UPDATE: Michael Goode of Reapertrades.com, who is up $98,000 on my strategy, just did his analysis of EONC and you can see it is VERY different (as this company has a tonnnn of dirt)…you can learn from BOTH of our approaches in our new “Learn To Read SEC Filings” DVD package.
Long before I shorted 16,000 shares today at $3.40ish, I learned of eOn Communications Corp. (EONC) a few years ago when they were hyping their product that could backup your cell phone’s phonebook…it was a cool idea and the press loved it, but the stock, aside from a brief spike, failed to jump as I expected it would with a such a cool product! (anybody remember Colonial Data’s stock price rise when they invented caller ID? MY grandfather made some great $ off that)…
Flash forward to this morning when I saw EONC’s stock up 100% on this 10:40am rather solid earnings press release…quarterly revenues up 217%, profits of 22 cents/share…yearly revenues up 52% to $10.65 million from $7 million last year…strangely positive for such a miserable little $4 million (now $8 million) company.
But I figured, sure, why not, after all, the runup in Diedrich Coffee Inc. (DDRX) from $2 to $30 started after a big earnings report…so I marked EONC down as a potential buy if it could hold its gains all day as surely this kind of impressive earnings would carry over tot he next day….right?
As I ignored the stock mid-day (as TIMfundamentals Part Deux DVD students know which sites I check and what information matters to me), and what I found was not pretty.students know, I rarely buy mid-day, preferring to wait until near the market close to make sure big winners have enough momentum all day long and don’t tankl!), watching it uptrend slightly to $4+ from yesterday’s close of $1.65, I started checking the message boards and researching (
So instead of buying EONC, I immediately located shares to short and shorted biiiig (for my tiny account), sending this reasoning to:
UPDATE: Shorted 3000 More at $3.25…Shorted 13,000 shares of EONC at 3.40ish…represents about 30% of my Covestor auto-trade portfolio (don’t think the auto-trade will work on this one though since the marketcap is below $50 million)…gonna try shorting more, but wanted to let you know, this company is up 100% today on “positive” earnings on an apparent 50%+ increase in revenues…what they fail to mention is that that increase is only due to including revenues numbers from an acquisition and without it, revenues actually dropped because their products aren’t in great demand. Not to mention these “positive earnings” might get a lot of hype from today’s PR but they’re nothing new, here’s the SEC filing from a week ago where they talk about revenues
Revenue is comprised of product revenue generated by our Millennium and Cortelco product lines and product and maintenance and professional service revenue generated by our eQueue product line. Net revenue increased approximately 52% to $10,645,000 for the year ended July 31, 2009 from $6,994,000 for the previous fiscal year. The increase reflects $4,231,000 in Cortelco revenue subsequent to the acquisition on April 1, 2009, partially offset by lower eQueue revenue from products, maintenance and professional services, and lower Millennium revenue compared to the prior year. Sales of Millennium systems and eQueue systems were adversely impacted by slowdowns in key U.S. government and education markets and increased competition.
Did I mention the company EONC acquired was owned by EONC’s own chairman of the board of directors David Lee? He also owns or controls several other companies EONC is doing business with, I’ll have a detailed report later, but oh boy, what a mess! Oh yeah and just to top things off, EONC’s accountant was spotted for several deficiencies by the PCAOB…normally I don’t like shorting only a $10 million company, but this entire runup from $1.65 is based on hype and accounting tricks….my goal is to cover at $2ish and will add if it goes higher
PS I might be early, but shares are going to be tough to borrow as people do any basic research on this company
Quarterly revenues might technically be up 217% and yearly up 52%, but why didn’t their press release mention that ALL that growth was due to combining the revenues from their April 1 acquisition?
My research through their SEC filings led me to these nasty nasty nasty facts, which is why I went short (and you can learn to do the same research by pre-ordering my “Learn To Read SEC Filings DVD Package”):
1. These “positive earnings” aren’t even new news, they were in an SEC filing from 10/29/09 and the stock didn’t budge because the SEC filing showed the nasty truth that there is no actual growth and the profits are basically just an accounting trick (explanation below)
2. Subtract the acquisition and EONC’s crappy yearly revenues were $6.414 million compared to $6.994 million last year, a drop of $580,000, or A LOSS OF 8%….not 52% growth….maybe legally okay to phrase it the way they did, but it’s not ethical and more importantly, it’s not accurate.
3. EONC may technically be profitable, but it’s totally due to the acquisition of Cortelco, which was earning $1.6 million/year BEFORE EONC bought them out for $11 million on April 1, 2009 (who does acquisitions on April fools Day…these guys because the joke is on shareholders)…since EONC doesn’t have $11 million, they agreed to pay quarterly payments of approximately $500,000 to Cortelco shareholders…that’s right to buy a business earning $1.6 million/year, EONC is basically paying that Cortelco’s shareholders $2 million/year until the $11 million has been paid off…risky business, but it looks good in the short term, right?
4. OK, so its an acquisition, what;s the big deal? Let’s see who the incredible leaders are behind Cortelco, shall we? We’ve got James W. Hopper as President, Walter D. Duffey as VP of Operations and Lee M. Bowling as Comptroller…wait a minute, I recognize those names form somewhere? Hmmm, where could i have seen them?!?!?! Aha! According to Yahoo! Finance’s Company Profile for EONC, James W. Hopper is CEO and Lee M. Bowling is CFO….what the deuce?!?!?!? OK, OK, maybe Cortelco’s website has just been updated to account for the acquisition, right? NOPE. Hopper has been President since 1997 and Bowling has been there since 1996.
On top of that, SEC filings say “David Lee, Chairman and CEO of eOn, is the Chairman and the controlling shareholder of Cortelco.”, but that fact is strangely ommitted when Lee is quoted in the earnings press release as saying: “…commented Mr. David S. Lee, Chairman of eOn’s Board of Directors. “For the fourth quarter of 2009 all divisions (eOn US, Cortelco and eOn China) were profitable resulting in net earnings per share of $0.22 before imputed interest expense. With our recent reorganization and merger with Cortelco, I feel that the company is now positioned to achieve positive results going forward.”
EONC ACQUIRED CORTELCO WHICH IS RUN BY THE SAME PEOPLE AS EONC, AND NOW EONC IS PAYING EONC’S MANAGEMENT (THE LARGEST CORTELCO SHAREHOLDERS) $11 MILLION OVER TIME FOR THEIR SLIGHLTY PROFITABLE COMPANY AND PASSING CORTELCO’S PROFITABLE OPERATION OFF AS EONC PROFITABILITY AND GROWTH. THIS ARRANGEMENT STINKS TO HIGH HEAVENS.
5. What kind of accounting/auditing firm would allow this to happen? Well, that would be GHP Horwath, P.C. which got smacked by the PCAOB (account industry’s regulators) for “audit deficiencies”….doesn’t matter what the problem is, that immediately makes me suspicious of ANY firm using Horwath as their auditor.
6. And of course, the actual business stinks: EONC admits in those SEC filings that sales dropped because they “were adversely impacted by slowdowns in key U.S. government and education markets and increased competition.” Who is the competition you ask? Little firms like Oracle, Salesforce.com and Cisco
7. I could also get into how EONC was forced to do a 5-1 reserve split in 2008 just to stay listed on the NASDAQ and that they also have other strange arrangements with David Lee controlled companies like Spark Technologies (the company that actually had the cell phone backup magic stick), but I think cutting through the BS of today’s earnings press release is infinitely more important.
I am incredibly proud to spot all this and EONC’s management should be ashamed, if not imprisoned/fined (although I am not a lawyer so I guess if you disclose in SEC filings that nobody reads, it’s okay). I covered that 3000 in the other account just so I don’t have to have 2 accounts open while trading this bad boy tomorrow, and I am currently short 13,000 shares overnight, with an unrealized profit of $6,000+ and check out somefared as they were first to receive my alert on this stock when it was at $3.40:
(will also know what I expect this stock to do tomorrow)
Followed your short of EONC,2500 shares @3.32, covered @2.95 @4:00pm +$911.00 in 90min. WOW WOW!!! YOUR the best.
Covered into that big sell order near close, cleaned up $17,432 after everything, thanks Tim, really showing me the light
Scalped EONC for $1176.40. Reshorted 2k shares @ $3.365
I scalped it for +$118. I like your logic, but I watched pennystocking part one, these first day supernova shorts are not for me…..
Big buy orders holding this thing up. Scared me away for a $1000-ish loss. Gonna enter a little more sheepishly next time.
Shorted 2000 @ 3.38 covered @ 3.24. Quick $280 gain. No way in hell I’m holding this overnight. I’ll wait for proper price action and short again. Thanks Tim.
covered at 3.15, nice quick 7% gain.
Grabbed $600 profit on 3000 shares, am very happy