Small Cap Network Blog

I trust you caught this morning’s newsletter edition, which specifically talked about Bio-Matrix, China Energy Recovery, and Spicy Pickle. All three had posted some good news, and all three stocks had a chance at a breakout. My strategy was a ‘wait and see’ approach though. (If you missed those comments, you can read this morning’s update by clicking here.)

Well, I’d be kidding myself if I said I wasn’t a little surprised that Bio-Matrix (BMSN) ended up being the biggest beneficiary today. The news didn’t illustrate any kind of immediate and tangible impact, yet shares are up 71% today. Volume is a little light, but still…

I don’t know where this will go, but my curiosity has really been spurred as a result. Follow through is the key from here, so the next few days will mean quite a bit in deciding if BMSN’s trade-worthy or not.

On the other hand, the move from a high above $1.20 to a low of $0.20 clearly was an overblown devaluation. At the current price of 60 cents, the market cap is still only about $14 million. That’s roughly the kinds of dollars we were expecting for revenue in their first twelve months of operation. Maybe the news was convincing that they’d actually become operational soon. Makes a little speculative sense.

As for Spicy Pickle (SPKL), this is the one I was surprised didn’t take off. The acquisition was accretive immediately, and it will have a very real benefit to the top and bottom line. You could cry ‘dilution’, but the upside far outweighs the downside.

I think 46 cents is the line in the sand. Shares have bumped into that ceiling - or close to it - several times during the consolidation phase over the last three weeks. If it can break out of that range (40 cents to 46 cents), we may finally get some much-deserved movement. That’s why I wanted you to put it on your watchlist.

And China Energy Recovery (CGYV)? What can I say that’s not obvious? This is by far one of the best fundamental stories we’ve covered in a long time. However, somebody has been trying hard to get out of a major position.

I’m personally surprised they don’t want to hold onto it - the stock is undervalued by most anybody’s standard. But, not everybody who owns a stock (no matter how brilliant they’re supposed to be) can see the big picture. I think these sellers will be kicking themselves in about six months, even if all of us want to kick ourselves in the meantime.

With that being said, it looks like all that selling volume is starting to dry up; hopefully the big seller is out of the way. I can still see this stock taking off in a flash. Like I said earlier today though, timing is everything. I’m keeping tabs on the chart for the right time….which clearly isn’t today.

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I would guess between the detailed coverage we’ve provided and your own due diligence, most of you could actually have written this thing yourselves, but….there’s an investor fact sheet available for anybody wanting to learn more about the investment potential of our small cap stock pick Spicy Pickle Franchising (SPKL).

The document is available via the Spicy Pickle web site, and can be accessed simply by clicking the link. Don’t worry - it’s not some 80 page dissertation. The whole thing is a couple of quick pages.

One thing they did add that I liked was a revenue growth estimate for 2008. We’ve been trying to hit a moving target in that regard.

New restaurants are being added all the time (which creates one-time as well as ongoing revenue). But, we’d have to know exactly how many they’re adding and at what point in the year they’re to be added to nail down a hard number. The company just posted a dollar figure….making my job much easier.

It’s worth a look, though don’t plan on finding a lot you didn’t basically know already.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

I’ve said it before, but I want to make sure any newcomers are also aware….we welcome any and all feedback, good or bad. We read every e-mail, and every message posted in the blog. We try and respond where merited, and when it’s something worth discussing publicly, we’ll do so (but will withold your full name and e-mail for the sake of anonymity). You may not like our response, but sometimes having an honest and open forum requires that possibility.

Anyway, we’ve got such an e-mail today. Mark writes…

First off, let me say that I am an investor in the Spicy Pickle, and a huge fan of their food.  However, you latest musings on the company and the stock had so much spin that it made me dizzy.  I just re watched the promotional video.  Mark Geman had stated that they would have 40 stores by the end of 2007, and hope to open another 40 or so during the course of 2008.  Having just opened up the 42nd store in the 7th month of 2008, there is no way they will have another 40 opened by year end.  Therefore, they have not done what they said they were going to do, which in my opinion is why people are bailing on the stock.  Also, wasn’t it you guys a couple months ago saying that some technical “gap” had closed and now we don’t have to worry about the stock dipping below a certain price, yada yada yada?  No mention of this in the latest release.  Facts are facts guys and you cannot ignore them.

Thanks for the e-mail Mark. Let me respond in (roughly) the order you presented things.

1. No spin intended. The company is growing stores at a consistent pace. The stock did sink, but the stock also bounced pretty firmly. I acknowledged all of those things, but the over-arching theme has always been (go back to the very beginning of our coverage) perpetual revenue once stores are up and running. If it sounded like spin to anybody else, my apologies.

2. They had about 40 stores by the end of 2007. They have more stores being built right now (more than we know about), but I think you’re right - 40 more stores by the end of December may not be possible at this point. I don’t think that’s the reason people are selling the stock though…at least not directly. I think they’re selling the stock because the stock’s just not performing. Open to debate.

3. TO BE CLEAR, I NEVER SAID ANYTHING CLOSE TO YOUR SUMMARY “wasn’t it you guys a couple months ago saying that some technical “gap” had closed and now we don’t have to worry about the stock dipping below a certain price, yada yada yada? ”

I don’t know you, so I’m going to be as respectful as possible, but I think you’re seeing and remembering what you want to, and ignoring or overlooking what you need to. Please don’t put words in my mouth. Here’s actually what I said then….

“I believe there were two things going on in the first quarter….The other one, I believe, was the gap between 71 cents and 74 cents that had been lingering since September 24th. Gaps tend to act as vacuums, because traders just can’t tolerate an untidy chart. Well, with the gap filled and the market environment hinting at improvement, at least one (if not both) of those burdens have been lifted. Immediately after the gap was closed, shares perked up. Since then, we’ve seen higher highs and higher lows, not to mention a break past a short-term resistance line. Somebody’s buying this stock at these levels….If you were waiting to re-enter (or enter for the first time) a position, I have to say I really like the way this chart is taking shape. I feel a move back to $1.25 is possible in the near-term. I think a revisit to $2.00 is a possibility further down the road.”

I would never, have never, and will never say you never have to worry about a stock dipping below any level. You won’t find anything even close to that kind of arrogance anywhere on our site. Even my bullish stance on SPKL was obviously not set in stone.

4. We never ignore facts, good or bad. Don’t believe me? Take a look at these facts we’ve acknowledged about several of our companies….

Smart Energy (SMGY)

“I confess I’m not sure if I’m shocked or not. I knew Smart Energy Solutions (OTCBB: SMGY) was struggling - quite a bit - to grow their already-anemic top line. However, I’m not sure I expected to see such a significant drop in sales. I did though - this quarter’s revenue was 37.7% less than the same quarter a year earlier. They did $397K in Q1 of this year versus $637K in Q1 a year ago. The reason they gave? “…sales of the Battery Brain product fell as a result of delays in receipt of purchase orders from key distributors and orders for private label products that are not carried in inventory and needed to be manufactured.” I’ll provide a translation - the things aren’t selling. This company has just been a disaster. They’re not bad guys - in fact. the management team seems quite intelligent. They’re just not getting the Battery Brain on enough shelves, and then pushed through into consumers hands. They thought they could do it, but have yet to get any traction. At this point I’m inclined to go ahead and dump the company from our watchlist; there’s no sense in any of us wasting any more time on ‘em.”

Zupintra (ZUPC)

Zupintra’s ability to over-promise and under-deliver makes Orchestra’s ability to do the same look like child’s play. You can change the company’s name and focus all you want - eventually you have to make some money doing whatever it is you’ve decided to do that year. How could you not know you needed letters of credit to do telecom business, and how could you not get them for months? (To our knowledge, they still don’t have them.) 

Titan Global (TTGL)

Many of you have been asking what my thoughts were (and are) regarding the fiasco known as Titan Global Holdings (TTGL, or TTGLE…depending on the day). I tried to respond to the best of my ability, but didn’t want to permanently pass judgment until I could really figure out if the mess was real, or just perceived. After having had some time to scour all the recent filings, my official and professional conclusion is this - Titan Global is a joke…a complete and utter joke.

And I could go on and on. I’m not going to though….no need to.

My point (and message) is this - we’re not always right, but we are always complete, and honest. That’s a lot more than most site’s can say.

We acknowledge success and failure…even our own. We were wrong about SPKL a couple of months ago. It wasn’t the first time, nor will it be the last time. What you’re ignoring is the incredible gain we’ve made on BMSN, THC, and the fact that we pretty much pin-pointed the market’s recent bottom (last weekend). You seem to have forgotten that we told you biotech was a ‘buy’ on June 25th. (Biotech is up 9% since then.)

Like I said, I’m not trying to be disrespectful. But, you said it yourself…”Facts are facts guys and you cannot ignore them” We totally agree, but you can’t ignore them either, for the exact same reason.

Anyway, here’s the bottom line…if you’re looking for perfection, look elsewhere - we’re not perfect. You won’t find it anywhere else, but at least you won’t waste any of our time time expecting it from us.

If you want honest and founded opinions on small cap stocks, sectors, and the general market, keep reading our stuff. If you want better than average picks, stick with us. If you want something you’re not going to get anywhere else, that’s what we do. You may well decide to unsubscribe (which is fine), but there are a few hundred thousand people that would disagree with the decision.

In the meantime, we remain bullish on Spicy Pickle. The stock does not yet reflect the company’s results, but we think it will eventually. That was our message….give it time.

Most of you will know we’ve been paying close attention to micro cap stock Spicy Pickle (SPKL) over the last few days. A major support line at 83 cents was broken this week, and we watched SPKL sink to a low of 69 cents as a result. If that number rings a bell, it may be because that’s basically where the stock hit a low and rebounded in April.

The obvious question is, do we buy or sell here? My honest opinion is that this is a great opportunity to buy. That’s not to say it’s risk-free, but from my point of view this pullback is simply a washout of some selling that’s been ‘on the verge’ for a long time.

And just as a reminder, the same bearish arguments many folks are bound to be making now were also being made back on April 4th…right before the rebound to a peak of $1.01.

The other reason I’m far more apt to be a buyer than a seller here (in addition to a retest of a key support level) is the shape of the daily bars the last three days. Tuesday and Wednesday were fairly harsh, and on significant volume. Thursday was bullish - in the face of marketwide weakness - on slightly better volume.

It’s your call, but small cap and bulletin board stocks have a way of zigging just when it looks like they’re going to zag. I’m expecting the less obvious possibility to play out, based on my past experience.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

In case you didn’t see the chart yesterday, small cap stock pick Spicy Pickle (SPKL) finally broke under a key support line that had been in place since mid-April. It was roughly at 83 cents. SPKL had traded as low as 81 cents last week and early this week, which didn’t bother me too much since we never closed under 83 cents. On Tuesday though, too many owners were tired of waiting. The stock hit a low of 70 cents…..and came right back to close at 78 cents.

So, am I bullish, or bearish? Neither just yet, though based on the way the stock acted on an intra-day basis, I’m actually leaning towards bullishness…depending on what happens today.

That deep low - and subsequent recovery - may have been just what the doctor ordered….a flushout of all the Nervous Nellies, and a significant buy-back following the move to new multi-week lows. In other words, there were lots of sellers in the early half of the day, and then lots of buyers in the latter half of the day. (The shape of the say’s bar can tell you quiet a bit about the market’s psychology.)

That said, today’s the critical day. The bulls really need to follow-on from yesterday’s efforts and push SPKL at least a little higher today. If not, some more Nervous Nellies could use yesterday’s slight rebound as another exit opportunity…which is comparatively better than the low of 70 cents.

I’ll post more thoughts as needed here.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Tally another one for this small cap company…Spicy Pickle (SPKL) has opened its 39th restaurant. This one’s close to home, in Fort Collins, Colorado. It’s the second company-owned store in Fort Collins, and if my math is correct, it’s the 6th company owned store. These stores offer more top and bottom line potential than a franchised store would.

This opening also pushes the company closer to operating profitability. When we first started covering their progress I guesstimated they’d start generating a positive cash flow with about 50 stores. That estimate was largely based on franchised units, but a handful of company-owned stores could bring the number of required stores down to the mid-40’s.

On that note, as spring turns into summer and construction is easier to do, I’m looking for the pace of store-openings to increase. We could see 50 stores by this fall.

The stock’s been in a bit of a funk the last several days, and didn’t even budge with today’s announcement. I suspect even though the news is good, investors ‘get it’….the company’s opening lots of restaurants. It doesn’t light a fire anymore. It’ll show up in the next quarterly filing though, which will light a fire.

If you’re in the area, the new restaurant is located at 2120 E. Harmony Rd., Unit 101, Ft. Collins, CO. As we’ve said from day one, we’re excited about this small cap investment based on the great food, which is the reason we’ve seen such rapid expansion. If you get a chance, go try the food and you’ll understand why for yourself. 

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

I admit I had to read this press release a couple of different times to make sense of it. Once I finally saw how the puzzle worked though, it all made a lot more sense. What I’m talking about is this small cap company’s latest billboard campaign. To grab some attention, Spicy Pickle (SPKL) is deliberately spelling words wrong on the billboards. And yes, it’s working.

For example, one of the boards read “‘Fud fors mahrt peah pal”. It only took me about 40 seconds to figure out they were trying to say “Food for smart people”.

The goal of the campaign is two-fold. One is to illustrate how the restaurant looks at things in a different way. The other is to send anybody who mentally processed the billboard to a special site the company has set up - http://www.languageofflavor.com/. At the site, browsers can try to figure out more phonetic sentences, and even submit some of their own. Of course, the over-arching point is to reinforce the brand name ‘Spicy Pickle’.

Not earth-shattering, but kinda’ fun.

By the way, I trust you saw yesterday’s news about the 38th restaurant being opened. The company just keeps growing, and growing.

Anyway, all this talk about food has made me huhn gree fora puh neenee.  

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

No surprises here really…small cap company Spicy Pickle (SPKL) has delivered as expected, opening the first  restaurant in downtown San Diego, California. It’s the second in the area. That means 37 are now open, and leaves more than 90 on the way. All the details are below.

In the meantime, how about that market? Stocks mustered a little strength yesterday, and in some cases poked to highs above my personal ceiling (which was February’s highs). The Russell 3000 exactly retested the resistance at 808 though…the third time in three months. Of course, we also watched every index fade from the intra-day highs, and close in the middle of the day’s range.

You could make a bullish as well as a bearish a case out of what we’ve got right now. I’m still leaning on the bearish side of the fence though. The fact that the market is up as I write this makes such an opinion tough to hold onto though.

I’ll say this much - a strong close/finish today could clinch the end of lethargy and the beginning of a move higher. As I’ve said all along, I suspect we’ll see more ‘down’ before it’s all said and done, but the bulls are testing the waters in the meantime. They could push the Russell 3000 all the way back to the 200 day line (at 831) with this effort. After that, I’d be cautious again.

By the way, is it just me, or are some of these index charts starting to make upside-down head-&-shoulderish patterns? If they are, that’s bullish. More importantly, the likely ’slingshot’ effect should carry them right up to the 200 day lines or so. Amazing how the market ‘knows’.

In other news…

One of our small cap company picks continues to fire on all cylinders. Downtown San Diego’s first Spicy Pickle restaurant is now up and running. The lease for the second of what will be twelve units for this franchisee has already been signed. The details really aren’t all that important. The important message is continued growth - Spicy Pickle can clearly do that.

Don’t forget about our Tenet Healthcare (THC) stock pick either. It jumped this morning from $5.46 to the current price of $6.08. That’s a new multi-month high. The catalyst? An upgrade from Credit Suisse. As of now, the trade is up 49.7%.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Well, it’s been two full trading days since I highlighted three of our bulletin board stocks. My general theme on Tuesday morning was simply that the pullbacks for all three didn’t really worry me, provided they started to rebound soon. So far, all three picks have behaved satisfactorily. None have been ‘like gangbusters’, but then again we’re not in a gangbuster kind of environment.

So what type of market environment are we in? Here’s my latest take - I’m not overwhelmed by Wednesday’s bullishness.

Let’s just mix things up a bit today and look at the Russell 3000 (though each chart is telling the same story). Basically, the market is hovering just under a ceiling, but so far has been unable to break though. To its credit, last week’s rally and this week’s persistence has gotten very close to carrying stocks past early-February’s peak. But, horseshoes and hand grenades, you know?

For the Russell 3000, the line in the sand is 808. Though the Dow and the NASDAQ are technically above their February peak levels, it’s been far from a convincing move. So from my point of view, the overall market is still in a trading range.

Here’s the Russell 3000 chart.

Now, about those three bulletin board picks….

Spicy Pickle (SPKL) quelled the selling pretty quickly Tuesday morning. I mentioned those sellers were limited in number (as indicated by weak volume), and based on the way they’re not putting up a fight now, I think they have been flushed out. The buy-in volume has been a little less impressive than I’d like to see, but we’re getting decent action on the stock.

When I mentioned Smart Energy Solutions’ (SMGY) stock had found a floor at 17 cents, I think maybe somebody took that as a dare. SMGY tagged 16 cents on Wednesday. No big deal - we saw an immediate rebound. It’s just one of those things where ‘as sure as you say it….’

Anyway, I want to reiterate the message I was sending then - though the stock is not doing great, it’s not like there are armies of sellers. In fact, there are decidedly more buyers, need on the rising accumulation line. It’s just that the buyers can’t string enough decent days together in a row to break out of the funk. It’s definitely becoming a test in patience.

And then there was SpongeTech (SPNG). The issue here wasn’t a lack of strength, but too much strength to sustain. The stock did indeed pull back even further on Tuesday, hitting a low of 3 cents. On Wednesday, we saw nice, reassuring rebound, with SPNG again hitting a low of 3 cents and pushing off of it to end the day at 3.6 cents. That’s not the biggest deal though.

Take a look at the last two bars (Tuesday and Wednesday). They’re almost mirror images of each other, and both are relative tall bars (wide ranges). Though it’s not technically what’s known a ‘bullish engulfing’ pattern, it comes pretty close. We need to see a little more upside on Thursday to clinch the signal. It’s encouraging though.

Anyway, all this bodes well for all three bulletin board stocks. Is the market giving ‘em a little nudge? Sure, but we’ll take it.

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One of the toughest parts about evaluating a fast-growing bulletin board company like Spicy Pickle (SPKL) is distinguishing between expansion-based growth and the improvement of your existing revenue centers. To help investors measure a stock’s merits, sometimes a retailer or restaurant will post what are called ’same store‘ sales. The idea is, even if the company never opened another unit, you’d still want to see proof that the top and bottom lines could grow.

Just a few moments ago, Spicy Pickle announced their Q1 (2008) same-store revenue growth was just a hair under 5%. The sixteen stores they had up and running during Q1 of 2007 generated an average of 5% more sales in Q1 of 2008. Therefore, the corporation’s royalties were increased by the same percentage (they take their cut from the top line).

What’s it mean? To us, the most important thing it demonstrates is simply proof of viability. Growth is tough to come by in any environment, but it’s particularly impressive considering consumers went into hibernation mode during the first quarter of this year. If there was any doubt that the ‘fast and casual’ concept would fly, the sales increase should negate the worry.

In short, the restaurant’s concept has been proven in the real world. Here’s the news release.Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.