I’m adding this DD from repos39 since I’m sure we’ll get some discussion about it.
Hello Again,
It’s me again and the year has not ended.
In my previous DD [NXTD DD], I introduced a company that was fundamentally sound and mentioned a theory about EOY squeezes. This theory is playing out right in front of our beady little eyes, and because of this instead of eating beans/jollof for Christmas I was researching finding another excellent setup.
Before I introduce this next stock with a P.E ratio <6, maintenance + initial margin for a short position at 200%, actively buying back shares, specializing in manufacturing disposable protective apparel and infection control products (aka COVID), tight coiled consolidation pattern.
I want to mention another theory.
Target date funds have ‘quantitatively large effects’ on stock prices
I believe we’re going to see a bull rally in small caps in the next 30-60 days. Balanced funds / target date funds are underallocated to the sector after the last quarter’s performance. So it’s not just EOY squeeze as mentioned before, it’s also an underallocation of money toward small caps. If you read the Jp Morgan snippet in the NXTD DD you will notice small cap (or high beta) stocks are down 30% this year:
Historical unprecedented overshoot in selling smaller, more volatile, typically value and cyclical stocks in the last 4 weeks.
Also, JP Morgan explicitly states that they will be buying small caps as part of their investment strategy. If these dudes are doing it others will follow since it’s becoming obvious that we are at the bottom of a small cap bear market.
Volatility comes in patches.
My trading style mandates for me to recognize this because during meme/sqz/ev whatever you call it, during the run you stay active make bank then go to sleep. Therefore, since its sqz season and small cap season here’s another interesting stock: $APT - ALPHA PRO TECH. Alpha is engaged in developing, manufacturing, and marketing a line of disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical, and dental markets, they also have a segment that supplies materials for homes/buildings. For this DD it should be noted that I received a good deal of help on the fundamental part.
Catalyst
Share buyback
Below see an important snippet of Alpha’s expansion of its share repurchase plan:
Note, this falls in line with the small cap oversold theory; aka Alpha’s management thinks that the stock is oversold, and have exhausted a previous share repurchase program, extended it, and are now buying back more shares.
Covid FUD
Anytime covid FUD happens APT shares jump. In July, Delta surge and bunch of news releases about the mask mandate, this lead to the July jump for Alpha above $12
It happened again in November, with Omicron:
Pretty soon we’ll run out of greek letters (omicron, delta, etc) and we’ll have to resort to naming covid variants after sororities, Alpha Kappa Pie Varient— fucks you up, makes you poop, wear a mask or mudbutt in 3 days. So I’m bullish on the covid future and Alpha the mask company.
Covid is rampant
Covid is actually rampant in New York rn
Rampant in LA as well, not going to post the graph, however a lot of my friends have covid, and personally I got it a couple weeks back from a packed nightclub in Hollywood.
Mask Mandates coming back and so is consumer interest in masks
Let’s checkout medical mask trends on google search:
Clearly, mask demand is coming back based on google trend data. Mask mandates are coming back as well.
Therefore, Alpha should see increasing margins from selling medical-grade PPE.
It does not look like market priced-in that covid is back.
Fundamentals
So, unlike some small caps who will issue shares to dump into retail during any positive price action because they are desperate for cash, Alpha is making bank and they are actively reducing the float through stock buybacks. They also have a P.E ratio 5.74, making them undervalued, but let’s take a deeper look…
52wk chart
Insider buying/holding
Insiders have mostly been selling positions, leading a large year of sell-offs in 2020 near $40million. Selling activity has tapered this year, with a mere ~$350,000 in sell-offs. This lack of selling as the price neared the 52wk low indicates that insiders believe that the company is currently undervalued and has upside. The fact that there have only been one sale by an insider in the last six months (where the stock has been battered and near 52w lows) further proves this. [link]
The one analyst that is covering $APT has a PT of $16.75 so 177% upside.
With all of that Covid talk, it’s also worth mentioning that the other segment of their business, Building Supply Sales, has grown dramatically as well. Home builders across the country can barely meet demand and the products that Alpha provides to that segment has demand increasing in lock-step with new home builds. This segment of their business was UP 31% YoY, and each consecutive quarter so far this year has represented record revenue. Alpha only sees this demand increasing near term as well. In other words, folks saw that their PPE segment was down bigly because “CoVid is eNdInG” and it has sold off hard. However, not only is covid here to stay long term, but APT also has growing sales and demand outside of PPE. Double whammy for shorts.
Cash Flow Statement
Looking at their cash flow statement, APT has been burning through cash in the previous 9 months. Despite being positive from a net income perspective, large changes in their net working capital (namely increases in inventory and decreases in accounts payable) have led to large operational cash outflows. The inventory they are sitting consists of unsold PPE that will be sold as demand increases due to the Omicron variant. In addition to this, they have been spending mildly on PPE, but remark that they can sustain their current growth trajectory with their current cash position (and are already to spend ~$1.5 million additionally on expanding production capacity for their building materials). In addition, a positive sign is clearly the buyback program, repurchasing ~$4 million since the beginning of the year.
Balance sheet
Net income dropped with the large drop in revenue due to the decreased demand for PPE. EPS is approximately 1/10 of what it was in Q3 ‘21 compared to the same quarter in the previous year. However, despite the large drop in net income, the return to peak pandemic era restrictions as well as solid growth in their building segment will lead to strong earnings for APT. A projected increase in PPE sales as a result of this new wave of Covid will also lead to higher margins, as APT has higher margins on these products relative to their building products.
The company also has no debt and their most recent Q report feature this:
As of September 30, 2021, the Company had cash of $17,636,000 and working capital of $49,746,000
So essentially they have 67,382,000 in assets and no debt and if they were to stop doing anything and liquidate today each shareholder is entitled to roughly $5.09 of value, as of writing this DD the share price is $5.84. This is the absolute bottom, we saw the price bounce off almost exactly these values in November.
While I may be taking some creative license here, I think it’s warranted: if a stock is near 52wk lows (as of writing this) while the business forecast looks very optimistic AND the company is spending capital to buy back shares, I wouldn’t be surprised to see some insider buys leading up to the next earnings. If I were an insider and my company is spending its own capital to reduce the float (and effectively boost PPS), why wouldn’t I take advantage of that situation and buy some shares myself? Seems like a no-brainer move and a win-win.
General Highlights:
- Retained Earnings
- Retained Earnings has gone up over time - good sign that the company has been profitable and investing money back into the business
- Share repurchase program (2m)
- Extremely bullish - essentially puts the chances of an equity offering near 0
- Inventories
- Currently, Alpha has been experiencing an increase in their inventories. This has primarily been driven by decreases in demand due to the slowing of the pandemic. However, considering the recent Omicron variant as well as supply-chain issues that have been hurting many companies, this large inventory is an opportunity for Alpha to take advantage of. This will allow them to quickly get product to customers and bypass any short-term issues still plaguing (no pun intended) global supply chains. It puts them in a strong position to capitalize this quick rebound in demand for PPE as many states begin to reinstate restrictions and mask mandates.
- Net Income
- Net income dropped with the large drop in revenue due to the decreased demand for PPE. EPS is approximately 1/10 of what it was in Q3 ‘21 compared to the same quarter in the previous year. However, despite the large drop in net income, the return to peak pandemic era restrictions as well as solid growth in their building segment will lead to strong earnings for Alpha. A projected increase in PPE sales as a result of this new wave of Covid will also lead to higher margins, as Alpha has higher margins on these products relative to their building products.
- Cash/Debt
- Alpha is in a strong cash position, holding $17.6 million on their balance sheet. In addition, they have very little debt on the balance sheet. The majority of their long term liabilities consist of leases.
Taking all of the above information together, the picture becomes clear: this is a company that strongly feels their share price is undervalued while they also see rising demand for ALL of their products and services in the near future. Also, and it’s obviously not a guarantee, but it would be hard to see insiders/tutes dumping shares at 52wk lows as the new share repurchase program is just getting underway. If anything, I fully expect to see new filings start to come in as institutions start or increase their position as Alpha exceeds expectations for future earnings.
Q&A
- Is this another dog shit squeeze-play company?
- No, while this is a squeeze type play, the company in question isn’t dog shit. They have been profitable for a good period of time as seen by their retained earnings increasing over time, a sign that the company has been profitable and investing extra funds back into the business
- Will the company dump (do an equity offering) ?
- Highly, highly doubtful , this is because the company has virtually no debt and almost 18m in cash. On top of this, the company is doing a share buy back worth 2m, so I don’t think it would make sense for the company to conduct a buy back and an equity offering at the same time…
- Any catalysts coming up?
- Covid duh. Omicron being so infections makes it clear that masks will be bought/used for the near/mid term.
- How would you describe the history of this company?
- A small cap firm that has slowly grown and spiked during the pandemic in 2020. The stock has taken a breather but the company is still profitable and retained earnings continue to grow - indicating that the company has a bright future ahead. This company is also diversified in that it is not a pandemic-dependent company. Their line of building materials and current expansion of capacity for these product lines indicates that they have growth potential even in a world after Covid.
Wait what? Wtf is going on, I’m confused. Legit catalyst and not shitco, wtf you playing at its squeeze season? Yes, the stock is not “shit” and for some reason its #25 on the fintel.io shortsqueeze list (as of writing this)
Float
There are 13,232,391 shares outstanding as of APT’s most recent 10-Q on November 5th.
Of those 13.2m shares, the largest holder is…the Director of Investor Relations, go figure (she’s also on the board). Screenshot of insiders holdings from IBKR in total 1.34m shares held by insiders For some reason, the above screenshot doesn’t include the CEO’s holdings, which amount to roughly 955k shares (via most recent filings which are accounted for here. So we now have a float of
~10.93m. Next up, let’s look at institutional holders.
Excluding Renaissance and Susquihanna, we have around 2.01m shares held by institutions. So, the float is reduced to 8.92m . No one is saying these shares are locked up, because they can be lent out. We already made the case that tutes/insiders will be increasing their position, and Alpha is actively repurchasing shares. If Alpha did a market buy today (they won’t do this), that would remove around 360k shares from the float.
However, as previous plays have demonstrated, you don’t need a tiny float especially in this environment for these stocks to move, SPRT has a float similar, and BBIG had a float of 120m+ and we all saw how that ended, ATER float of 40m+, and CEI float of 250m+, MRIN 14m+. I’m saying you just need the conditions to be there.
Squeeze Metrics
Real quick. Let’s revisit what a short squeeze is:
Some stocks attract high short interest, which can be viewed as the amount of shares sold short as a percentage of float, or how much stock has been issued that is available for trading. The problem comes if the stock prices starts to rise quickly. Those that are short the stock will likely receive a margin call. They either have to put more money up to secure their position or close their positions.
So a squeeze in essence is a margin call. There two type of margin:
- Initial margin : collateral posted to protect the clearing house/brokerage against future risk exposures for the open position.
- Maintenance Margin : minimum collateral that must be maintained at any given time in your account. If the funds in your account drop below maintenance margin then
- margin call: required to add more funds immediately to bring the account back up to the initial margin level.
- forced buyin: in the context of squeezes the short is forced to cut their losses by buying back some of the shares they sold.
Both types of margin collateral requirements are set by clearing house/brokerage to protect them from risk to changes in an open position.
Since a squeeze is all about margin let’s take a look at the margin rates for Alpha:
Top is IBKR, Bottom is Fidelity
First, let me give you a challenge: go through your sqz stocks using IBKR and find a stock with maintenance + initial margin = 200%. I bet you can’t, the only stock I’ve seen with margin requirements this high was GME during its squeeze. It’s still relatively expensive to short GME btw, so super stonkers can rejoice!
So 200% on IBKR and 300% on Fidelity is very high, and no squeeze stock you know has margin requirements even close to this level. Aside from the Chad stock GME. In addition, IBKR initial margin equals maintenance margin, therefore there is a zero tolerance stance. Any incremental change in price demands immediate collateral.
Let’s go through a toy example. Suppose you’re short 1000 shares of Alpha at $2.5. Then to open up this short position the cash you need to hold in you your account to open the initial position is 10002.5200%= $5000. Where 200% is the initial margin rate for IBKR, 2.5 is the current stock price, and 1000 is the number of shares short. So $5000 to open up a short position need $2500 dollars worth of stock.
Suppose the price of Alpha increases one dollar to $3.5.
Since 10003.5200% = $7000, ( where 200% is the maintenance margin, $3.5 is the new stock price, and you are still short 1000 shares ). You must post $7000-$5000 = $2000 to maintain your account.
If you don’t have the money then you can go to the market and buy shares to maintain your account. You must buy enough shares to satisfy the following equation
$5000 >= 200%*(1000-x)*3.5, if we solve for x we have that x= 286. So you must liquidate 286 shares of your short position, or 28% of your short position. If the price rises by two dollars to $4.5 you must liquidate 445 shares of your short position or 44.5%, if the price rises by three dollars to $5.5 then 546 shares or 54.6% of the short position, if the prices rises by four dollars to $6.5 then 616 shares or 61.6% of the short position. Here it is as a graph
Formulas used to calculate are from equations (i) and (ii) in paper: Clearing prices under margin calls and the short squeeze
Can see that the big increase happens from $3 to around $6.5, this is where the slope of the graph is highest, afterwards the graph kind of flattens out. I expect big moves as we move up the margin call ramp.
So the question is why is the initial margin and maintenance margin for Alpha at GME levels and what is the significance of initial margin = maintenance?
On instruments determined to be especially risky, however, either regulators, the exchange, or the broker may set the maintenance requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by the trader. [link]
Broker(s) generally raise margin when expected volatility in the underlying is high, or a lack of liquidity. Volatility for APT is relatively low (as of writing this DD), so I’m guessing the rate is high because the broker(s) saying the ability to locate these shares is getting tougher.
Anyway, that’s about all I have to say about margin. Typically I don’t mention it because usually it’s the same for all squeeze stocks, like 100%, so really not much variation, but Alpha’s margin requirements are eye raising for sure.
The rest of DD goes through the usual patterns we identified in RELI DD and again in the NXTD DD. So I’ll be brief, refer to RELI DD for better explanation.
Big increase correspond to 7/19, 7/27, 7/31 and the most recent increase on 11/27
So what caused these bumps in the short rate? The increase in July especially seems significant….
Above you can see that on the three days of interest July had a good amount of volume. So much so that you can see from OBV in the interregnum between the two dates $APT is flat, so $APT was thinly traded since on average 400k. You can also see that recently OBV has increased, this is due to the last few days having volume of over 1m, and volume remains elevated. Typically for these sqz stocks volume precipitates price moves. So here is the pattern: Pathetic volume, a big explosion, pathetic volume again, then slow ramp up of volume corresponding to PA. This is the profile fit by RELI, HUDI, and others… APT fits this pattern as well.
So with stocks with high FTD%/Float but historically low trading volume there is some catalyst in the past that spikes the price, but the price is beaten down. In the catalys section we already identified the causes of the July and the November spike; covid scaries. The july spike in particular caused the borrow rate to go up, and it has yet to recover since, coupled with the extremely expensive margin rate this indicates things are still tight.
On to ortex:
General trend down in all metrics leads me to believe that covering is happening under low volume; covering in low liquidity has to happen slowly over time unless it spikes the price. It’s a careful balance of exiting and shorting again any big spike that could potentially blow up your position. The spike in metrics on Nov 30th leads shows that price level is being defended. You can also see the covering in the official exchange reported SI decreasing from 1.72m to 1.01m.
Looking at the spike in short metrics a bit deeper and the rationale for why this happened. You can see from the chart above that the shorts were saving their position, see how it went from profit, to loss, then to profit again just by re-shorting in November. Position is going back into the red now though.
Below you can see FTD/SEV (short exempt volume) also spiked in November indicating some shenanigans:
Above with the assumption that the float is 11.88M, we see that FTD%/Float hit over 11% and most recently it hit almost 9%. For FTD%/Float anything over 5% is significant, since float is closer to 9m as shown previously we have some very encouraging numbers.
Real quick: why do we care about SEV, well here check out LGVN. SEV showed good signs and within two weeks, BOOM. Would have been a 30x return…
Why is APT being shorted?
Short interest is not crazy high but the initial/maintenance margin is, and taking into account the sudden jumps, it may not be far-fetched to assume that it is one fund or a handful that is shorting the stock rather than a multitude of funds. My guess is that someone made a calculated bet against this stock and is not looking to stay here for long, which is helpful in terms of squeeze metrics as forcing them out of their positions is kind of the point.
TA
As per TA big reversal over 7 and also falling Wedge on Weekly Chart
Bear Case
One risk here is that the company was repurchasing shares because they believe they were undervalued and will then put out an equity offering once the stock price rebounds. However, this is unlikely as this share repurchase plan was already in place and there is no precedent/record of APT doing this. Furthermore, their remarks in the 10-k [link] that their current cash position is enough to fund their operations and planned capex is a signal that they are not looking to the capital markets.
Tldr;
Alpha is actively buying back shares & has a P.E ratio <6. An undervalued covid play that specializes in disposable protective apparel and infection control products and building supply products with analyst PT of 16+.
- Alpha’s maintenance/initial margin is at 200% on IBKR, and 300% in IBKR higher than any squeeze stock you know. Indicating that brokerages think it’s incredibly risky to hold a short position.
- FTD%/Float at 11% which is significant. Anything over 5% I’ve found to be a good signal. There is also a short exempt spike recently.
- Shorts are leaving Alpha, however because Alpha’s liquidity is shit the exit is over an extended period of time. Which is good. no shorts = moon. Shorts forced to exit quicker = moon.
- They have 67m in assets and no debt and if they were to stop doing anything and liquidate today each shareholder is entitled to roughly $5.09 of value, as of writing this DD the share price is $5.84. Low chance of a dump
- The environment generally is ripe for small cap + squeeze stocks.
I’m in as per usual with calls, mostly Jan 21s but I have some weeklies. I am now considering shares as IV has increased since initially starting this DD. This will be the end of the 3 part series:
- Part 1: RELI: shit stock with promise
- Part 2: NXTD: Happy Holidays tell your wife bf I said hi ( have a position, very juicy still )
- Part 3: APT: black out or get out, nye special
Hope you had fun!
Sorry that the price has moved for Alpha, writing the DD took some time, and I had to research while also providing updates on NXTD.The market is really ripe for these stocks, and I still see a good deal of upside for Alpha hoping for $10+ soon.
So, this one is a fun one because good ole repos was shopping this DD to the mod team behind the scenes over Christmas. The DD here follows the typical Reddit pumper template of being massive but light on specifics.
