NEW YORK (TheStreet) --Two stocks on the move lately -- Revolutionary Lighting (RVLT) and Superconductor Technologies (SCON) - Get Report -- show the risks that low-capitalization stocks face because of their smaller floats.
Revolutionary Lighting is a micro-cap in the light-emitting diode (LED) business. It's a company with a low stock float, a clean balance sheet and capable upper-level management. It recently received
a round of financing
. Those funds were used to pay off debt, and structure the firm to move forward with a capital sheet that could dedicate earnings to growth of the business.
Revolutionary Lighting is in a similar position to Superconductor Technologies. A leader in the development and production of high-temperature superconducting materials, Superconductor Tech soared on bullish news that it had received purchase orders from multiple customers. Shares closed at $4.15 Monday, up 15 cents.
To develop the capabilities to deliver the orders, Superconductor Technologies had to raise capital. It chose to do an equity offering rather than borrow money. As a result of the dilution of the existing shares, basic supply and demand here, the price fell by 26%.
Revolutionary Lighting could be ready to do the same.
In recent market action, Revolutionary Lightning has soared from $0.90 to a closing price of $4.01 Monday. There were several factors contributing to the surge:
- Equity financing was secured in early March;
- Management issued a very bullish outlook in early April; and
- It received positive press from TheStreet, Seeking Alpha and other media over this period.
Actions such as these will often times take the price of a micro-cap (market cap $300.2 million) such as Revolutionary Lighting much higher in a short period of time. The chart below shows how Revolutionary Lighting skyrocketed more than 400% in 2013.
The recent developments do not fundamentally alter the fact that the company is losing money (-200% profit margin with a negative return on equity of more than 150%) and may be vulnerable to a selloff. Revolutionary Lighting has only $1 million in revenue, and the stock is trading as if it is valued around $400 million. In other words, the stock is way overvalued!
The relative strength index (RSI), a sign of when a security has been overbought or oversold, is now very high. RSI signals that this stock could be ready to turn and fall, taking out all stops. This often happens with small-cap stocks as speculators and momentum traders will ride the wave to higher share prices and then sell after gains have been booked. So how in the world would the stock tank without anyone selling into it?
If Revolutionary Lighting, like Superconductor Technologies, announces an equity-raise to generate more capital, the stock could easily get slammed. The other possibility is that swing-traders and daytraders are done with this stock and have trailing stops, which could cause a cascade of selling. This eventually could present a buying opportunity in the event of a plunge, due to the long-term potential of Revolutionary Lighting. But for now, a collapse in the stock price is more likely due to the big run-up in price, small number of shares being traded and overvalued fundamentals.
-- Written by Ben Brinneman in Charlotte, N.C., owner of C Squared Trading, which teaches how to trade legitimate "penny stocks," priced between $2 and $10.
At the time of publication, the author held no positions in stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Trader Ben Brinneman, featured on MarketWatch, Bloomberg and Reuters, resides in Charlotte, NC and is the owner of
. Ben Brinneman started his career trading bonds for U.S. Bancorp and was an analyst for a wealth management firm. He was mentored by some master traders on the stock market and how to profit week in and week out. After assembling custom trading plans for other traders and friends, it was at that point he decided to create C Squared Trading, and teach other retail traders and investors the methods that had brought him success trading in the stock market.
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