The SmallCap Pump & Dump Capital Raising Game: AgFeed Industries Inc. (FEED)

Posted by timothysykes on Thu 17th of Apr, 2008 08:45:08 AM

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What’s the ultimate goal of publicly-traded smallcap companies? They sell shares when their stock prices surge to raise the most capital possible. This morning, recent high-flyer Chinese pig-farmer (FEED) did just that, becoming the latest victor in the smallcap pump and dump capital raising game, raising a cool $10 million, selling shares at $16, less than 10% below their closing price of $17.40. What are they gonna do with this newfound capital—buy more pig farms of course!

You can look at this two ways—it’s great for the company that they could raise so much $ at such high prices—usually these financing deals are done at much bigger discounts, think 25%+. The capital gives them a shot at true business glory, even if the odds are still decidedly against them. Then again, it’s dilution below market prices—the rich get special deals—so this stock should open lower as poor people sell their shares—wondering how to buy stock 10% below market prices (hint: you either need to give the company a lot of $ or convince them you and your connections can and will pump up their stock price)

Don’t get me wrong, agri stocks are hot and this is a clear chart breakout so I have only two concerns: 1.) When companies do deals at inflated prices, you gotta wonder if the pump was natural or simply created by the company itself or “an unidentified third party” to show the investors they’re negotiating with how hot a company they are and to get the more $ on any deal. If so, promotions like that can cost a few hundred grand and a couple of puffy press releases–who knows, but the stock’s got a lot of proving to do. 2.) FEED proudly talks about buying these pig farms for only 3x net income—either they’re getting great deals or the pig farmers know their business better than naïve investors and are happy to be out of the pig-f%$@ing industry! If so, FEED should be trading with a PE of around 3—let’s give them the benefit of the doubt that their Blockbuster Video-type acquisition model will increase profits, earning them a PE of 5, putting the stock at $6/share.

But that’s rational sissy value investor thinking—this is a smallcap momentum play and whoever bought those shares is gonna try damn hard to pump this thing up so they can sell for some fat juicy pig-roasted profits!

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