WPCS Short Squeeze and 2 More Reasons to Buy
WPCS International (NASDAQ:WPCS) operates globally, providing a comprehensive range of capabilities in wireless communication, specialty construction, and electrical power. It provides expertise in the design, project management, installation, and maintenance of infrastructure, enabling the deployment of advanced technology, the delivery of information, and the expansion of global economies. WPCS has traditionally focused on the servicing and installation of wireless and technology construction for public service entities, health care services, energy companies, and corporate enterprises. In truth, the company had been struggling until WPCS made its move into the Bitcoin universe. Since then, it has become a battleground stock. In this piece, I will detail the major concerns and offer two more reasons why you should consider buying this stock.
Concerns Are Prevalent, But Can Be Overcome
An article on TheStreet.com by Dan Freed questioned whether WPCS is scarier than Bitcoin itself. The largest concerns centered on three things — a huge position held by just two hedge funds; a huge dilution of shareholder equity; and management confusion over shares outstanding. The concern over share dilution goes hand in hand with hedge funds. The massive share dilution which I outline below was a result of two hedge funds, Iroquois, and Hudson Bay Capital having acquired $4 million of convertible bonds in late 2012.
When the bonds were issued, they came at a time when the company was on the verge of dying. TheStreet.com article outlines that nobody really could grasp the terms of the language of the bond contracts, which were amended several times. However, it became evident that these hedge funds could end up in control of the company. It was these funds that suggested the move into Bitcoin via the BTX trader application. This move is what is definitely going to revive the stock. It’s a solid buy for nice profitable trade. However, the move could make or break the company. Some pain in January came from dilution. In the last few months, new shares have come on due to the bonds, resulting in tons of new shares coming on.
The dilution tested management. Management wasn’t quite sure how many shares were issued, stating it wasn’t over 10 million. WPCS first told us that it had issued 4,153,179 new shares, bringing the float up fourfold. Two weeks later, WPCS told us it had issued a total of nearly seven million more shares in three separate transactions, bringing the total share count to just over 12 million shares. Finally, just two weeks ago, WPCS reported it had issued another 1.25 million taking the total to 13,303,622. Further, WPCS has another $1 million or so worth of notes that could be converted, suggesting the share count could increase by roughly 4 million to 5 million more. That would require additional authorization, however, since according to WPCS’ latest 10-Q it is only authorized to issue 14,285,715 common shares. This issue may have prompted the former auditor to resign, though that’s speculation even if the timing suggests it. That said, WPCS has now hired a much stronger firm, which I outlined in a prior article. But there are now two more reasons to buy this stock.
A Major Firm Has Taken a Significant Stake
We have learned that Blackrock (NYSE:BLK) has taken up a position in the company. In a filing, we learned that Blackrock has a 5.3 percent stake in the company. This tells me they could be looking to acquire more shares and get someone in on the board. Possibly, it is looking to make a huge profit off of a swing trade as I have suggested. Right now, the 5.3 percent passive stake is an interesting data point the supports the bull thesis. I suspect we will hear more about this in the coming months.
An Epic Short Squeeze
As of January 15, there were over 800,000 shares sold short. That represents a massive percentage of the company’s total (albeit growing) float. On February 3, 2014 we got a tasted of what happens when the shorts are under pressure (figure 1).
Figure 1. Price Action in WPCS International in the Last Five Days
As you can see, as shares began to rise, it created momentum of buying and much of this may have been short covering. It was up 5 then 10 then 15 percent. A few minutes later is was surpassing 20 percent, leveling off at about 25 percent appreciation. Once the momentum plateaued in WPCS, I am willing to bet more short positions were reinitiated. These types of stocks are vulnerable to incredible short squeeze rallies. Once the first piece of positive news is released, don’t be surprised to see the stock move 30 percent, 40 percent, and even 50 percent in a single session.
I Missed the Move
I had an open buy order at $1.35. The stock didn’t get there and I missed this huge rally. That said, I hope it comes back down so I can try and catch the next leg up. The shorts will likely pressure this stock, so I will look to enter at approximately $1.55. Sometimes you just have to say, “I missed this one.” However, now the company has a large position shareholder in Blackrock and is setting up for another epic short squeeze. Don’t get caught short this stock.
Disclosure: Christopher F. Davis holds no position in WPCS. He plans to enter the stock at the $1.55 level given new data on Blackrock’s stake, expectation of a short squeeze and positive news on the company’s Bitcoin trading platform to be released in the next few weeks.