Tuesday, 5 March 2019

Going For a Second Run On ACET and SQBG

Last week we picked Aceto Corporation (ACET), a company that dropped significantly after announcing a Chapter 11 bankruptcy filing. While initially down on the first two days after trying to catch the falling knife, the stock price tripled to $0.43 on February 27, allowing for significant profits to be taken. We once again bought shares on Tuesday afternoon as the stock looks set for a second run after ending the day up 28%. ACET was a top short pick from last year in our article "Short Aceto As It Heads Into Bankruptcy" and has dropped 90% since. Now that bankruptcy has officially gotten started, we believe it is a good time to cover any short and go long in order to play the bankruptcy bounce since there is some promise that shareholders could recover something during this process. Our weed-related pick Sequential Brands Group, Inc. (SQBG) rose 20% a day after calling a long position on it, but has since dropped back down to $1.64. We think that SQBG's deal with Canopy Growth (CGC) (WEED.TO) and Martha Stewart is brilliant and the stock will continue to do well for as long as cannabis remains a hot sector. This pull back is an ideal opportunity to capitalize on a cheap entry point in hopes of a second run. We are up to 832 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel. You can also follow us on Twitter @StockTradePicks. We have over 3,700 followers on Twitter as well.

One piece of good news is that ACET received a NASDAQ delisting notice that would have delisted the stock on March 4, but the company requested a hearing to delay that ruling. This is a good sign that management is still willing to fight to keep the stock alive. ACET dropped after announcing the following:

PORT WASHINGTON, N.Y., Feb. 19, 2019 (GLOBE NEWSWIRE) -- ACETO Corporation (ACET), an international company engaged in the development, marketing, sale and distribution of Human Health products, Pharmaceutical Ingredients and Performance Chemicals, announced today that it has entered into a “stalking-horse” asset purchase agreement with an affiliate of New Mountain Capital, a leading growth-oriented investment firm with over $20 billion in assets under management, to sell its chemicals business assets for gross proceeds of $338 million in cash, plus the assumption of certain liabilities and subject to certain adjustments, on a cash-free and debt-free basis.

The sale will be conducted under Section 363 of the U.S. Bankruptcy Code. To facilitate the sale and satisfy its debt obligations, Aceto and its U.S. subsidiaries have filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey (Newark). Aceto’s foreign chemicals business subsidiaries are not included in the filing but will be included in the sale. In addition, Aceto intends to enter into a stalking horse agreement for its subsidiary, Rising Pharmaceuticals. Aceto expects to complete the dispositions of its chemicals and Rising businesses before its fiscal year end on June 30, 2019.
“For the past several months, the Board has been conducting a comprehensive evaluation of strategic alternatives to address the Company’s debt burden in consultation with its financial and legal advisors while continuing to work cooperatively with its lenders.  After assessing its options, the Board has determined that Court-supervised sales of Aceto’s chemicals business assets and its subsidiary Rising Pharmaceuticals are in the best interest of the Company and its stakeholders,” said William C. Kennally III, Chief Executive Officer of Aceto. “This decision provides stability and deep capital resources to the Company and, importantly, ensures the continuity of customer, partner and supplier relationships critical to the Company’s businesses operations and success.”

Aceto will operate its business in the ordinary course while it completes the sales of its chemicals business assets and its subsidiary Rising Pharmaceuticals.   To that end, Aceto has received a commitment for debtor-in-possession (DIP) financing of $60 million from a syndicate of lenders led by Wells Fargo Bank, N.A. The DIP financing will finance Aceto’s working capital needs through the completion of the sales transactions and support payments to vendors and suppliers for post-petition purchases in the ordinary course.

The proposed sales will be conducted through Court-supervised processes under Section 363 of the Bankruptcy Code, subject to Court-approved bidding procedures, potential receipt of higher and better offers at auction and approval by the Court.  PJT Partners LP is acting as Aceto’s financial advisor and investment banker to lead the sales processes under the bid procedures and Lowenstein Sandler LLP is serving as legal advisor. AP Services, an affiliate of AlixPartners LLP, is also serving as Chief Financial Officer and advisor to the Company. 
The bid for the chemicals business is $338 million, while no bid has been announced on its Rising Pharmaceuticals subsidiary yet. This "stalking horse bid" is a minimum bid like what you see on an eBay auction. This bidding process will last for four months so there is lots of time to hear more bids. ACET's total liabilities are $702 million so it is not unfathomable to think that the total combined bids for both divisions could exceed that amount if things go well. ACET's total market cap is only $7 million. This is a very low valuation to bet that the bids will increase substantially from here. Any stock has risk to it, especially one that is in bankruptcy proceedings so investors should trade accordingly.

ACET has accumulated a lot of deferred tax assets from years of operating losses. ACET has accumulated $82 million in deferred tax assets which currently all but $5 million is offset by a valuation allowance. If ACET was to sell all of its operating assets and exist as a shell, that shell's tax assets have value in the instance of a reverse takeover that is done in a way to not invalidate them. This article gives a good overview of this process.

Sequential Brands Group, Inc. (SQBG) is at the other end of the spectrum, a recent listing that ran since announcing a deal with Canopy Growth (CGC) (WEED.TO) to have Martha Stewart join on as a product advisor.  The news release stated:

"Canopy Growth and Sequential Brands Group Announce Collaboration on CBD Product Development

Martha Stewart to join as advisor on hemp-derived CBD products
SMITHS FALLS, ON and NEW YORK, Feb. 28, 2019 /PRNewswire/ - Canopy Growth Corporation ("Canopy Growth" or "the Company") (WEED.TO) (CGC) and Sequential Brands Group, Inc. ("Sequential") (SQBG) announced today that Martha Stewart has joined the Company in an advisory role to assist with developing and positioning a broad new line of product offerings across multiple categories.

 With decades of success in publishing, broadcasting, online and merchandising, Martha Stewart has firmly cemented herself as one of the most well-respected businesswomen in the United States. Along with a deep understanding of what consumers in the United States and around the world want, Martha has been one of the most vocal advocates for animals, championing the health and wellness of pets and farm animals alike. With several clinical trials underway, Canopy Growth will be leaning on Martha's vast knowledge of consumer products while exploring the effectiveness of CBD and other cannabinoids as they relate to improving the lives of both humans and animals.
"I am delighted to establish this partnership with Canopy Growth and share with them the knowledge I have gained after years of experience in the subject of living," said Martha Stewart. "I'm especially looking forward to our first collaboration together, which will offer sensible products for people's beloved pets."
"As soon as you hear the name Martha, you know exactly who we're talking about," shared Canopy Growth Chairman and co-CEO, Bruce Linton. "Martha is one of a kind and I am so excited to be able to work alongside this icon to sharpen our CBD product offerings across categories from human to animal."
As previously reported in January 2019, Canopy Growth has developed diverse product offerings specific to hemp-derived CBD and the Company looks forward to working closely with Martha Stewart as they further develop and introduce these products to market in the future. Canopy Growth previously reported that it will invest between $100 and $150 million in a hemp industrial park in New York State with an intended purpose of being the Company's first hemp facility in the United States. 
Here's to Future Growth (it's a good thing).  
About Martha Stewart Martha Stewart is an Emmy Award-winning television show host, entrepreneur, trusted lifestyle expert and teacher. She is also bestselling author of 94 books which have been published by Clarkson Potter, who continues to partner with the brand on new culinary titles. Millions of people rely on Martha Stewart as a source of useful "how-to" information for all aspects of everyday living - cooking, entertaining, gardening, home renovating, collecting, organizing, crafting, holidays, healthy living and pets. The Martha Stewart brand reaches approximately 100 million consumers across all media and merchandising platforms each month. Her branded products can be found in over 70 million households and have a growing retail presence in thousands of locations.
About Sequential Brands Group, Inc.
Sequential Brands Group, Inc. (SQBG) owns, promotes, markets, and licenses a portfolio of consumer brands in the fashion, active, and home categories, which includes the Martha Stewart media and merchandising properties. Sequential seeks to ensure that its brands continue to thrive and grow by employing strong brand management, design and marketing teams. Sequential has licensed and intends to license its brands in a variety of consumer categories to retailers, wholesalers and distributors in the United States and around the world. For more information, please visit Sequential's website at: www.sequentialbrandsgroup.com. To inquire about licensing opportunities, please email: newbusiness@sbg-ny.com."
This is an extremely brilliant partnership that will reap substantial benefits for both companies. Though it will be much more bullish for SQBG only because it has such a small market cap of $105 million so the percentage impact on operations and stock price will be much greater. Why should this partnership be so lucrative?

Martha Stewart's name is not as wholesome as it once was prior to her legal issues, however she is still the face of the family for many moms. The BIGGEST hurdle Canopy and other weed players will face outside of government policy is mainstream acceptance of cannabis/hemp products. The old-fashioned, conservative, religious mom who makes the buying decisions for so many households across America wants nothing to do with "pot-smoking hippie" nonsense. Martha Stewart has such high profile and influence in this demographic that she can access this market to Canopy in a family friendly way. That includes hemp products today and likely CBD for medical use down the road as well as the untapped pet market opportunity.

The positive case for SQBG should be very apparent. This is a new, hot market and Canopy is global market leader. This deal brings SQBG legitimacy to a whole pile of investors flush with cash and looking for new angles in the cannabis industry for which to profit. This brilliant partnership will be lucrative to the bottom line for SQBG but more importantly from a trader looking to get in early, should make this a very hot stock for a sustained period of time.

Disclosure: We are long ACET, SQBG

2019 got off to a reasonable start in January for microcap stocks as the market in general was bullish for the month. There were a lot of stocks that spiked 100-500% in a matter of one or a few days. As we look towards the rest of 2019, we have to figure out what's next for microcap stocks? TradeMiner identifies seasonal trends and market cycles, the Penny Stock Prophet and Microcap Millionaires finds the next big small cap plays in various industries while Addicted to Profits makes trades from a Canadian perspective.

There are also some good books available on microcap stocks and day trading such as:

Mastering Microcaps: Strategies, Trends, and Stock Selection (Bloomberg Professional Library)

The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks

Microcap Magic: Why The Biggest Returns Are In Stocks You've Never Heard Of

How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology

How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology

A Beginner's Guide to Day Trading Online (2nd edition)

Stock Investing for Beginners: Marijuana Stocks


Here are some other good stock market resources. This includes technical analysis and day trading, dividend stock investing, gold and commodities, sector rotation, options trading and microcap trading strategies:

The dividend stock report from dividendstocksonline.com

at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)