What really happened with PN ? (Thanks to Craig)

Investment Analysis Clubs Saul’s Investing Discussions
1

Thanks to CraigDoc, who was the first to figure out what apparently went on with PN. He wrote:

Could it have something to do with the warrants related to CEO selling shares…it seems as if the warrant holders profit from the lowest price between Feb 1, 2016 and 9 March 2016 (10 trading days after earnings release).

Holders of certain warrants apparently had the right to exercise those warrants (buy shares of stock) at the lowest price the stock hit between Feb 1st and March 9th. They therefore sold short the stocks they were going to get (and more as well) to get the best possible price, by pushing the price down, and succeeded quite well. Undoubtedly some regular stockholders got scared and sold too, which helped the warrant-holders to push the price down.

Last Wednesday they got it down to $3.65, and apparently gave up. It closed yesterday (just three trading days later) at $4.97, up 36.2% from the low in three days. That’s a bunch in three days and means that there’s no more point in warrant-holders selling any more shares short. They’ll never see a lower price than $3.65 by the 9th of March, which is tomorrow.

There’s good news and bad news in what happened. The bad news would be if the exercise of the warrants represented dilution at a cheap price. (However, if it’s just the CEO’s shares they are buying, it doesn’t change the share count, and doesn’t cause any dilution).

The good news is that there was nothing wrong fundamentally pushing the price down, it was a manipulation of the price that warrant-holders could exercise the warrants at. The other good news is that it was actually an amazing opportunity for us (as I stated in my earlier post).

What happened last Thursday to break the back of this manipulation at $3.65? Well, the CEO (and the company) apparently got fed up and said enough is enough, and announced a share repurchase, effective immediately.

Okay, How did this work? Why would someone sell 5,000 or 10,000 shares of stock last Wednesday at $3.70 to establish the low price at $3.65, when they know that the price is probably going right back up?

I haven’t looked up how many warrants there are, but say you are a hedge fund or two, with the right to exercise warrants to buy a million shares at that lowest price, would you care about selling 10,000 shares at that price? It’s 1% of the million shares that you will be able to buy at $3.65 when you exercise your warrants, and the stock is already worth 36% more three days later. You expect to sell your shares eventually at $7 or $8 or $10 or more. Interesting manipulation for them, isn’t it? (A million shares is less than 4% of the total share count, so that isn’t a ridiculous number to consider).

Note that it was a sure thing for them. They didn’t have to worry about buying back the shares they sold short at $5.00 and $4.50 and $4.00 and $3.75, etc to drive the price down. They get the shares to cover at the lowest price it hits (which was $3.65)! They couldn’t miss.

It was also great for us as well as we had the opportunity to buy at a cheap price too, without all the work of pushing the price down.

I hope this helped.

Saul

For Knowledgebase for this board
please go to Post #15056.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

Saul

17 Likes
2

So Saul - do we have any idea what equilibrium price is without the manipulated ups and downs? Clearly from a fair value point of view it should be a lot higher.
Ant

1 Like
3

So Saul - do we have any idea what equilibrium price is without the manipulated ups and downs? Clearly from a fair value point of view it should be a lot higher.
Ant

Hi Ant, well ten times adjusted earnings would be $7.80. You can take it from there.
Saul

4

Yeh that works on the value side, I just wasn’t familiar with the manipulated price swings from the warrants. Is there any way of working out what it would be once all the manipulation is out of the way? What was the pre-warrant manipulation level as I am not familiar with the timescales?
Ant

5

So what is the general consensus of everyone about purchasing PN now relative to the 8/5/15 price of $18.93?

6

What was the pre warrant-manipulation level as I am not familiar with the timescales?

Hi Ant, a quick look at a price graph on Yahoo finance shows me that they IPO’ed in Jan 2015, and sold at $13 to $18 all year (with a quick trip once to $11 and back), but then in December the price tanked.

Saul

7

Saul thanks but in reality I can’t take the credit. While I hold little stock in Yahoo message boards there are occasional gems that come off of it and this I picked up off yahoo.

1 Like
8

…I can’t take the credit. While I hold little stock in Yahoo message boards there are occasional gems that come off of it and this I picked up off yahoo.

Craig,

You can take credit for bringing it to Saul’s board, though, since (as you say) there is not much to commend on Yahoo. You discerned that this info was a ‘gem’ that we here would appreciate.

Thanks!

Pete

3 Likes
9

I got in under $5 per share last week…am very tempted to buy more shares. I, too, am wondering how the others on this board feel about it.

10

I, too, am wondering how the others on this board feel about it.

Shares are up to about 5.50. So non-GAAP P/E is still around 7…I’d say that’s still quite cheap. Let’s consider…

The high share price was several months ago at more than 3x current price…question is which price is right. I can usually predict with a fair degree of accuracy what the P/E will (should?) be on most types of companies (retail, tech) based on growth and perception of risk…I never seem to be able to with financial companies. Should this carry a PE of 15? Most banks don’t. But then, it’s growing a lot faster than most banks. But then, it’s smaller, so more risky.

This is from Finviz…riddle me this:


Sector	                P/E	FWD P/E
Basic Materials	        21.48	19.25
Conglomerates	        82.99	19.29
Consumer Goods	        18.1	14.9
Financial	        14.57	7.22
Healthcare	        24.79	14.53
Industrial Goods	23.7	15.63
Services	        20.24	15.94
Technology	        22.73	16.11
Utilities	        16.94	16.66

I don’t know if PN still has a near-term double from here. No one knows that. But I don’t think it’s out of the realm of possibility. What should it’s P/E be? Who knows?

However, based on how it’s growing, its FWD P/E (take with a grain of salt obviously) is below 5. So if you believe in the company, it certainly still looks cheap.

2 Likes
11

*insurance brokers, I mean, not banks.

12

Yeh I wasn’t sure if the manipulation started at the $13 level or at the $6 level where it hovered for a while.
Thanks
Ant

13

I was reading the Patriot National (PN) Prospectus (form 424B3) released 2/8/2016 and they mention the following about their warrants that may be exercised this year.

As described in “Selling Stockholders,” the selling stockholders hold warrants to purchase shares of our common stock. The New Series A
Warrants are exercisable to purchase up to an aggregate of 3,250,000 shares of our common stock at an exercise price of the lesser of (i) $10.00 and (ii) 85% of the market price of the shares (as defined in the New Warrants), from July 1, 2016 to December 31, 2020, subject to adjustments and limitations pursuant to their terms. The New Series B Warrants are exercisable to purchase a number of shares that the holder could purchase at a price equal to 90% of the lowest 10-day volume-weighted average stock price during the period commencing on February 1, 2016 through and including the Adjustment Time less the number of shares such holder purchased, subject to adjustments and limitations pursuant to their terms, at an exercise price of $0.01 from December 16, 2015 to December 31, 2020.

I could not confirm anywhere the warrant dates quoted by Craig and now Saul from Yahoo message boards. I think confirming the source of those dates is important because those boards are filled with people that will say anything.

3 Likes
14

Try page 37 of the 8K filed on December 23, 2015.

2 Likes
15

Thank you Craig. For others, that referenced wording follows below. I know it is dry reading, but it is the only clues us poor investors have ìn possibly knowing the rules of the game that insiders play. I just want to understand because this is the 2nd time i’ve seen an example of how the rules make more money for insiders by driving down the price of the stock. I personally believe this is corrupt, as it essentially is just taking from ordinary investors who rationally sell in these cases. I’m not a disgruntled investor complaining (I actually have been catching this falling knife all the way down at very high risk since I identified this company to this board and am now doing very well). I hope many of you are as well. Just think if you were the one manipulating WITHOUT the high risk, moving the price with relative assurity, and trading the pivots that you create.

Now back to learning. I still don’t read anywhere about this being 10 days after earnings are released. It is difficult for me to follow and I thank Saul for his easy to understand explanation and sharing that with us. I’d like to read the below wording and understand how the dates line up. Also, wouldn’t this same pressure to lower the price occur again by July 1, 2016 when the Series A Warrants are exercisable at the lower of two price values as I shared from the prospectus in my previous posting?

Imagine if SEC Filings were required to be explained more clearly as Saul has done rather than like this:

(d) [INSERT IN SERIES A WARRANT ONLY: [Intentionally Omitted]] [INSERT FOR SERIES B WARRANTS ONLY: “Adjustment Share Amount” equals the greater of (I) zero and (II) the difference of (i) the quotient of (x) the Stockholder Purchase Price (as defined in the Securities Purchase Agreement) divided by (y) 90% of the lowest Market Price during the period commencing on February 1, 2016 through and including the Adjustment Time, less (ii) the number of Stockholder Common Shares previously sold to the Holder pursuant to the Securities Purchase Agreement.]
(e) [INSERT IN SERIES A WARRANT ONLY: [Intentionally Omitted]] [INSERT FOR SERIES B WARRANTS ONLY: “Adjustment Time” means 9:00 AM, New York city time, on the tenth (10) Trading Day after the earlier to occur of (x) the later of (A) the initial Effective Date (as defined in the Registration Rights Agreement) and (B) the date of the filing with the SEC by the Company of its Annual Report on Form 10-K for the fiscal period ended December 31, 2015 and (y) such date whereafter all Registrable Securities (assuming the cashless exercise of any SPA Warrants) shall be eligible for sale without restriction under Rule 144 (as defined in the Securities Purchase Agreement).]

1 Like
16

I agree and continue to be amazed that this kind of activity is not illegal and punishable. I too have a hard time fully understanding the language but a part of me feels like if indeed this is a game at least we can to a degree join it. I can only wonder how many investors were stopped out of the stock or sold when it was falling especially since this coincided with earnings.

1 Like
17

I never seem to be able to with financial companies. Should this carry a PE of 15? Most banks don’t.

Hi Paul Bryant,
PN is not a bank or a financial institute. There is a Patriot National Bank which is a bank, but it has a different symbol. Just thought you’d like to know.
Saul

18

Now back to learning. I still don’t read anywhere about this being 10 days after earnings are released.

Hi F1Fun, Please understand that I didn’t look this up or try to understand the complexities. I just responded to the clear and evident evidence of what actually happened. After yesterday’s close up another compounded 9% on a really bad market day (resulting in up 48.5% in four trading days), I’d say that my imagined explanation explains what’s going on as well as anything. While Craig’s clip may have missed some of the subtle details, it certainly seems to have explained what went on very well. However PLEASE don’t imagine that I understand all this down to the details.
Saul

19

Hi Craig,Saul. I agree with both of your responses. Thanks closing off the topic and my questions. I look forward to more 48% returns in 4 days.

1 Like