On Changing Your Mind
Last year I did some year-end summaries. I thought I’d look back and revisit some of the stocks I had described getting out of. Here’s what I wrote a year ago about CTSO, SZYM, and PFIE:
Year End 2014 summary: CTSO, one that I got out of
I had a moment of madness in 2014 when I took tiny positions in three penny-stocks. I don’t know how I first got interested in CTSO, but they were growing revenue rapidly. However they were still losing money. Investing in companies that are losing money went against all my internal rules and principles.
I bought in to CTSO in June at between 23.8 cents and 24.5 cents. I came to my senses in August, when it became clear that while there was theoretical reason to think their device might be beneficial, there was no evidence it was, and the few studies that had been run were equivocal at best. As anyone who knows anything about medicine knows, citing a few case studies is meaningless. You need a controlled study. There weren’t any that showed positive results. All their stories of “success” refer to success in getting distributors, or “opinion setters”. It started to seem like it was very questionable long term.
I sold out at 25.2 cents. Since then they announced Sept quarter results. Revenues continued up. Losses were even greater than the year before. In fact they were considerably greater than total revenue, making profits any time soon very unlikely. Since then they did a 1-for-25 reverse split so they could get listed. It doesn’t help the company, but probably will help the insiders sell stock. 1-for-25 made my 25.2 cents worth $6.30. It shot up to $10 on the basis of the reverse split. Today it blew off steam as high as $12.87 and then dropped as low as $9.32 and closed at $10.40, down about 50 cents, or 5%. If some of you were still in it, I hope you got out during the blow-off above $12. It may go on up, but I have no regrets about selling out. This is DEFINITELY not my kind of stock. As I said, a moment of madness.
Well I’m looking at it now (Dec 27, 2015) and the price is $6.35. That’s down from $10.40 on the day I wrote my summary a year ago, and basically unchanged from the price I sold out at ($6.30).
Year End : SZYM, Where did I go so wrong?
Solazyme was a disaster. I knew better than to buy a development company which was losing money, but they promised that they were close, VERY close, to large-scale production and profitability.
I started buying SZYM in Jan of 2013 at $7.30 in very small amounts and added gradually at $8, at $9, at $10, at $11 and even, heaven forgive me, at over $12 as the story got better and better. They promised their US plant would open in the first quarter of 2014, and that their huge, many times larger plant in Brazil would not only be open, but actually pretty close to running full bore by the end of the second quarter. They announced Encapso, which made drilling more efficient. This all would change them from a small money-losing development company, to a large scale, commercial production company, no longer money-losing and soon profitable, and even very profitable. This was going to become a huge, multiproduct company with products from the food industry to cosmetics, to industrial oils!
The time line I’m giving you is just from memory, but the US plant opened on schedule and started producing on a small-scale basis. Just a teaser, though. What mattered was the huge Brazil plant. The first warnings of trouble were when they didn’t get it opened on time. They assured everyone that they were having no technical problems with their process. Just a problem in getting consistent electricity from their partner. And the problem continued and continued.
The price started dropping, and with all their reassurances it looked like a bargain at $8 when it had recently been at $12. On October 17 of this year I decided to cut my risk at $6.40 and sold half my position, and foolishly kept the rest, not wanting to give up. On Nov 5, after the close, they announced their 3rd quarter results – AND an entire reformulation of their business:
"In the broader commodity markets, pricing is challenged for the semi-commodity oils that most of our first-generation oil products compete with, such as enhanced palm kernel oil. So, to cite a specific example, palm kernel oil was selling for about $907 per metric ton as of last week versus about $2,000 just a few years ago, and our overall input costs have not dropped commensurately over this period.
Consideration of these factors has led us to make some adjustments in our strategies to drive capital efficiency and commercial success. We will narrow our production focus to smaller volumes of higher-value products at both Moema and Clinton/Galva. We will prioritize cash management and product margin over a rapid capacity ramp. We, therefore, no longer plan to produce at nameplate capacity within 12 to 18 months.
We believe this is economically prudent in the short term while better positioning us for long-term opportunities. This will enable us to better manage our capital as we ramp production at the plants, descend the cost curve and continue commercializing and driving increased demand for high-margin products such as Encapso and specialty food oils."
Basically they were abandoning any hope of large-scale commercialization at least for 18 months, and with no time line after that. They were going to remain a small money-losing development company, which was going to try to cut its losses by firing workforce, cutting salaries, focusing on small scale high margin products. They were going to be carrying their two plants half or more empty, which would greatly increase their cost of goods sold, and reduce margins. They’d obviously need more money raises, if they could find buyers, which would dilute the shares further.
This wasn’t the hypothesis that I, or many others signed on for. The next morning they opened at about $3.75, and I sold out the other half of my position there. It closed that day at $3.14, and closed today at $2.58. (It’s been as low as $2.16).
They started Jan 1st of 2014 at $11.19. I got out at an average price of about $5.00, so this was a significant loss for my portfolio for the year. Where did I go wrong? It’s easy. This was still a development company, which hadn’t got a real business going yet when I bought in. I never should have done that. I should have waited until Moema was up and running, and the company was profitable, even if I paid a lot more. The message is clear: Avoid development companies that are just starting out, no matter how good the story! Nuf said.
Well, as of Dec 27, 2015 when I’m writing this, the price is still $2.68. It hasn’t gone anywhere since I wrote it up a year ago, and it’s down 46.4% from where I sold out. There have been lots of press releases about “progress” but they are still losing lots of money.
Year end 2014: PFIE - Why I sold out
I’ll make this short and sweet. I sold out of PFIE. Why? Because of the total crash of oil prices. I felt that with all the new salespeople they hired, they could have large new expenses which would overwhelm any new sales, and could show (perhaps large) losses. I could be completely wrong, but thinking of all those pink-cheeked new salesmen and women making cold calls on oil companies who are shell-shocked from the fall in prices, just didn’t seem promising. It’s not their fault, as they certainly didn’t anticipate this oil crash when they hired those people a few months ago, but I’m not obliged to stick around to see how it turns out. I’ll watch from the side-lines.
I mostly sold out about $2.40. PFIE closed 2014 at $2.28. It’s now (Dec 27, 2015, when I’m writing this), at $1.03. That’s down 57.1% from when I sold.
It looks like changing my mind about these stocks and selling out has turned out to be an okay decision so far. From where I sold them, these three stocks are now up 0.8%, down 46.4% and down 57.1%, for an average of down 34.2%. On the other hand, the money I reinvested in other stocks is up 18%.
Down 34.2% means that they are only worth 65.8% of what I sold them at, and they would have to rise 52% just to get back to where I sold them. To get to the 18% the money’s gone up in 2015, their price would have to go up 81% from where it is (118/65.8 = 1.81).
To finish up, I didn’t write up AudioEye at the end of 2014, but it fits in nicely. Here are my thoughts about it.
AudioEye (AEYE) was a little penny stock that at one time I got suckered into thinking would be the “next big thing”, and I took a small position. Boy was I wrong! But I had the sense to change my mind and sell out (at a loss) starting at about 63 cents, and down to 40 cents before I was able to sell it all, and I reinvested the money in better stocks. Some members of the board had followed me in, and a few thought I was making a mistake in selling out, that I was being premature, that I should give it more time: “I’ll give it a couple of quarters to develop.” They referenced the “non-cash revenue” being quoted in the earnings reports, etc. Most common of all was, “Maybe there will be a bounce”, or “I’m waiting until it gets back to where I bought it.” Well a couple of days ago (Dec 27) I came across a reference to it in some old notes, and I checked the price out of curiosity. I found that AEYE is now selling at 4 cents. Yes, that’s four cents! It would have to increase its stock price and market cap by roughly 1300% to get back to where I got out.
Sometimes changing your mind in the face of new evidence, and selling when necessary, is the most important thing you can do. If you are wrong, you can always buy back in. I think that being willing to change my mind in the face of new evidence is one of my most important skills. Learning that it’s okay to change your mind when appropriate is one of the most important things I try to teach on this board. Let this post remind people that I sometimes make mistakes getting into a company (big mistakes, on occasion), but that I am willing to consider the possibility that I was wrong and change my mind when I see that I actually was wrong. And that that is very important.
I hope you found this instructive.
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