As we approach mid-summer, trading in U.S. equities has hit the traditional seasonal doldrums — with the exception of some big-name, big-cap issues whose prices have reacted to recent earnings reports. In fact, most small and mid-cap issues are essentially running in place, waiting for market catalysts to send their share prices north or south.
That doesn’t mean, however, that it’s a bad time to stake out positions in some of the more promising companies whose stocks currently appear to be consolidating and carving out fresh bases of support. Among the issues that bear watching, I want to bring your attention to the following three plays in the small-cap space.
American Superconductor (AMSC)
American Superconductor Corporation provides megawatt-scale solutions that lower the cost of wind power and enhance the performance of the power grid. The company manufactures products using two core technologies: PowerModule programmable power electronic converters and its Amperium HTS (High Temperature Superconductor) wires.
The company operates in two business units: Wind and Grid. The Wind business segment enables manufacturers to field wind turbines with power output, reliability and affordability. The Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with efficiency, reliability and affordability.
Once a high-flying issue fetching $50 per share, AMSC appeared to reach rock bottom in early May, touching a fresh 52-week and all-time low of $1.25 per share. A bit of technical buying lifted them slightly off those lows, but only marginally. On July 10th, however, the company announced it had signed a $60 million deal to build a superconducting cable system spanning more than 3 miles to bolster Chicago’s grid and provide added reliability against extreme weather or terror attacks for Exelon’s Commonwealth Edison unit — part of a U.S. Homeland Security initiative. It was the first large commercial application of AMSC’s technology.
In the immediate aftermath of the announcement, AMSC rose jumped 28% to $2.06 for the stock’s biggest price increase since May 2008. Profit taking kicked in soon after, pushing AMSC share price back below $2, but buyers have once again managed to send AMSC back through $2 this week.
From where I sit, the Exelon Commonwealth Edison deal appears to be a potential game-changer for a company that has been promising to deliver on its unique technology for many moons — and may be about to do so in a big way. Although consolidation of the big price jump may continue for some time, this issue is worthy of monitoring for more potential gains in the months ahead.
NF Energy Saving Corp. (NFEC)
First, the bad news: investors continue to find it tough sledding among U.S. exchange-traded stocks of companies doing business in China. The latest victim, which I recently wrote about, was China XD Plastics (CXDC), whose shares had a meteoric rise earlier this year based on what appeared to be excellent earnings. With the stock already pulling off of its 52-week highs, a disparaging SeekingAlpha article called into question the legitimacy of those results, sending CXDC shares plummeting — and as of today they continue to find fresh post-breakout lows.
With that cautionary tale in mind, I want to call your attention to another company based in China, NF Energy Saving Corp. The company is engaged in manufacturing large diameter energy efficient intelligent flow control systems for thermal and nuclear power generation plants, major national and regional water supply projects and municipal water, gas and heat supply pipeline networks.
NFEC also provides energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure industries.
There are several reasons why NFEC shares have found buying interest recently, pushing the stock up to a recent 52-week top of $3.10 before pulling all the way back to the $2.30 channel. Undoubtedly part of the reason for the enthusiasm behind NFEC has been its micro-thin float of 3.1 million shares, which momentum traders love to exploit.
Arguably though, there are two better reasons to like NFEC. First, the company has been cutting a series of deals, which bodes well for its bottom line. But perhaps most importantly, it is operating in China’s massive marketplace — which should present even more bountiful opportunities in the weeks and months ahead.
Again, the only caveat is the potential for one article like CXDC experienced to level the share price for good. This is a risky play, but with big risk can come big rewards!
No watch list for 2014 would be complete without at least one marijuana-related stock. Of course, after a huge and rapid early year run-up in the share prices of almost any issue even remotely associated with this expanding industry, the bottom has fallen out of the vast majority. Even worse, several of those high-flyers, and high-flyer wannabes, have been suspended by the SEC. Still, that hasn’t stopped the regular emergence of new, publically traded entities trying to capitalize on the nationwide shift to relaxing pot laws.
One of the more interesting plays right now, which just saw its share price briefly explode due to the announcement of a large investment, is DigiPath, Inc. In business since 2010, DigiPath Corp. develops and sells digital pathology solutions for academic medical centers, reference laboratories, biopharma organizations, community pathology practices, hospitals, and life science research institutions worldwide.
The company offers hardware, such as PathScope, a whole slide imaging system that provides images in an open file format; and PathLive, a telepathology system. The company also offers software products, including PathReview, a Web viewer and image server management system for whole digital slide images; and PathConsult, a digital pathology solution to support remote consultation, second opinions, and reporting capabilities. In addition, it offers PathCloud, a digital pathology solution that removes various data storage and connectivity concerns; PathTrade, an exchange initiative; PathStore, a Web based e-commerce vehicle for professional services; and PathGuarentee, a money back guarantee program.
DIGP shares went parabolic on July 28, rushing up from a $0.55, topping out a $6, before profit takers knocked the stock back to the $2.50 level. The news that lit a fuse under the stock was an announcement by the company that it had raised about $8.2 million in order to finance its digital pathology solutions, cannabis education curriculum development and to explore new lines of cannabis businesses. In the same SEC filing, the company reported $217,248 in digital pathology revenue and positive shareholders’ equity of $7.1 million for the fiscal quarter ended June 30, 2014.
“We believe that the increased availability of and demand for medical cannabis – especially as states and the federal government move to ease laws around the cannabis industry – has created unprecedented growth opportunities,” said DigiPath Inc. CEO Steve Barbee. “Our revenues are increasing, we have capital on hand, and we are focused on expanding our infrastructure and building shareholder value.”
On Wednesday DIGP shares fell even lower following their breakout, dipping down to about $1.80 at the time of this writing. Although I wouldn’t be surprised to see the share price fall even further given its massive momentum run-up, and people’s mistrust of many issues in the pot sector, DigiPath appears to be well worth tracking in the coming months. There’s little doubt that several of the current players in the cannabis industry will ultimately emerge as clear cut winners, and DIGP may become one.
Good luck and good trading!
Warren Gates, Senior Analyst, Normandy Research