In our bankruptcy bounce series, we have made readers aware of the risks of playing bounce plays with respect to delisting. Achaogen, Inc. (AKAO) was a great example of that where we couldn't play the run from $0.10 to $0.19 on April 25 as the stock was getting delisted the next day. AKAOQ dropped to $0.08 the next day so it was the right move to avoid the stock. Emerge Energy Services LP (EMES) is a bankruptcy bounce play without the threat of delisting as it is working to avoid going through Chapter 11. We are up to 856 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 3,800 followers on Twitter as well.
EMES tumbled 78% from $1.69 to $0.38 on April 23 after announcing a restructuring agreement that, if successful, will keep the company out of Chapter 11 bankruptcy. An out of court process will avoid the "Q" symbol delisting that happens to a company that goes through Chapter 11. EMES could be delisted for falling behind on its financials or due to its low price, but those issues are given months to resolve before the NYSE exchange delists a stock.
The agreement can be seen as one bad scenario over the other, but that is to be expected when a stock tanks 78% in a day after a news announcement. If the deal gets approved by all parties, noteholders will be given 95% of the company and existing common unitholders will keep the remaining 5%. While a court-supervised restructuring is still on the table, the noteholders have until the end of the year to agree to the deal. So it will be a while before any court-supervised Chapter 11 process is initiated, if at all. That makes EMES very unlikely to be delisted any time in the near future and therefore can be bought and held for a while to play the bounce from its oversold condition.
After EMES dropped to $0.38, it spent the next two days at $0.31 before rising 14% to $0.35 on Friday. We think that this is a bullish sign and that the units from a technical standpoint could go on a run. There is a large gap to fill between $0.60 and $1.36. While gaps don't always get filled, especially under negative circumstances, we cannot discount the adage and that others will buy EMES solely because they think a gap fill will come. That should actually add to buying pressure rather than selling pressure if/when EMES heads towards $0.60.
There are over 1.7 million shares short out of a total float of 21.9 million; a short interest of 8% is a decent base to expect a squeeze from short covering. Keep in mind that shorts likely have an average cost basis of well over $2.00. It doesn't make a lot of difference to them whether they cover at $0.30 or $0.50. Their short is up 75% to 90% anyways. But for someone who bought the stock at $0.30, a price of $0.50 is a 67% return.
Disclosure: We are long EMES
EMES tumbled 78% from $1.69 to $0.38 on April 23 after announcing a restructuring agreement that, if successful, will keep the company out of Chapter 11 bankruptcy. An out of court process will avoid the "Q" symbol delisting that happens to a company that goes through Chapter 11. EMES could be delisted for falling behind on its financials or due to its low price, but those issues are given months to resolve before the NYSE exchange delists a stock.
The agreement can be seen as one bad scenario over the other, but that is to be expected when a stock tanks 78% in a day after a news announcement. If the deal gets approved by all parties, noteholders will be given 95% of the company and existing common unitholders will keep the remaining 5%. While a court-supervised restructuring is still on the table, the noteholders have until the end of the year to agree to the deal. So it will be a while before any court-supervised Chapter 11 process is initiated, if at all. That makes EMES very unlikely to be delisted any time in the near future and therefore can be bought and held for a while to play the bounce from its oversold condition.
After EMES dropped to $0.38, it spent the next two days at $0.31 before rising 14% to $0.35 on Friday. We think that this is a bullish sign and that the units from a technical standpoint could go on a run. There is a large gap to fill between $0.60 and $1.36. While gaps don't always get filled, especially under negative circumstances, we cannot discount the adage and that others will buy EMES solely because they think a gap fill will come. That should actually add to buying pressure rather than selling pressure if/when EMES heads towards $0.60.
There are over 1.7 million shares short out of a total float of 21.9 million; a short interest of 8% is a decent base to expect a squeeze from short covering. Keep in mind that shorts likely have an average cost basis of well over $2.00. It doesn't make a lot of difference to them whether they cover at $0.30 or $0.50. Their short is up 75% to 90% anyways. But for someone who bought the stock at $0.30, a price of $0.50 is a 67% return.
Disclosure: We are long EMES
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