An Elephant Hunter’s Theory About Axion Power’s Price Surge
John Petersen
Over the last few days I’ve been inundated with questions from readers who want to know why Axion Power International (AXPW.OB) has smoothly surged from a low of $0.25 on December 30th to a closing price of $0.58 yesterday. The short answer is the stock is finally emerging from the mother of all supply and demand imbalances and the persistent sellers that punished the price over the last 20 months are almost out of the picture. Since I believe we’re witnessing the beginning of an entirely new market dynamic, a detailed explanation seems appropriate.
In December 2009, Axion closed a private placement transaction where four large buyers and 47 small investors bought 45.8 million shares of common stock at a price of $0.57 per share. I was thrilled. At the time I wrote:
“To my way of thinking, the most impressive aspect of Axion’s financing is sheer size. Axion had roughly 37 million common share equivalents outstanding before the placement and sold 46 million additional shares. Selling 55% of a company without surrendering control is extremely rare. The more telling fact is that the cumulative reported trading volume in Axion’s stock for 2009 has only been 6.6 million shares. In other words, these private placement investors bought roughly seven times the annual trading volume in a single transaction. Nobody in his right mind buys that kind of weight with the expectation that he’ll be able to resell at a profit in an illiquid market. That tells me this group of investors is taking a long-term view and swinging for the fences with Axion’s other large holders. I’m delighted to have the company, even if they did get a better price.“
Based on 30 years in the trenches as a small company corporate finance lawyer I believed the 2009 private placement would put a solid floor of $1.20 under the stock price. The market behaved about the way I expected it would for three and a half months and then all hell broke loose when:
- A busted hedge fund that owned 2.7 million shares began liquidating;
- A bankruptcy estate that owned 544,000 shares began liquidating; and
- Resale registration statements for 2008 and 2009 private placement shares went effective.
All of the sudden there were far more shares in the hands of willing sellers than the market could absorb. As the sellers started pushing their offer prices down in an effort to clear their books or turn a quick profit, the price fell from a 10-day moving average of $1.18 on March 30th to $0.80 on May 30th. By the end of July the 10-day average had fallen to $0.55. There were no problems with Axion’s business, but there were a number of large shareholders who forgot the fable of the goose that laid the golden eggs.
A few days ago one of my followers on Seeking Alpha drew my attention to the daily short reports OTCBB market makers file with FINRA. The FINRA data is unusual because the market makers report all sales of shares that aren’t under their control as short sales. Therefore, two types of transactions show up in the FINRA reports:
- True short sales; and
- Transactions where a selling stockholder has a physical stock certificate that must be converted into electronic form prior to delivery.
Other transaction types are reported from time to time, but they’re rare. Since true short selling has never been an issue for Axion, it occurred to me that the FINRA daily short sale reports might provide an accurate and reliable way to track resales by private placement purchasers. On Tuesday my data-mining friend H. T. Love sent me FINRA short data going back to April 1, 2010, just before the resale registration statements for the private placement shares went effective. The accuracy of the FINRA data as a tracking tool for resales of private placement shares is astounding.
Since April 1, 2010, the total of short sales reflected in daily FINRA reports from market makers is 35,888,306 shares. During that period, my best estimate of the shares that have moved from physical certificates to electronic form follows:
| Busted hedge fund | 2,746,869 |
| Bankruptcy estate | 543,600 |
| Deceased stockholder | 8,245,614 |
| The Quercus Trust | 5,724,978 |
| Special Situations Funds | 7,433,411 |
| Weak 2009 small investors | 10,800,000 |
| Total | 35,708,594 |
My best estimate of the shares remaining in the hands of 2008 and 2009 private placement purchasers follows:
| Blackrock | 7,150,000 |
| Manatuck Hill Partners | 7,200,000 |
| The Quercus Trust | 2,846,451 |
| Strong 2009 small investors | 3,600,000 |
| Total | 20,796,451 |
The only numbers in the tables that are an outright guess are the shares held by weak vs. strong 2009 small investors, and that guess simply assumes that 3/4 the small 2009 investors were spooked by the market decline and decided to take their cash out of the game at a break-even price. While the data for Blackrock and Manatuck Hill is based on old SEC filings, both should file updated reports by mid-February.
If you look at the Axion chart for the last 20 months there is nothing that would attract a short-term trader, except for a brief run-up in January through March of 2010. In fact, the chart would terrify every trader I know. That means the only people who might have been attracted the stock were investors who attended an Axion presentation and decided to buy, or who’ve followed my blog for a long time, climbed a personal wall of worry and decided to swing for the fences in hopes of an elephant hunter’s return.
I believe my long-term readers have bought the substantial bulk of Axion’s float. Unless Manatuck Hill, Blackrock or the remaining 2009 small investors start selling in meaningful volume, it looks like the only reliable source of supply is the Quercus Trust which will probably sell the rest of its shares over the next few months. From this point forward, I believe the market price is in the collective hands of the investors who bought over the last 20 months.
The last 20 months have been a very trying time for Axion’s stockholders because of a highly unusual supply and demand dynamic. In a normal market I would have expected the floor of $1.20 to hold till the summer of 2010 when Axion announced an important development contract with Norfolk Southern that would normally have boosted the price into the $1.80 range. Last fall I would have expected Axion’s disclosure of superior testing results with BMW to boost the price into the $2.70 to $3.60 range. At this point I don’t know what an objective fair value for Axion’s stock is, but I expect to find out over the next few weeks.
Discl
osure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.
Why are you confident real short selling is not part of the equation?
The reported short interest ranged from a low of 1,107 shares to a high of 254,656 shares in 2011. That’s background noise from processing delays as opposed to real short selling.
I always find analyses like this fascinating, in that they treat “common shares in Company XYZ” as in intrinsic commodity that can be in shortage or surplus. There are, of course, some unusual conditions when this can occur, such as a short squeeze, or just prior to a triple witching-hour. But by and large, the value of an equity changes not because the shares themselves are in surplus or shortage, but rather because the prospect of future profitability of the company changes. Indeed, any other change in price is artificial and is not a sound basis for long-term investing.
It is remarkable, therefore, that Mr Petersen omits any discussion of the underlying business case for Axion. If Axion’s prospects are great, why did the market systematically miss this great buying opportunity for years? Certainly not for lack of information, as Mr Petersen has been an ardent proponent of Axion throughout, even to the point where some might call into question his objectivity in assessing competing technologies, such as EVs–a market that Axion’s lead-based batteries are simply not competitive. Absent any new information that Axion’s prospects are changing, or any credible claim that the market hasn’t considered all the information already available about Axion, there is simply no basis to believe that its equity price today doesn’t fully and fairly value the company. The “buy now or you may miss your chance in the future” argument that underlies Mr Petersen’s argument simply isn’t a credible basis for investing, as it doesn’t answer the question of why I should want to invest now at all.
The notion of an efficient market like you described is viscerally appealing and often true in the case of well-established and widely known first tier public companies.
It is absolutely meaningless, however, in the case of emerging equities that are largely unknown and historically illiquid. In those cases supply and demand issues frequently overwhelm business realities for an extended period of time.
It’s always important to remember that in the short run equity markets act like voting machines and in the long run they act like weighing machines.
If you’ve been reading my work for any length of time you know that Axion is at the transition point between R&D and commercialization, and that it’s leading potential customers include Norfolk Southern Railway which wants to use the PbC for hybrid locomotive retrofits and BMW which wants to use it for stop-start.
If you don’t already know why Axion has an appealing risk-reward profile, it’s too late for me to try and teach you.
I’m curious, Mr. Konrad, do you continue to own AXPW? I am long AXPW.