Fortress Energy Inc. â€“ A Case Study
Why did it surge by 56 per cent in one day?
Company and financial performances
Fortress Energy Inc (TSX - FEI) is a company from Alberta which specializes in exploring, developing and producing natural gas in western Canada. As we all know, natural gas prices have fallen dramatically in the past year. When looking at the company's sector, one can think that things must not be that easy for FEI.
When looking at FEI shares during the last year, we can imagine that individuals who invested in the company had really hard times. FEI traded between 8-38 cents per share. Investors who bought FEI shares on December 18, 2009 have already lost 79 per cent of their investment as of November 11, 2010.
If you invested in FEI shares in mid 2007, you have already lost nearly 98 per cent of your money since that time – probably not the best investment in anyone's life.
A brief financial history
Since 2009, FEI traded at relatively low values of about 20-25 cents, and some local peaks of 35-45 cents. During the third quarter (3Q), the share value deteriorated to a minimum of 8 cents. Then the company published the 3Q report for 2010.
FEI shares soared from 8 cents to a maximum of 13.5 cents by the end of the trading day. The closure was 12.5 cents, 56.25 per cent higher than during morning trading. It all happened because of the 3Q financial report.
3Q report makes a big difference
FEI reported its 3Q financial results during the November 12 trading day. Was there anything special about the report? Not really: its bottom line was a net loss of 3.39 million dollars in the third quarter, a bit less than the 3.78 million dollars loss in 3Q 2009. Sales were 5.4 million dollars in a quarter, higher by 1.17 million than 3Q 2009. The market capacity of the company is only $6.9 million, which does not explain a daily jump of 56.25 per cent in just one day.
How can such a jump be explained?
There may be many reasons for such a jump. It can be due to some optimism, sometimes speculations, or even small news can cause such a move. One major reason is that FEI has been trading for a long time in the “Few Cents” territory.
Some investors may say to themselves: "We know that the company is undergoing difficult times, no improvements are expected and according to analysts nothing is new." Investors also think that if they invest just $10,000 and buy shares for 8 cents each and the company is out of the market,then they have lost their money.
However, when looking at the company from the perspective of 2007 prices, then a loss of 98 per cent or 94 per cent is about the same. But if you buy a share at a 98 per cent loss and sell it for a 94 per cent loss compared to the original prices, your profits are 300 per cent on the investment, and that happens a lot, particularly before reports are published.
On the other hand, some investors may be very disappointed by the reports and sell everything. Then the losses may be even worse.
What do I have to do?
If you believe in the strategy of buying very cheap shares that will one day rise from the abyss, there are many companies out there that are traded for cents, or even just one cent. Find them and ask yourself the following questions:
a. What is the average trading volume? If it's very low you may find it hard to sell if at all.
b. Read and understand the balance sheets.
c. Is there cash in the "pocket"?
d. Is the sector at a positive momentum?
e. Read latest news and future expectations.
f. Is there any buyer interested in the company? This may cause a significant jump in the shares.
g. Learn how the shares behaved after any announcement or Q report.
Do not forget, this is gambling, not investing.