporation (OTC: SHLDQ) is still publicly traded as an over-the-counter stock. The only matters that this former company has going on are a few things that need to be resolved in bankruptcy. As far as Sears and Kmart stores are concerned, those are presently owned (bought out of bankruptcy from SHLD) by Transform HoldCo, a private company created by former SHLD CEO Eddie Lampert as a division of his private ESL Investments company.

The “Q” in the SHLDQ ticker symbol simply denotes that it’s in bankruptcy. While many online sources no longer pay attention to what the stock is doing, its most recent price was $0.18 on September 4, 2020 (as of the time of this being written) and it is still actively traded over-the-counter.

So...what do the shareholders own?

Nothing. Sears Holdings Company liquidated completely and sold everything that it had to sell in bankruptcy. When it comes to stocks, remember, shareholders ARE the owners, so if a company closes up (usually by bankruptcy) and there’s no money left by the time the process is finished, common shareholders get nothing. The stock is worthless.

Of course, the stock remains worth something on paper. Presently, SHLDQ has a market cap of 73.97 MILLION dollars, even though the company represents exactly nothing and hasn’t been worth a positive 74 million dollars in some decades. That’s a whole story unto itself, but SHLD had spent the last fifteen or so years laboring under crushing debt, closing stores and increased competition---most notably from Walmart and Target.

MARKET CAP: Basically, market cap just refers to the number of outstanding shares multiplied by the share price. In other words, it essentially represents nothing more than the perceived value of the company.

So, SHLDQ theoretically has a value (according to shareholders) of nearly $74,000,000, except, in actuality, the company is completely worthless. It was unable to cover its debts, so even if it wins any pending decisions in court...all that money is going to do is pay creditors. The company itself is literally worth nothing, owns no physical property, owns no intellectual property and consists entirely of nothing.

And, SHLDQ is a penny stock, though SHLD (before bankruptcy) had spent quite some amount of time as a penny stock.

PENNY STOCK: The Securities and Exchange Commission simply defines, “Penny stock,” as any stock that trades for less than $5.00/share.

Importantly, that doesn’t necessarily mean that penny stocks are automatically bad companies. Many companies were penny stocks at one point or another. Penny stocks are also sometimes listed on major indices and, as such, are strictly regulated by the SEC.

Here are examples of why some companies are/were penny stocks:

1. You could simply have a company who’s having a tough time, as we saw of so many during The Great Recession. Even during the recent COVID downturn, some huge names briefly found themselves as penny stocks according to the SEC definition.

For instance, have you ever heard of Ford (F)?

2. Many new companies and startups spend some amount of time as penny stocks. It costs money to meet all of the SEC regulations, after all, so some companies wish to be publicly traded, but also to conserve funds. For that reason, you have OTC stocks that do not trade on any major SEC regulated stock index. It doesn’t mean they are bad companies.

One monster stock that went from OTC trading and now trades on NASDAQ ($82.27 as of September 4th) is Monster Beverage Corporation (Ticker: MNST) the makers of Monster Energy Drink. That company sure did okay for itself.

Pier 1 Imports is an example of a company that went full circle. They originally traded OTC, got huge, then people decided that Pier 1 sucks and now it’s bankrupt and an OTC stock again.

3. Many penny stocks are small cap companies (low total value) and will never be anything except OTC stocks. In an exceptional few of these cases, these are actually very strong companies that just don’t want to spend the money it would take to meet SEC requirements and be listed on major exchanges.

One other thing that we should mention is the concept of a, “Reverse Stock Split,” which is what companies listed on major exchanges will sometimes do to retain their listing if they are trading too low or believe they will get to the point where they are trading too low.

One recent example was now-bankrupt Chesapeake Energy (CHKAQ) who had been trading as low as $0.13/share. Chesapeake was at risk of getting delisted because it had an insurmountable amount of debt, had traded so low so consistently and had no reasonable expectation of such a quick turnaround that they would be north of $1.00/share anytime soon.

Getting delisted would cause investors to lose confidence---not that there was a lot of confidence left to lose---so the company did a 200-FOR-1 reverse split.

What that means is, for every 200 shares of Chesapeake stock you owned, now you owned one share of CHK. Theoretically, this would cause the stock value (per share) to multiply by about 200, bringing the $0.13/share stock into something like the $26.00/share range.

It ended up at $16.80/share instead at the end of that day. It basically spent the rest of its CHK (pre-bankruptcy) existence behaving like a penny stock with a higher than normal share price. A penny stock is basically what it was. It reacted to notable improvements in energy prices like you would expect such a stock to do, but the reactions were mostly overreactions as nothing could stop the financial bloodbath.

PENNY STOCKS AND TRADING GAMES

Some of these companies trade in the double, or occasionally, triple-digits per share. The most notable ones will often be found on the OTCQX Exchange which breaks companies into tiers based largely upon their share price. In order to be in the premier tier, for instance, a company must maintain a stock price of $1.00/share for at least ninety days and meet other certain reporting requirements. These companies do report to the SEC and FDIC, but the requirements are quite as stringent.

The next step down is the OTCQB markets, which do have more-than-zero requirements. For one thing, companies must pay $12,000 annually to be listed as well as a one-time application fee of $2,500. At least to start, the company must successfully trade for at least a penny per share and must not be in bankruptcy. They must also report to the SEC and FDIC, though the requirements are not as stringent as companies listed on major indices.

The OTCQB tier is where you might start to get into some quick trouble. One reason is because this is where you start to find, “Shell companies.” Shell companies are publicly-traded companies that only exist on paper and do not have any actual business operations.

Another thing is these are the types of companies where things can get highly speculative. Many of these are what I call, “Idea companies,” where I mean that it’s a person or group with an idea that, if it works, might make a ton of money. The ideas usually don’t work.

The primary goal for shell companies and idea companies to be listed is to be able to sell their stocks in a more-or-less legitimate way for the primary purpose of raising capital. If your intent is to buy and hold with such a company, then you’re basically an investor in the initial idea of what the company wants to do. It’s almost something akin to getting in as a partner.

Usually, these companies need the money just to have any chance of getting their ideas off of the ground. Therefore, they’ll get themselves on this index and the company will issue more shares of stocks to be sold to the public or via direct offering to an investment company...or pseudo-investment company.

This process of directly flooding the market with more shares, or selling them directly to an entity, will increase the number of outstanding stock shares for the company. Because the number of shares has increased, but the fundamental underlying value of the company is theoretically not changed very much, (other than day-to-day) the stock price will generally go down when additional shares are introduced to the market. After all, you now own a decreased percentage of a company that has essentially not changed.

In more egregious cases, this concept is known as, “Stock Dilution.” It’s because you’re diluting the value of the current shareholders.

Also, when offered directly to an entity, these additional shares are often sold at a substantial discount compared to the current market price. The goal for the company buying them is sometimes to hold these shares long-term, (like legitimate institutional investors might do) but sometimes they’ll dump them for an almost immediate profit.

Everyone wins in the end when this happens. Except the shareholders.

The company selling the shares to the institution wins because they get a direct influx of cash from the institution who bought the shares. The institution buying the shares often wins because they are getting such a discount via the direct offering that the stock price will generally not fall below that point before they can sell all of the shares.

The current shareholders (who are, technically, the owners of the company) lose because they receive no additional shares and the shares they do have are worth less than they were before.

Finally, that brings us to OTC Pink, often called, “Pink Open Market,” or, “Pink Sheets.” My advice for people on this is to remember that pink is only a shade away from red!

There are no reporting or disclosure requirements whatsoever for these companies, and many are in default, significant financial distress or (as with SHLDQ) flat out bankrupt. In the latter few cases, these aren’t even good enough to be Shell Companies...these are companies that have definitively failed.

That doesn’t mean that every Pink Sheets company has failed. Some active companies that are considered less immediately risky (not that it means much) will do some reporting by way of the International Reporting Standard or Alternative Reporting Standard. What that means is that some of these companies actually operate as going concerns and disclose certain financials accordingly to the over-the-counter market, often by newswire. This wire is called the OTC Disclosure and News Service.

Companies that are in financial distress, bankruptcy or who do not want to adhere to OTC basic reporting guidelines find themselves in the category of, “Limited Information,” companies. Some companies that find themselves here are often there due to accounting issues, insufficient information or fraudulent accounting.

Some companies are in the category of, “No information,” which just means that they are publicly traded, but do not report anything whatsoever. The problem with this, obviously, is what the hell is an investor really able to know about the underlying company?

TRADING VS. INVESTING

What a minute, aren’t they the same thing?

Absolutely not!

Imagine if a friend of mine wanted to open a bar, but he needed some people to get some money involved in order to get himself a location, equipment, starting employee cost coverage and inventory. He comes to me and asks me to invest (key word) as a partner in his bar business. Let’s suppose I agree to do that and give him $5,000 towards these initial costs in exchange for a percentage of the business.

My friend now does all of these things, but a week later, I go back and ask for my $5,000 back immediately. Clearly, this is a patently ridiculous scenario. He might not even be able to scrape together $5,000 (and continue to operate) because he has perhaps spent the money without even opening the bar yet!

I would hope that you would never do this to someone. Even if you would, a business partnership would usually have some kind of implicit or explicit profit-sharing agreement by which you couldn’t just effectively change your mind after a week.

Fortunately, you can do this with stocks, and you won’t lose any friends in the process!

Investors: In order to be a stock investor, the emphasis must be on the expectation of long-term profits by buying and holding stocks in a particular company. For me to invest in my friend’s bar, we might have ownership percentages based on how much money was put in, and at the end of the year, I might get that percentage of the profits, if any.

Eventually, we might come to find that I have received my investment back and still have a certain percentage of his bar business. As a result, this has been a positive long-term return for me. It is at this point that my friend might make a one-time offer to buy out my percentage of the bar all at once.

In any case, I have invested in the bar because I believed my hypothetical friend could run a bar successfully as long as he had the start up money.

Similarly, investors study up on a company (or really believe in a startup company) and will decide that they think the company has a good future. They plan to buy and hold the stocks for some not necessarily pre-determined amount of time and keep them as part of a portfolio.

Traders: While some people do both and there can be occasional crossover (intent to invest long-term, but decide to sell earlier than planned) stock traders are much more interested in the short-term movement of a stock.

Traders are more price-focused than they are focused with the long-term future of a company. In fact, a trader might find himself buying and selling ownership in a single company many times while the investor has just held the stocks.

Traders will even engage in, “Day trading,” which means the buying and selling of a single stock in the same trading day. Some day traders may own a stock for literal minutes before selling it!

***The SEC has certain guidelines to prevent low-value traders from conducting day trading. Perhaps the most prohibitive of these is that day traders must maintain an account balance of at least $25,000 with a particular brokerage in order to engage in, “Pattern Day Trading.”

Traders with a lesser account balance may engage in a rolling four day trades within a period of five business days. More than this and they are to be tagged as, “Pattern Day Traders,” and not permitted to do any day trades for a particular amount of time unless their account balance is brought up to $25,000, or more.

Theoretically, this restriction is to protect novice and amateur investors as day traders can endure huge losses within even a single day. Many day traders also like to intentionally pick volatile stocks, which can sometimes see huge price drops within a given period...so then they panic (sometimes rightfully, usually not) and sell them.

Of course, there are some people who might do okay at day trading, though they don’t have $25,000 right now, and it could be argued those restrictions hurt such people. Besides that, I also consider it a meritorious argument that people should be allowed to do whatever the hell they like with their money, so if a brokerage wants to go ahead and prohibit day trading or require a minimum balance, then let the brokerage do it.

DISCLOSURES:

1. I do not own any stocks or companies that have been mentioned in this article so far, or that may be mentioned later in this article. I do not plan to initiate any positions in any companies mentioned within the next 72 hours. (In other words, if I say something favorable/unfavorable, I’m not doing it in my own interests.)
2. NOTHING IN THIS ARTICLE SHOULD BE TAKEN TO CONSTITUTE TRADING OR INVESTING ADVICE. This article is purely for informational and entertainment purposes. If you are going to get into trading/investing, then this article is not even a sufficient start. This covers absolutely the most basic information and you would need to do considerable research before getting your own money involved.
3. The remainder of this article will be written from more of a trader’s perspective. Even when I follow the markets (which I don’t always, as they bore me pretty quickly) or actively play around, I do it from the perspective of a trader and with the goals (short-term profits) of a trader in mind.

TRADING & INVESTING TERMS

If you’re going to play around with stocks at all, then there are a few extremely basic terms that you absolutely need to know. There’s also one concept that is more important than any:

LOSING TRADERS/INVESTORS BET WITH THEIR HEARTS; NOT HEADS!!!

It’s not sufficient just to, “Like what a company is trying to do,” and then decide to invest in that company heavily. Granted, you won’t be the first person to catch lightning in a bottle, but for everyone who does, countless more get themselves struck by the lightning instead.

One of the goals with investing and trading is to be smarter than the other investors and traders. In order to do that, you’re going to need information before making your decisions. Good information. Even armed with information, it’s still a, “Confidence Game,” particularly for traders. Traders are playing against the tendencies of less knowledgeable traders as much as they are anything else.

For that reason, before we get into some terms, the real goal should be to quantify as much about a company as you can and look for inefficiencies. If you don’t have a mathematical basis for making an investing/trading decision, much like a slot player, you’re just gambling.

That doesn’t mean that everything you do has to be based strictly on the quantifiables, but the quantifiables should at least underlie your decisions. When you play against the tendencies of other traders (most notably, the tendency to overreact) for instance, then you might not be strictly playing the quantifiables...and that’s fine if you know what you’re doing. We’ll get into that a bit later, but for now:

Market Cap: Market Cap simply refers to the number of outstanding shares v. the share price of a particular stock. If you take the number of shares outstanding and multiply it by the share price, then the result will be the market cap.

Importantly, the market cap is reflective only of a perception of value.

For example, we discussed Chesapeake Energy earlier, and this bankrupted and delisted company currently has a market cap of 50.86 million dollars. Chesapeake Energy, however, is currently WORTH less than nothing. That’s why they’re in bankruptcy. They can’t even keep up with the interest on debts combined with maturing debts, much less pay off all of their debts and have their cash result (after liquidating assets) be a positive number.

Chesapeake is in the process of restructuring its debt and having some cancelled. They are still operating as a going concern, but as part of that restructuring, current and new creditors will be awarded equity (shares) in the company that emerges after bankruptcy.

Of course, if Chesapeake could meet all of its debt obligations, then one would think it wouldn’t have filed for bankruptcy protection in the first place...and one would be right. There is insufficient cash, assets and equity to cover liabilities. The result of that is going to be that current common stock shareholders (owners) of CHKAQ do not actually own anything that has positive value.

It’s also important to know that, in the event of any bankruptcy, common shareholders get to split whatever is left at the end. Of course, if there was going to be positive cash value at the end of the bankruptcy, then the company would not be bankrupt.

So, CHKAQ stock is simultaneously likely worthless and also worth whatever someone is willing to pay for it!

Being overwhelmed with debt is certainly not a new concept. JCPenney is another stock to enter into bankruptcy this year and it’s highly doubtful that they will survive (as an entity at all) unless they get a miraculous outright buyer.

In fact, many publicly traded companies carry massive debt loads that they could not immediately meet (that’s why you take loans in the first place) and may not be able to meet in the future. GameStop will likely discover this in the near future unless they are able to restructure upcoming debt maturities by then. They’re massively screwed.

That takes us to:

Book Value: Book value gives you a rough idea of what a company is actually theoretically worth, at least, in a perfect world.

Simply put, Book Value is the rough equivalent of what, “Owner’s Equity,” would be in a sole proprietorship or partnership. Simply put, you add up all of the assets, subtract the liabilities, get the remainder and then divide the number of outstanding shares.

An important thing to understand is the difference between liquid and non-liquid assets:

Liquid Assets: These are assets that are either cash or can immediately be turned into cash. For instance, you might have cashable bonds or have made loans that can be called in for a lesser amount any time you want. You get less money, but you get it immediately.

Non-Liquid Assets: Non-Liquid Assets are assets that cannot immediately be turned into cash. While there are certain accounting guidelines associated with the value of such assets; the exact value is often unknown and depends on the situation.

EXAMPLE:

We’re going to use really small numbers just to keep it simple. Imagine if I am the CEO of a publicly-traded company that only has 1,000 outstanding shares:

Assets: $1,000,000

Liabilities: $500,000

Stockholder Equity: $500,000

Book Value: $500,000/1000 = $500/share.

My stock could be trading at $300/share or $700/share and it does not impact the book value. It does affect the market cap, but again, the market cap is only a perceived value...as is the stock price. So, my book value is $300,000 in the $300/share scenario and $700,000 in the $700/share scenario.

Some investors and/or traders might consider the $300,000 market cap (at a price of $300/share) a, “Market Inefficiency,” which just means that they think the market is fundamentally wrong (mathematically) about how much the company is worth. These people might well be inclined to buy stock in the company if they can get it at that price.

Investors in my company might decide to try to sell if they can get $700/share, though, because they might perceive the company as not actually being worth that much...but maybe not.

Remember, it’s a, “Confidence Game,” so the investor might even hold at $700/share (despite the fact that it doesn’t immediately seem to be justified by the book value) just because the investor thinks the company is great at what it does, will continue to improve and become worth even more per share one day.

However, it’s important to remember that, “Book Value,” is not the end all and be all of stock trading. While having a book value greater than the current stock price is certainly a good thing in general, it’s not a guarantee of anything...especially in the long-run.

In the short run, it’s usually a pretty good thing. This is especially true in cases of market panic, recessions, etc. One company that I recommended to a few friends was American Eagle Outfitters (AEO) based largely on the fact that it had dipped significantly with COVID, but underlying was a financially sound company who literally said (earnings call) that they could make not another dollar this year and be just fine. At the time I made the Buy Call, the company was trading right around market value.

Generally speaking, stock markets are very future and expectation focused. This is also true of investors (as opposed to traders) both individual and institutional. Because of that, market caps (perceived values) are often MUCH higher than Book Value simply because the long-term outlook for the company is priced in.

Price-to-Book Ratio (P/B): The concept that we’ve been discussing is known as price/book ratio. This is simply the market price divided by the book value per share. A, “Strong,” P/B ratio depends on the industry, but any result for this that is less than one is almost Universally considered good.

Of course, when it comes to OTC stocks, it’s only good if you REALLY trust the accounting. It wouldn’t be too difficult for a company that nobody is paying attention to to over-inflate asset values, which over-inflates book value, which creates a stronger P/B ratio.

But, if you can get a P/B ratio near 1 on a national (or large regional) company that is listed on a major index, that’s going to be a pretty good sign most of the time.

I cannot emphasize enough that Book Values are very much a, “Quick Glance,” indicator. You can see them for free on YAHOO! Finance for stocks listed on major indices...so this is not any kind of deep research. The value of the assets is also NOT ABSOLUTE, but is rather a snapshot of the most recent accounting period.

For example, let’s pretend that the publicly-traded company I mentioned above was a bar. Anyway, all of us shareholders decide that we have this great book value that exceeds what we paid per share, so we do a vote and decide just to shut it down and convert all assets to cash, then pay ourselves according to the number of shares we have.

That’s fine, but suppose that $800,000 of the assets that we are reporting come from the fact that we own the real (physical) property of the bar outright. We decide to go out of business, but we have one small problem, nobody really wants to buy a building that is a bar right now. Okay, so we cannot liquidate this real property...but now we’ve already closed! What do we do?

Let’s just say that we’d have some trouble selling our stock in the company to anyone right now. At least, not for what it was once worth.

That may seem ridiculous, but it’s true of just about anything. There are innumerable assets within a company that cannot be immediately liquidated.

Walmart, for instance, probably has an asset value for all of the real property they own, which is to say physical property. But, if every single Walmart went out of business right now, it’s not like they could sell every single location instantly. Just the fact that the property is not operating would reduce its value compared to the appraised value that they are using in listing it as an asset.

It’s for that reason that hotels that are interested in selling will not simply just close and sell, except in those rare situations where you take less of a loss by being closed. The value of the property drops by a pretty high percentage when the property is no longer operational.

After all, a business has already failed at that location or is perceived to have failed. Furthermore, if a different company or entity is perhaps interested in the property and does not intend to operate the same sort of business, then it can come with substantial costs to repurpose the physical property.

And, what the hell would you turn a Walmart into? Seriously, what retail location is big enough to take over a Walmart location? Target? Why does Target want to try it in a town where a Walmart has failed?

This is also what is partially responsible for the decline of malls, particularly indoor malls. When these monolithic retailers (such as JCPenney and Sears, among others) start closing, then it leaves a huge empty location that nobody really needs. Who’s going to go into that location? Macy’s? Macy’s already has a store in the mall and they’re not necessarily in expansion mode, anyway. (They’re not doing so hot)

So, now, the location needs to be repurposed if the mall is even going to be able to fill it at all.

Anyway, the point is that the value of non-cash assets is not absolute. For example, debts receivable is a line item on the assets side, but it assumes that whoever is indebted to your company is able to eventually pay you. If the company that owes you money goes into bankruptcy and you are awarded a reduced award, then your line item is not worth as much as you thought it was.

Earnings Reports: Generally speaking, companies will submit an Earnings Report quarterly, as well as an annual one, then conduct an Earnings Call. Earnings Reports are just regular financial disclosures that let investors know what’s going on with the company.

Earnings Call: In my opinion, this is the important part of the earnings cycle. The Earnings Call is a phone call by which shareholders (and non-shareholders) can listen to the CEO, and often other company executives, explain the Earnings Report, the reasons that the Earnings Report was the way it was and future plans. This year, you’ll hear the word, “COVID,” even more in these calls than you will on the news!

Earnings-Per-Share (Actual and Estimated): Earnings-per-share simply refers to a company’s profit for a given period (annual or quarter) divided by the number of outstanding shares. The reported EPS is the actual number whereas industry analysts will often offer, “EPS estimates,” in the weeks or months leading up to an Earnings report.

Many stock market players, some of whom are traders, will make decisions based upon these EPS estimates, but they’re pretty meaningless. They’re called, “Estimates,” for a reason and it’s not like the analyst has much in the way of inside information when making these educated guesses.

However, when EPS estimates are missed, sometimes a stock will experience a short-term decrease, but we’ll discuss that more in a bit.

Price-to-Earnings Ratio: This just takes the share price and divides it by the earnings per share. In the event that a company has had a profitable quarter per year, it essentially tells you how much in profits you have made (or losses you have taken) relative to each share of stock that you have. Therefore, if a company loses money in a given period, this ratio will be negative.*

*Again, VERY basic industry analysis tells us that quarterly P/E (even actual) is not the end all and be all. For example, it’s a pretty well-known fact that retail does better during the holiday season. Therefore, if you’re a retail store, (especially novelty retail) then whatever quarterly reporting period covers the holiday shopping season SHOULD be your best EPS quarter, because it’s the quarter where you should have been the most profitable.

Similarly, if a retailer (especially a specialty retailer) loses some money in the quarterly period that covers the first few months of the year; it should generally not be seen as a huge problem. Retailers fully expect to lose money (or breakeven, if lucky) the first few months of the year because there’s no holiday shopping season. It’s also Winter and many folks are cooped up at home, or broke (from holiday shopping) until tax refund time.

EXAMPLE:

Let’s suppose that an industry analyst expected a retailer to lose $0.01/share EPS in the first reporting quarter that covers January-March of a particular year. Now, imagine that this retailer instead loses $0.02 EPS during that quarter...that’s going to be reported as, “Missed earnings estimates by 100%.”

So, an amateur investor/trader who holds the company might say, “Missed by 100%, that can’t be good! They’re going out of business for sure!” At which point they may panic and sell everything they own in it.

But, what really happened?

What really happened is you had a retailer who was expected to lose a small amount of money in their WORST operating quarter who lost slightly more than expected. You could very simply look at the annual EPS for the previous years, as well as for the quarters of those years that cover the holiday shopping season, and see that the quarter where they, “Missed estimates by 100%,” is nothing more than a rounding error in the grand scheme of things.

WHY EARNINGS CALLS?

Earnings calls give investors and traders the opportunity to hear the explanation for the earnings reports from the executives of the company themselves. When listening to these calls, you’ll come to understand their explanation of why the numbers are what they are.

The financial reports themselves are the what, and they are that which is quantified...which again is important, but is not everything. You also want to know the why behind what happened.

One example when I was following the stocks a bit was that of a company that had missed the EPS estimates, but the reason why is because they paid off a sizable loan that they had out early in order to save money on the interest.

If you factor out the amount that the company paid to bring the loan to an end, then they would have beat EPS estimates. In the long run, paying off the loan is better, of course. It enabled them to avoid paying several million dollars in interest payments over what would have otherwise been the remaining life of the loan.

Reading between the lines, that information also tells you that the company is not immediately desperate for cash. I see that as definitely good. They’re willing to spend a little bit of cash on hand (during COVID, no less!) now in order to be better cash positioned in the future. That’s just smart money management.

Earnings reports/calls will also reflect forward-looking statements, which aren’t guaranteed to come to fruition, but can be very informative.

In the COVID environment, particularly when everyone was thinking, “The end of the economy is nigh!” My interest in companies was mainly in their reaction to the fact that they could conceivably not open for the entire remaining calendar year. My picks that I had made to a few friends on PENN and AEO were based largely on the fact that those companies said they could make not another dime that year and be fine. That’s especially true with AEO.

PENN’s stock price had mostly just dropped by an amount that was immediately ridiculous, as with many other casinos...but again, separate article.

I didn’t really base my pick on AEO on much other than the fact that the entire market overreacted to the COVID thing in general, the P/B ratio was OUTSTANDING, particularly for retail and the underlying financials looked great. There was also the fact that the CEO openly declared that they could make not one dollar this entire year and be just fine.

Stock analysts worth listening to (which I’m not) got on the AEO train, but they did that a few days after I had already called it an outstanding buy.

DIFFERENT TYPES OF STOCK TRADES

NOPE!!!!

I’m not doing it.

I want to say that I am nothing even approaching a stock market expert, and if you’re reading this, neither are you. The only thing more important than knowing what you know, when playing around with money, is knowing what you don’t know.

I won’t even use the words, but there are all kinds of different variations of ways to play in the stock market. I’m not going to lie; there’s a lot of money that can be made doing it.

But, remember that stocks are a, “Confidence Game,” and a Confidence Game is a type of bet. You’re betting that something is either going to happen or not happen.

And, when you risk something of value in exchange for the opportunity to gain something of greater value (in this case, money) you’re gambling. That’s especially true if you are operating in the stock market as a trader (as opposed to long-term investor making decisions on deep research) rather than an investor.

If you’re even reading this with interest, then you don’t know enough about the markets to get cute, because I have an Econ degree and I sure as hell don’t know enough to get cute.

I’m going to make things really simple for you starting out: Don’t start out until you’ve done exhaustive research, particularly on historical trends in a particular industry that you feel like you know something about. For my part, I’m pretty confident that I know just enough about retail and hospitality that I can do fundamental trades COMPETENTLY.

Competently does not mean that I can do them well. It doesn’t mean that I would make money. All competently means is that I believe I have an expectation of breakeven, or better, just because I’ve spent a lot of time studying how the underlying financials work as well as certain historical industry trends in particular sets of circumstances.

Until you have put in a TON of research, and by that, I mean have spent at least a few hours every week studying the way all of these things work for at least a year...then do this if you want to play around:

1.) STAY THE HELL OUT OF OTC TRADING FOR GOD’S SAKE!!!!!!!!

2.) If you think the price of a relatively well-known company’s stock is undervalued, or should go up, then objectively research the financials, reports and listen to the earnings calls OBJECTIVELY to see if they would point to a confirmation of your hypothesis. Don’t do this research WANTING to be right, TRY TO PROVE THE NULL-HYPOTHESIS, TRY TO PROVE YOURSELF WRONG, and if you can’t demonstrate why you’re wrong, then:

Buy the stock if you think the price will go up.

3.) Sell the stock if you think the price will not go up anymore.

Listen, you’re not a sole-proprietor. Yeah, you kinda, sorta own the company, but really you have almost nothing to do with it....unless you’re a huge shareholder. Make sure to be doing your research periodically and, if the company’s starting to go down the tubes, remember that there’s no reason for you to go down the tubes with it.

What I always like to say is, “Holding is the same thing as buying,” because you can sell and get the money anytime you want. If you had a particular amount free and clear and would not buy the stock at its current price, then you should at least consider selling it.

4.) “Average down,” is a stupid concept.

The idea behind, “Average Down,” is that you already own shares in a company, but the share price is down compared to when you bought it. Therefore, were you to sell it, you would lose money.

So, some people will, “Average down,” by buying more. Because they have bought more, the share price now has to reach a lower point (compared to when the first shares were bought) and the person can sell it at breakeven.

Here’s an example:

Let’s suppose I buy 1,000 shares of The Golden Goose Casino INC. at a price of $15/share. I do it.

Since I’ve made this purchase, the price has now dropped to $14/share. A 100% average down would then see me buy another 1,000 shares, so:

I own 2,000 shares.

My average price-per-share was $14.50.

RESULT: If I can sell all of my shares at $14.50, then I’ll break even. More than that, I’ll profit.

The only thing that, “Average down,” does is chase bad money with good, in many cases. If the share price of Golden Goose Casino dropped from $15/share to $14/share, don’t you think that there at least could be a reason for that? What are you going to do if the price is down to $13/share a month later, buy 1,000 more shares automatically?

It just doesn’t make sense as a strategy.

What could make sense is to do another analysis of the company and determine whether or not it is still a good buy at this new $14/share price. But, when you’re going to decide if it’s a good buy, you HAVE to believe that it’s the best buy that you can be doing with that new money.

In other words, you have to ask yourself, “If I didn’t already own it, would I buy it?”

If the answer to that question is no, then don’t buy it just to get your average price-per-share down. All you did then is make a buy that’s only slightly less stupid than the one before it was.

THE WAY I PLAY

I don’t.

I have a tendency of making good picks, sometimes, not that it was particularly difficult to do so with the huge COVID overreaction. All you really had to do was stay away from speculative healthcare type stuff and just look for fundamentally healthy companies that weren’t going to go belly-up just because of a few months of lost revenues. Any company with a reasonable financial foundation should be able to sustain that.

But, I don’t actively invest or trade...if I do, then I do it just for fun and with no real expectation of profit...so I’d keep the amounts really small.

In addition to the fact that a great many people could never hope to understand the markets, another reason that so many folks will go with portfolio managers or index funds is the simple fact that you lose objectivity when you’re playing with your own money.

Imagine you put 10% of your net worth in a stock that you had a lot of faith in for one reason or another, but then the stock just starts tanking...what do you do? If you panic and pull out, then you might be selling too low on a stock that should have a profitable long-term expectation. If you cling tenaciously to the belief that the stock will recover in absence of actual evidence, then you might hold all the way into the toilet.

Another thing is that no investor should be mulling over, “What Ifs,” and expect to play it perfectly 100% of the time. If you buy a stock, chances are it will drop below that price at some point (volatility) which means you theoretically could have bought lower. And, if you sell, the stock will quite likely climb (at some point) above the point where you sold it.

The perfect trade (buying at the lowest point possible and selling at the highest) is basically a once in a lifetime sort of affair. In general, you also can’t obsess over past mistakes or, “Chase your losses,” by playing hunches in the hopes of recovering money that you’ve lost on a transaction.

Everything needs to be a cold analysis that is as objective as possible.

And, barring another massive market overreaction almost across the board, you’re not going to be entering into a, “Shooting fish in a barrel situation.” In other words, it’ll be tougher to make money in the markets from now to the end of the year than it was from March-Present.

JUST PLAYING AROUND

In the rare event that I do play around, I do so as a trader focused primarily on retail and hospitality industries. Mainly, I look for companies with sound fundamentals and good P/B ratios to miss earnings expectations...which results in a bunch of selling from novice/amateur investors who react immediately to the reports...which precipitates an even lower price...then I try to, “Pick the bottom,” and do what I call, “Playing the correction.”

In other words, the company missed earnings expectations, but the profit/loss is not so great as to change the long-term outlook for the company or the underlying financials in any real way. Therefore, I try to time when the market is done overreacting to the poor earnings report, buy at that time, then generally sell pretty shortly after when the stock has recovered to close to its original price before the earnings report was released.

When I make a play of this nature, on average, I end up holding the stock for about five business (trading) days.

Another thing that I like to see when making trades of this nature is---and I figure professional investors know more about it than I do---institutional investors either hold or start buying more of a particular stock when the price drops. In other words, the big players think that the price drop is a temporary thing and is not justified in the long run.

One thing about this style of trading is that you might end up holding something longer than originally planned, but that’s not the end of the world. Again, you’re picking companies that are fundamentally sound in the first place. In other words, you’re acting as a trader, but also picking companies than an investor might choose to pick.

If you see a company miss earnings expectations, and the underlying financials reflect that the company is just about in the toilet anyway, then that probably means they’re going to face significant distress, or even bankruptcy, even faster than originally believed. You would not want to, “Play corrections,” on a company like that because there’s a very good chance that the price just isn’t coming back.

But, for the most part, I don’t play in the markets because I don’t have a ton of money and it bores me. Being active in the markets entails almost constant research and paying attention to day-to-day broader market movements, industry movements and movements of individual companies to learn how everything relates to everything else. If you want to be an actual investor, that’s one thing, but there’s really no casual way to be a successful trader.

DON’T PLAY THE OTCS!!!!

It’s difficult enough to fully research historical trends in a particular industry for major companies being traded on major indices. At best, you can become really good at playing a few somewhat specific market segments, ideally, industries where you already have something of an understanding of how the underlying business works.

The major indices are not as subject to manipulation from other traders, and especially not from insiders as the OTC’s are. Any number of shady stuff goes on in the OTC’s, pump-and-dump, etc.

If you don’t believe me yet, then let me give you an example of a publicly traded company on a major index:

MEET TOP SHIPS INC.

Top Ships Inc. (TOPS) is a publicly traded company listed on NASDAQ and is frequently listed as one of the hottest stocks in the penny stock world. This is particularly true on the free trading apps because you can’t trade many OTC Markets on those.

Top Ships Inc. is a Greece-based shipping company that is engaged in shipping oil around the world. This is not a, “Shell company,” it exists and does a legitimate business. With that said, there are many interesting things about TOPS:

1. Insiders own exactly 0% of it. Because the stock is worthless.
2. Institutions own less than 1.5% of it. Because the stock is worthless.
3. The stock currently sits at $1.10/share (after a recent reverse split to increase the stock price, remember, that’s where you exchange x number of shares for a lower number) and has market cap of 43.815M dollars.
4. The market cap makes TOPS a small-cap stock, but in the most recent trading session, the volume was 3.65M shares. Given their average volume of 6.15M shares, that was a very slow day. Probably also owes somewhat to the reverse split, there are fewer shares to trade.
5. One share of TOPS stock was worth $4,261,949,997,056 on November 1st, 2004.

Well, sort of.

You see, that’s a share price that hasn’t been adjusted to account for the number of shares that have been added to the market, reverse splits, etc. etc. All kinds of games.

Let’s look at all of the reverse splits throughout their history:

03/20/2008 1 for 3

04/21/2014 1 for 7

02/22/2016 1 for 10

05/11/2017 1 for 20

06/23/2017 1 for 15

08/03/2017 1 for 30

10/06/2017 1 for 2

03/26/2018 1 for 10

08/22/2019 1 for 20

08/10/2020 1 for 25

Why all of the reverse splits? Often, it’s so that their trading price will continue to meet requirements in order to be listed on the Nasdaq.

How many outstanding shares of TOPS are there right now? Roughly forty million, based on reverse engineering the market cap.

Therefore, we can determine how many shares there would be had these reverse splits never happened. Well, again, sort of.

In Millions:

40*25*20*10*2*30*15*20*10*7*3 = 756,000,000,000

Remember, that’s in millions, so we have to add six more zeroes: 756,000,000,000,000,000 shares of stock in the company. Remember, I’m rounding pretty substantially to get the starting case of forty million shares, but with this company, it doesn’t really matter.

Another thing that we can do is just multiply all of the split amounts to get the total multiple as if reverse splits had never happened:

25*20*10*2*30*15*20*10*7*3 = 18,900,000,000

Okay, so if we take the share price of $1.10 and divide by the number of shares there theoretically could be: 1.10/18900000000 = 5.8201058e-11

In other words, the stock would basically be absolutely worthless. It would be absolute garbage. For a share of this stock to be worth a penny would be an astronomical improvement.

Let me put this into perspective for you: If you invested $10,000 in TOPS stock January 1st, 2008, you would have $0.00 right now. Percentage-wise, you wouldn’t even be close to having a penny. You’d have to go pretty far to the right of the decimal point just to get to a place where your losses don’t round up to 100%.

Also, you wouldn’t have any shares of the company’s stock anymore. At some point along the way, you’d have an insufficient number of shares to be awarded a full share after one of the many reverse splits, and as a result, would just be paid out as breakage on the current price per share.

I guess that means you’d have gotten a few cents of your $10,000 back, so there’s that.

It would be one thing if the company had started out and, for whatever reason, issued eleventy gazillion trillion (or whatever ridiculous number) shares of stock, but that’s not how it happened at all. The way that TOPS works is cyclical, and they’ll just keep doing it anew until absolutely nothing is left in terms of stock value...perhaps until the number of shares is in the tens of thousands, or less.

DIRECT OFFERINGS

On March 31, 2020, TOP Ships Inc. (TOPS) placed a direct offering of 40M shares (more than even the current number of outstanding shares) with Maxim Group at a price of $0.20/share, as a result, TOPS shares plunged 59.4% in the premarket that day.

On April 17, 2020, TOP Ships Inc. (TOPS) placed a direct offering of 33,333,333 shares with Maxim Group at a total cost of $0.18/share for a total payday of very nearly $6,000,000.

That offering was met with a short term dip in price, but perhaps amazingly, the price recovered.

On April 30, 2020 (YUP!) TOP Ships Inc. (TOPS) placed a direct offering of 35,000,000 common shares with Maxim Group at a price of $0.186/share for total proceeds of 6.5M dollars for TOPS.

On May 15, 2020 (Sure!) TOP Ships Inc. (TOPS) announced a direct offering of 59,400,000 common shares at a price of $0.135/share for total proceeds of eight million dollars.

On May 19, 2020 (Why the hell not?) TOP Ships Inc. placed a direct offering of 51,700,000 shares of common stock with Maxim Group at a price of $0.135/share for total proceeds of seven million dollars.

On June 8, 2020 (Of course!) TOP Ships Inc. placed a direct offering of 166,666,667 shares of common stock with Maxim Group at a price of $0.12/share for twenty million dollars in proceeds.

(There was another one in June, but one or the other did not actually end up happening, so I’m not going to include both. It really doesn’t matter.)

On July 7, 2020, TOP Ships Inc. placed a direct offering of 158.64M common stock shares at a price of $0.10/share, for proceeds of nearly 15.9M dollars. Anyone want to guess to whom? Yup. Maxim Group---

Just on those transactions, TOP Ships added roughly 544,743,000 common shares to the market. Of course, that now reflects 21,789,720 shares after the reverse split.

What does that mean? It means that MORE THAN HALF OF ALL OUTSTANDING SHARES were effectively shares issued by TOPS this year...already knowing that they had to conduct a reverse split in order to not get delisted due to have such a low share price. They’d have had to do the reverse split even before all of this!

The point, of course, is to make/scam a bunch of money off of amateur would-be traders who have exactly no idea what the hell they’re doing.

TOP Ships have people out there pumping this piece of dog crap stock on Stocktwits and other trading boards. Additionally, it finds itself getting some website space on legitimate sites such as Seeking Alpha and Motley Fool, who sometimes report the common stock direct offerings, but should definitely contain links to something explaining the history of what this company does.

There are also other websites that will write little blurbs or articles (often included in lists with other stocks) that would essentially have this as a legitimate stock to invest in.

If you want a good laugh, read the chat log on Stocktwits. It’s an obvious scam when it comes to this stock, (just look at the offering/reverse split history!!!) but you’ll have people obviously pimping it and using all kinds of fancy two-cent stock terminologies (usually not even correctly). Some of them even tag their profiles as, “Bullish,” on Top Ships.

I don’t know about you, but I don’t tend to be too much of a bull on stocks that have lost 100% of their value.

But, the main thing that YOU need to take away from this is that the underlying business of Top Ships is legitimate enough. They’re a shipping company that ships oil. There’s even a cool little gimmick on their website that lets you see where all of their fancy ships are. They also keep buying and selling ships to get their name in the press...I don’t know what the hell it is, but novice investors who really need to read a book LOVE goofing off with shipping companies.

Not only is it an actual company engaged in seemingly legitimate business, it’s listed on the friggin’ NASDAQ! Who would look at NASDAQ and think this behavior would be allowed? Well, NASDAQ either doesn’t care or TOP Ships is doing just enough to stay within the rules.

Anyway, Maxim Group makes money because they just flip the stock immediately (sell) because generally the direct offering price is low enough that the price of the actual stock doesn’t drop that far by the time the sale is completed. Maxim can then turn around and sell the stocks back into the market for a small profit. That’s why well over half of the current stock was issued to Maxim Group this year, but institutional ownership is basically nil.

They’ll probably do it all over again next year and novice investors will lose their pocket money thinking that this ticket symbol is a legit investment. It’s not even a legit trade.

CONCLUSION

The simple fact is that you can’t just read up on the stock market for a few hours and all of a sudden decide you’re ready to trade profitably. Granted, here and there, some people are going to make a lucky pick and you’ll hear all about it. Most who lose money in the market aren’t going to want to talk about it.

I imagine you’ve heard the phrase, “If it was easy, everyone would be doing it.”

And, when you have a market that goes up well over 50% in less than six months (at least, the DOW) then you really shouldn’t lose money. Think about this: If you made a stock pick on March 23rd and that pick isn’t up 50%, then that pick sucked and putting money in a DOW Index fund would be outperforming that pick.

If you made less than a 50% gain, then your picks sucked and you really need to research.

If you’ve lost money in the market since March 23rd, then I strongly encourage you to do about a year of research before you even think about trading or investing again.

That’s overall, of course. Some individual picks will win and some will lose. Most had better win, though, especially in a rebound market that you’ll likely never see the likes of again as long as you live...at least, not one that rebounds that quickly.

So, it’s going to be tough. You’re going to be playing the normal game by the normal rules, and that’s going to take work, research and paying attention if you want to be successful. It’s also going to take not getting enticed by fancy ways of playing the market.

The simplest formula for winning has never changed: Buy low, sell high.

And, do your research. If this article taught you even one new thing about the stock game, then you really need to ask yourself whether or not you know enough to be trading...because I sure don’t feel like I know enough to get serious money involved.