DEATH DEFYING 528% Return on Poor Man’s Private Placement Parametric Sound (PAMT)!

Dr, Scott Brown

 

By Dr. Scott Brown

Parametric Sound has come under selling pressure lately.  It did not help that Seeking Alpha released what I call a “crash bash” piece on the company. There is a big stink brewing unleashed by an anonymous scoundrel.

PUBLIC SERVICE ALARM:  Spot stock manipulations as they happen.  Learn from this post.  Send this to everybody in your posse!

I doubt that the anonymous author can correctly define alpha.

Alpha refers to Jensen’s Alpha.   See Jensen, Michael C., (1967) The Performance of Mutual Funds in the Period 1945-1964, Journal of Finance, Vol. 23, No. 2, pp. 389-416, 1967

Look at the daily chart in the slideshow bellow.  Seeking Alpha decided to bad mouth the company during the third day of free-fall. If the author had a valid criticism of the Parametric Sound (PAMT) business model why wasn’t it blogged BEFORE the crash?

Rinse and Repeat: Short Parametric Sound

1. Parametric Sound’s technology is not new. The founder has been promoting the technology for 15+ years. The pitch is almost verbatim what it was since at least 1996 (as far back as online annual filings go).

2. Management relies on a demonstration with a hidden subwoofer to make investors believe the technology can produce a full range of sound. The science behind the technology indicates low range notes will not be achievable without risk of potentially harmful side effects.

3. The technology is not an attractive, transformative opportunity for target markets, specifically gaming because the speakers cannot produce bass. Adding a traditional subwoofer would eliminate any benefit achievable with this technology as anyone who has lived with a gamer knows, most of what is irritating is the bass from the explosions reverberating through the wall.

4. Parametric Sound does not have “strong IP” as management indicates with competitors, potential licensees, and a patent troll all possessing related patents which will greatly reduce the company’s negotiating power.

 

Read full article HERE.

An anonymous post such as this is a common tactic of stock manipulators. Parametric Sound (PAMT) crashed another 90 cents the day following the Seeking Alpha article tipped the short-term order balance back to short.

It seemed to have found support the day before. The seeking alpha article tipped the trading balance back to short. I have no idea who authored the Seeking Alpha article. I don’t know if this was an intentional manipulation. I don’t know to what degree the unknown author(s) profited by selling PAMT short.

The technology of PAMT has been under development for 15 years.  The technology reportedly improved in November of 2011.

My colleague Louis Basenese personally inspected the speakers created by PAMT and explains that the Seeking Alpha crash bash article claim that,

Management relies on a demonstration with a hidden subwoofer to make investors believe the technology can produce a full range of sound

is bogus. According to Louis Basenese.

The speakers create a 3-D sound, unmatched by any other speakers I’ve ever tested.

The Fundamental Numbers

Doc Brown’s Trading University Trade of The Week
Stock Parametric Sound
Symbol PAMT
Type (Contrarian / Momentum) Contrarian
Sector Audio Electronics
Exchange NASDAQ
Spin Off Date 10/6/2010
Spin Off Price (Unadjusted for Split)  $6.60
Spin Off Offering Price (Unadjusted for Split)  $4.50
Spin Off Shares Outstanding (Millions)                                       15.3
Sales Growth (3-Year) -50%
Earnings Growth (3-Year) -286%
Earnings Acceleration (Qtr. To Qtr.) N/A
Return on Equity (ROE) N/A
Date 10/2/2012 6/9/2012
Shares outstanding (Millions) 6.41 6.39
Composite Rating 19 61
EPS Rating 1 2
RS Rating 75 99
Group RS Rating D- B-
SMR Rating D E
Acc/Dis Rating C A+
Source Investors.com

 Shares outstanding for this company is 6.41 million following a 1-for-5 reverse split and seasoned offering for 1.88 million shares on March 21, 2012.

I prefer stocks that have between 5 and 30 million shares outstanding. There are so few shares outstanding.

It takes very little volume to move this stock. This stock will move upwards on very little institutional buying pressure.

This holds sans inside selling by thugs such as the seeking alpha’s anonymous author and minions.

A small pond in the form of few shares outstanding intensifies a news splash. Negative news such as the Seeking Alpha article can create a forceful share price downdraft.

When it comes to a Micro-Cap it doesn’t take much negative news from a prominent blog such as Seeking Alpha to manage shares of Parametric Sound (PAMT) downward.

But then again….

Welcome to the Land of High Uncertainty

Start-ups are born in the land of High Uncertainty. Parametric Sound (PAMT) is a technology start-up born from a spin-off.

Start-ups have no sales growth. They are starting up.

Start ups have no earnings growth. They are starting up.

Start ups have no earnings acceleration.  They are starting up!

Hence normal fundamental metrics go out the window. The analysis of this firm is that of a start up.

Traditional financials are of no help. PAMT sales and earnings figures are so slight that ratios such as growth and acceleration of earnings and sales don’t make sense. 

On Wall Street earnings and sales are measured in millions. How meaningful is it for a company with new technology as yet unavailable to the consumer to drop from $50k to $25k in sales?

Micro-Cap Canadian resource traders such as those in Rick Rule’s group turn to the same metrics private equity Investors use; the burn rate and the zero cash date.

The Burn Rate and Zero Cash Date

The burn rate tells you how much the company spends per month. The zero cash date tells you the length of time (barring a FUBAR) that the company can survive without another injection of capital. Re-capitalization reduces the original investor’s ownership through dilution caused by the increase in the number of shares outstanding.

Parametric reports $6,455,087 in cash holdings. The company filed a 10Q report with the SEC for the second quarter. See it HERE.

The firm reported $2,390,455 in total operating expenses for nine months ended June 30th. This implies a monthly burn rate (monthly operating expense) of $2,390,455 ÷ 9 = $265,606.10.

The cash zero date is in $6,455,087 ÷ $265,606.10 = 24.30 months forward from August 1, 2012.

PAMT is reporting financials that suggest that the firm can survive another two years without seeking additional capital. Two years is a reasonable length of time to wait for a pay-off.  Parametric Sound (PAMT) has already kicked out a 528% return to insiders in less time.

See my Den of Thieves Market Macro-Structure Theory HERE.

Institutional Profit Taking

The fact that the ACC/DIS rating has dropped from an A+ to a C indicates that institutional money managers have been taking a profit.  The Seeking Alpha article may have been a ploy by manipulators to drive the price down to a better repurchase level.

The Technical Picture

This is a particularly risky stock just because it is a Micro-Cap. As I have explained above these stocks are not analyzed with conventional fundamental numbers.  But the same technical tools apply.

PAMT-Parametric Sound Corp.-DAILY

PAMT-Parametric Sound Corp.-DAILY

Manipulator

SeekingAlpha.com Article

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Anonymous Manipulators Don't Get Caught By SEC!

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Anonymous Author's Ill-gotten Manipulation Gains

PAMT-Parametric Sound Corp.-DAILY thumbnail
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The Opportunity

Despite the recent stomach twisting free fall a bit ago this stock is holding to a well controlled gradual long-term uptrend on the weekly price chart as seen in the slideshow of this post.  It has found recent support and appears to be overcoming recent price weakness.

Volatility is a warning to long-term buy and hold investors.  This is a stock for hit and run traders.

Make sure that you have the skill and mind set for a micro-cap start-up play such as this.  Louis Basenese’s Micro-Cap Tech Trader is an excellent source of both skills and the appropriate mindset for these plays. The next technical buy signal is penetration of the current consolidation resistance of $7.40.  See daily chart in slideshow.

The Danger

The danger with ANY stock is that large shareholders decide to bail.  This results in a rapid substantial drop. This happens to all stocks. This includes blue-chips.

SO ALWAYS TRADE WITH MECHANICAL STOP-LOSSES ON YOUR EQUITY POSITIONS!

The good news is that this stock has found support for six days.  This is a positive sign that profit taking by institutional money managers is over and that the recent Seeking Alpha Anonymous Short Selling Thug Team (The SAASST Team) attack has been unsustainable. If you look at the chart you will see that this stock is coming back up.  The shorts are in the squeeze now. To build on what Warren Buffet says,

When the tide goes out everybody knows who has been swimming naked.

I say,

When manipulators swim naked they better watch their back for the rip-tide.

Money Management

This company is a spin off. “In a spinoff, newly created shares in the subsidiary are distributed pro-rata to existing parent shareholders. No cash is exchanged. In a selloff, the subsidiary is sold in whole to another firm. In a carve-out, a percentage of newly created subsidiary shares are sold in an IPO. The remainder is retained by the parent firm.

Read Powers, Eric (2012) Spinoffs, Selloffs and Equity Carveouts: An Analysis of Divestiture Method Choice.  Working Paper.

Spin offs perform worse than carveouts according to the article above.   Spin-off firms are bastard castaways of Fortune 500 CEOs who couldn’t make a division work. Some spin-offs become outcasts due to economics.  Other spin-offs are products of managerial misfeasance. There are a number of scenarios that impact the CEO’s decision to spin off a division according to Professor Eric Powers of the University of the South Carolina’s Darla Moore School of Business.

•           Financial Need: Is the parent in need of external capital and are other sources of external capital likely to be difficult to access?

 

•             Focus: Would there be a value-increasing change in parent focus if ties with the divested division are fully severed via either a spinoff or selloff?

 

•             Managerial Incentives: Are incentives for parent managers aligned with shareholder interests, decreasing the allure of the free cash-flow associated with a selloff or carveout?

 

•             Prospective Price: In a selloff or carveout, is the price for the division high or low relative to intrinsic value? If a spinoff is chosen, would the price from a selloff or carveout likely have been high or low relative to intrinsic value?

There are a number of situations based on these scenarios that can give rise to spinning off a division that has greater value under a different management.  Investors who specialize in these deals know the very real risks of investing in these so called “Micro-cap” companies. Some of the most experienced micro-cap investors are those who trade Unprotected Common Stock Private Investments in Public Equity (Unprotected Common Stock PIPEs).

PIPEs are negotiated sales of securities by listed firms to private investors that usually convert to publicly traded common stock. These privately issued instruments can take the form of Floating Rate Convertible Debt or Preferred Stock, Convertible Resets, Common Stock Resets, Structured Equity Lines, or Common Stock that is often packaged with warrants.”

 

Read Chaplinsky, S. and Haushalter, David (2012) Financing Under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity, Working Paper. 

Rick Rule’s team with Sprott USA is an experienced group of PIPE investors in North America.  Here is how the Roulette Wheel Money Management (RWMM) strategy works with PIPEs. They use unprotected common stock PIPEs to fund teams of prospect generators. 

They know from experience that most of these micro-cap plays trading across the Toronto Stock Exchange (TSX) will go belly up. But a small percentage of Rick Rule’s PIPE plays make so much money that they make up for the losers.

The problem here is that only accredited investors can invest in a Rick Rule PIPE play.

Plumber Joe” is disqualified by “We Are The 99” earnings and net worth demographics. Even for the “1%” the minimum is $10,000 Canadian for an accredited investor to play the resource prospect generator PIPE game.  Rick recommends that investors diversify into at least 10 or more PIPE plays. 

This implies an initial investment of $100,000. If you read the Chaplinsky article above you will see that this is the professional strategy as well.

Two Financial Heroes!

I applauded Louis Basenese and Robert Williams when they to created the Micro Cap Tech Trader Newsletter. This is a viable way for investors who are not yet members of the 1% to engage in these high risk yet high potential return plays.

The prudent approach is to allocate $1,000 each into 10 different micro-cap stocks. That is $10,000 to build a micro-cap portfolio or 1/10th of what it costs to invest in Common Stock PIPEs.

A hundred shares of PAMT costs $674 at market close today.  In this way a Joe Plumber investor can gain experience in these highly risky plays.

Should returns sour losses shouldn’t break the beer budget.

Should a Micro-Cap savvy Joe Plumber investor grow into a millionaire he will blossom into a far more competent accredited investor in private placements. He (or she) will be accustomed to working with tiny start-up companies on the outer fringe of Wall Street.

Stops and Mental Stops

The most conservative initial stop is at $6.21.  This is a 7.9% risk. A more speculative trader can set stop losses at $4.50.  This is the support of the prior consolidation behind the current trading range. 

See the daily chart for PAMT in the slideshow of this post.

This is an initial stop loss risk of 33%. Louis Basenese is a securities analyst I hold in the highest regard. He recommended Parametric Sound (PAMT) on a rise off of a sound base on 6/9/2012.  The worst possible fill upon recommendation was $9.07.

PAMT has traded down as low as $2.90 since. No options trade on this stock. Hence mental stops don’t apply. Parametric Sound could have been purchased at $1.75 a share on October 5th 2010.  It oscillated up to $11.00 in just over a year (adjusting for a five to one reverse split according to my platform).

That’s a [($11.00 – $1.75) ÷ $1.75] X 100 = [$9.25 ÷ $1.75] X 100 = 5.285 X 100 = 528.5% Holding Period Return since spin-off.

-Dr. Scott Brown

PS. If you don’t play you can’t win.  If you lose everything you can’t play.  🙂

PPS. Please open a ticket through the support tab above if there are any errors on my part.  Ditto for any broken links, etcetera.

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