Most stocks with floats of less than 5 million get there because of a reverse split. They might have ultra-small floats at the moment, but that won't last long as dilution is expected to come soon. That's what makes Universal Security Instruments, Inc. (UUU) a particularly rare gem. UUU has had 2.3 million shares outstanding for over a decade. The company doesn't dilute, but up until now it didn't make much money either. So it mostly stayed in the $2 to $10 range over the last 10 years, seldom trading most days with occasional volume spikes. However, after UUU's Q3 results last week, this stock has changed from range-bound small cap to undervalued gem with excellent potential for a short squeeze. If you like our picks you can follow this blog by clicking the follow button on the top of the left hand panel. We have 1014 followers on here as well as 119 followers on our Canadian blog. You can also follow us on Twitter @StockTradePicks which has over 5,000 followers.
From last week's press release:
OWINGS MILLS, Md., Feb. 16, 2023 /PRNewswire/ -- Universal Security Instruments, Inc. (NYSE AMEX: UUU) today announced results for its fiscal third quarter and nine months ended December 31, 2022.
For the three months ended December 31, 2022, sales increased approximately 8.3% to $5,758,661 compared to sales of $5,319,014 for the same period last year. The Company reported net income of $341,312, or $0.15 per basic and diluted share, compared to net income of $35,351 or $0.02 per basic and diluted share for the same period last year.
For the nine months ended December 31, 2022, sales increased approximately 6.5% to $16,251,106 versus $15,259,235 for the same period last year. The Company reported net income of $435,776, or $0.19 per basic and diluted share, compared to net income of $157,688 or $0.07, per basic and diluted share for the corresponding 2021 period.
"The primary reasons for the sales increases during the three and nine-month periods ended December 31, 2022, were improvements in deliveries from China and less port congestion in Long Beach, California. The primary reasons for the increases in net income during the three and nine-month periods were lower selling, freight, advertising and professional expenses, partially offset by the higher cost of electrical components due to continuing supply chain issues." said Harvey Grossblatt - President and CEO.
UUU earned $0.15 per share in Q3. While the rest of the world experiences inflation, UUU has gotten costs under control while still showing a benefit on the revenue side, with solid 8% revenue growth on the quarter. That resulted in a near ten-fold improvement in net income from $35,000 in the previous year's Q3 to $340,000. The $0.15 EPS for Q3 would lead to an annualized result of $0.60. A P/E of 20 would justify a $12 stock price while the stock is trading at less than 5 P/E right now. While it's difficult to stretch out one quarter's result over a full year, it's clear from the steadily improving financials that the company is trending in the right direction. It could just as easily surpass a $0.60 EPS for the next four quarters as it could come short of the mark.
The strong net income performance has also resulted in positive operating cash flow, allowing the company to pay off substantial debts and liabilities throughout the year. This will only increase profitability as interest expense will start to decline.
We would like to being attention to the stock's trading since the Q3 results were released on Thursday afternoon. The stock hit a high of $3.64 on Friday, but was pushed down heavily in the afternoon to close at $2.48, up a mere 13% even with these outstanding results. Checking the Naked Short Report, there was 2.3 million in short marked volume on Friday. This is greater than the float. Combine that with total trading of 17 million on the day - 10x the float - it's clear that there was a lot of high frequency bot trading that day, as well as naked short selling. The algorithm was set up to short the stock, because traditionally the stock tanks after a run. This scares away retail traders until the next pump.
The problem with this strategy is that this time around, the company's spike upward was justified on very strong financial results. With good earnings and a strong balance sheet, the company has the ability to pay a dividend or buy back shares. Both of these would cause large problems for the shorts and entice longs to buy in. With such a small float and low valuation, this stock can easily spike large on a squeeze.
We have already seen the beginnings of a permanent turnaround in the price. After a weak open on Tuesday, it closed up 7% on the day. It then followed that up with an 11% increase on Wednesday. It busted through its 50-day MA and is set to challenge its 200-day MA once again after the pullback from its highs on Friday. If it breaks through it again, we think it can go on a major run on a short squeeze as it heads towards a stock price reflecting its fundamental value.
Disclosure: We are long UUU
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