WPCS International: Clearing Up Some Misconceptions

Let me be very clear. I hold no position in WPCS International (NASDAQ:WPCS) and that is unfortunate given that I missed a big move in the stock that I was expecting (figure 1.) I had a standing order at $1.3500 that did not get filled. I simply missed the move. However, there are a few new pieces of positive evidence for WPCS that need to be shared and there are some clarifications from my last article that need to be made regarding WPCS’ operations.

Figure 1. Price of WPCS International Over the Last Five Days


Clearing Up Some Misconceptions

First, there seems to be some confusion regarding exactly what the company does. Some have contacted me with the impression that the company is a FOREX type company that is now dabbling in Bitcoin. That is not the case. It is moving to develop a Bitcoin platform after its deal with btxtrader.com. But this company is still primarily a failed telecommunications company — a pitiful performer that is hanging on to life. That said, I wrote my last bullish piece (and this current one) because WPCS is attempting to save its business. In turn, the stock that once traded 24 times higher than its current $1.60 price could move significantly higher given this decision by the company.

Make no mistake, the company still primarily provides a comprehensive range of capabilities in wireless communication, specialty construction, and electrical power. It is not a currency company or even a software company. Its core business is in the design, project management, installation, and maintenance of infrastructure for businesses. WPCS has no major plans to abandon its focus on the servicing and installation of wireless technology construction and installation of servicing cables for various enterprises. It is the move to Bitcoin and the trading platform that I believe will save WPCS, or put it out to pasture. There is significant risk, but very profitable trades can be made.

Further, as a long-term investment, the risk is that WPCS will not be able to cover its liabilities and could fail at monetizing the platform. I believe this is a possibility, but that WPCS is doing all it can to ensure this will not happen.

Second, a few followers reached out to me to ask if Bitcoin is on the rise (or drops), then why isn’t WPCS’ share price responding in kind? The answer is somewhat related to the first misconception; that WPCS is not a currency and/or Bitcoin company. WPCS is still a core telecommunications company.

That said, when WPCS announced its move to acquire BTX trader and diversify into this segment, the stock did trade with a 0.78 correlation with Bitcoin for a few days (correlations will fluctuate based on time period examined.) One trading session that increased correlation was when Bitcoin dropped heavily from December 17 to December 18, 2013, and WPCS dropped in kind by about 50 percent. It’s a bit misleading though, because the stock had just rocketed higher after announcing its move to Bitcoin trading exposure.

As of now, the correlation is below 0.5, indicating that that Bitcoin and WPCS really are only loosely correlated at best. Do not expect WPCS to follow Bitcoin more closely until WPCS is closer to getting BTX trader going. Even then, it’s not a guarantee it will trade with Bitcoin’s price. One thing I will state with 100 percent confidence is that WPCS wants Bitcoin to move with extreme volatility. Why? It will increase trading volumes. More trades equals more business and use of the platform. That will be a huge positive for WPCS.

Third, some have touted WPCS as the “only company with a Bitcoin trading system.” That is just not true. A simple Google search reveals a few competitors. One such company is mtgox.com, whose exchange can be found here¬†– so there are indeed alternatives out there, putting that misconception to rest. Where WPCS can compete is in creating a viable, flexible, and unique alternative to what is currently out there. There are a few ways in which it can differentiate itself, and WPCS is working to ensure that is the case, giving reason to consider this stock an investment.

First, WPCS provides actual funding to BTX to get it going. This is a huge advantage for the BTX platform versus competing platforms that lack funding and have a ‘cheesy’ appearance. Second, WPCS and BTX’s trading applications could include not just enhancing a user’s ability to trade Bitcoin across multiple exchanges, but could expand into other competing cyber currencies.

Why is it that Bitcoin will be the only currency it limits the platform to handling? Keep in mind, some traders and speculators are already using other cyber coins, so this is an attractive growth opportunity. A list of competing crypto-currencies can be found here. Keep in mind that Bitcoin has traded in dozens of paper currencies, so BTX trader should look to provide the most comprehensive and efficient display of bid/ask prices across currencies. Existing platforms are clunky in my opinion.

Fourth, WPCS is “a sure thing.” I should not have to bring this up, but given the hype around the stock I need to mention it. This belief is foolhardy, and I am bullish on this stock. There is no just no guarantee the stock will succeed, as there are prevalent risks. While I believe these will be overcome, and incredibly profitable trades can be made, it is possible the company falls flat.¬†Without repeating much of what was in my last piece, the following risks are worth reiterating: Bitcoin could go bust — unlikely, but it is possible; and incredible share dilution. Over two months, the float rose ten-fold. WPCS reported that after its last issuance/conversion of bonds, the total share count is at 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. Finally, a huge position held by just two hedge funds, Iroquois and Hudson Bay Capital, both have a massive stake in the company and could drive the price lower should it decide to liquidate positions.

More Bullish News

Blackrock (NYSE:BLK) has significantly increased its position in the company. Blackrock now has a 5.3 percent stake in the company. Why is this a positive development? I speculate that this tells me it could be looking to acquire more shares overtime as well as to get someone in on the board. Blackrock’s stake is powerful and their shareholder votes will impact the company. One issue of concern is the need to potentially convert more bonds or raise cash. Blackrock will have a huge say in these decisions. It is also possible it is looking to profit off of a swing trade as I have suggested is possible to made in WPCS. Blackrock’s stake is an interesting data point the supports my bullish thesis.

Can You Say Short Squeeze?

Short squeezes are a shareholder’s dream scenario as it tends to move stocks multiple percentage points. The most up to date short interest data, available here, shows there are over 800,000 shares sold short. That represents a massive percentage of the company’s total (albeit growing) float. As shown in figure 1, there was a touch of a short covering rally. The action has since slowed and shorts may be reinitiating a position. There has been a lot of naked short selling of WPCS. I would caution you not to short this stock given that the fundamentals of the company are changing and things are looking better. There is also not much time left to cover these short sales according to the data source above. Expect a rally from short covering, which will be compounded by the first piece of good news from the company.

Take Home Message

This article clears up some prevalent misconceptions about WPCS International. Blackrock’s stake in the company is a positive data point. The reality of a short squeeze cannot be overlooked. The key to WPCS’ stock moving higher rests in the company’s ability to release timely positive news and stay on track with its BTX trading platform. I may have missed the first leg up, and this stock may not see $1.35 again. Given my risk tolerance, I am now targeting a $1.55 price to consider a small speculative position. The stock is not without risks, but has the potential for high rewards.

More From Wall St. Cheat Sheet: