LightPath Technologies (NASDAQCM: LPTH) promoters and an infinitesimal glimmer of income have nearly quadrupled the stock from its 52-week low of 82 cents per share.
Now, the maker and assembler of molded optics, light-focusing components and glass lenses is overbought and extremely risky.
TheStreetSweeper didn't get a response to our request for comment but investors may find other viewpoints here.
Meanwhile, let's throw some light on LightPath before this stock can burn investors.
*Heavily pushed by professional stock promoters
Stock promoters orchestrated a blitz promoting LightPath some 34 times, ultimately priming the stock most recently on June 2, 2015, June 3, 2015 and June 9, 2015. And in June 2013, another company pushed LightPath, along with CLSN (~$7.50 then, ~$1.40 now) and SONS (~$16 then, ~$5.90 now).
Here’s a snapshot of some of the latest promos:
LightPath message boards have become the stomping ground of penny stock promoters, as indicated below:
(Source: Yahoo Finance)
Such promotions present a red flag for LightPath investors. All too often, investors get caught up in pump-and-dump schemes in which the stock rises for no real reason other than viral pumps, then the perpetrators dump the stock at inflated prices, leaving unsuspecting investors holding vastly devalued stock. Real companies, of course, don’t want to be associated with pump-and-dumpers.
Additionally, solid companies with real products don’t need hype spit out by professional stock promoters willing to “educate” potential investors, especially for a fee.
If we look past the promotions, LightPath metrics suggest the stock has been overheated to the boiling point and is now positioned to evaporate ... and the prospects are even more likely because of Lightpath's unusual cash position - which we will explain below.
First, let's consider that trailing price-to-earnings ratio over the past 12 months. It is an astronomic 67, while the price people are paying for future earnings is also staggering at 18.53.
We can see how out-priced it really is in many respects compared to the industry overall:
(Source: Yahoo Finance)
As if that’s not enough, just one analyst covers the stock – and that analyst’s price target for the year is nearly a buck under today’s price.
*Virtually no institutional interest
Big banks show a real lack of interest in LightPath. Investors can see in the snapshot below that institutional ownership is an incredibly tiny 6 percent:
And the institution holding the majority of shares - 2.7 million shares or close to 18 percent - is one most investors probably wouldn’t recognize, Berg & Berg Enterprises – a creditor that court records suggest doesn’t hesitate to push its weight around.
Legal filings allege that as a creditor, Berg & Berg tried to strong arm a struggling company into bankruptcy proceedings in order to capitalize on the company's $50 million in net operating losses.
LightPath isn’t even on the same wavelength as the well-heeled competitors in this space, including Panasonic (Panasonic (mat1.f), down 6.7% in past month), Kinik (down 5.4%, $4 billion revenue), Hoya Corporation, Samsung and Kyocera Corporation – as well as the industry overall.
(Source: Yahoo Finance)
*China ties force cash position to under $1 million
Companies' ties to China are of special concern particularly in the current climate - a climate well-known short-seller James Chanos of Kynikos Associates first recognized several years ago and ultimately turned into a pile of money.
LightPath is strongly linked to China. Though it states that customers tend to prefer doing business with US-based companies such as LightPath, the majority of its manufacturing appears to occur in none other than Zhenjiang, China and Shanghai, China.
While company presentations don't show a pathway toward growth, they do show the China facilities:
(Source: Company presentation)
Presentations also include a shot of the front door of corporate headquarters in Orlando, Florida and mention the manufacturing and office leased space there.
But public documents show nine other companies are also headquartered at the University of Central Florida Research Park, suggesting the 8,000 sq. ft. manufacturing floor may well be shared with others.
Indeed, LightPath is also intricately tied to China through the company's wholly-owned subsidiaries located in Jiading, People's Republic of China and in the New City district of the Jiangsu province of China.
In fact, LightPath director Xudong Zhu is also the President of Pudong Science and Technology Investment (Cayman) Co., Ltd. The entity holds about 14.9 percent of LightPath stock, including shares purchased for $1.40 per share in a January 2015 private placement that returned to LightPath about $1.3 million in desperately needed working capital and equipment.
Since the bulk of its business is tied up in China, so is half of its cash.
LightPath's cash and equivalents are technically $1.6 million. But, thanks to China's repatriation laws, LightPath needs nearly $10 million more in retained earnings before it can get its hands on the total amount.
So its cash coffers contain only about $800,000!
*Cash flow problems
As critical as cash is to running a company, it's no surprise that LightPath has cash flow issues. While it did make $663,000 in income last quarter, the problem is that it can't quickly turn sales into cash.
The company notes its "DSO" or days sales outstanding runs very high - about 63 days reported last quarter.
And it seems no end in sight with regard to its China customers particularly. So LightPath is throwing up another red flag as it tries to manage risk by roughly doubling its provision for doubtful accounts receivables to about $15.7 million.
*Misplaced priorities: R&D drops
R&D budget – the company’s lifeblood - was low at $350,000 in 2014. Now the devotion of research and develop required to ultimately help find new customers is even lower.
Indeed, research and development last quarter fell to a paltry $148,000.
Yet selling, general and administrative costs are 10 times higher than R&D and have risen over time. Yes, incredibly, SG&A jumped from $1.3 million to $1.4 million.
Those SG&A costs are top-heavy, with the top three executives raking in over $1 million in compensation:
(Source: SEC filings)
Here’s what these misplaced priorities really mean: With virtually no R&D, LightPath can expect little organic growth. The only remaining avenue for growth is through acquisition … So stock dilution appears a necessary evil.
LightPath can't live up to its $50 million market valuation. It is tragically low on available cash, has accumulated losses of $205 million, and depends on financing activities to produce five times more cash than its business operations.
So, LightPath's cash and R&D budget continue to cool off while its stock overheats. If LightPath wants to keep the lights on, it appears a capital infusion is imminent - probably through a stock offering with looming dilution potential.
All considered, TheStreetSweeper believes a fair valuation for LightPath would be 75 cents per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in LPTH and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.