Markets are moving in slow motion today. However, when you’re trading catalysts, there are bound to be opportunities in a universe of thousands of stocks.
Now, for the most part, when I’m trading my bread-and-butter setups, my goal is to squeeze out a 5-10% winner. If you do that enough times… the money starts to pile up.
That said, there are times where I look for bigger returns… gains as high as 20% on short-term trades. These type of said, my typical swing trade might last 1-4 days. However, when I’m going after larger returns, my holding period can be anywhere between 1-2 weeks.
That said, I’d like to share with you my latest catalyst swing trade.
USA Technologies (NASD: USAT)
USA Technologies provides end-to-end electronic payment and M2M and IoT solutions for the small-ticket, unattended retail market- a traditional cash only market sector that continues to transition to cashless payments. They make the transition to cashless easy to implement, manage and scale with turnkey solutions and our comprehensive ePort Connect service. Today, USAT’s ePort Connect service drives over 80% of USA Technologies’ revenues.
What happens when you have a great innovative company with products on the verge of becoming a success but a CFO that fails to do a proper job? Have a look at the price action of USA Technologies the last half year!
The facts in short: Their fiscal year ends every year on June 30th. Last year on September 11th they indicated they are unable to file the yearly earnings of 2018 on time and requested an extension of 15 days. Before the new deadline, beginning October 2018, they requested to the SEC additional time for the filing. Until today the yearly earnings and the last quarterly earnings have not been shared.
The reason for not filing is that they discovered that some of their revenues and costs have been filed incorrectly for income years 2018. On 14 January, they sent an open letter to their shareholders providing more details: “… revenues that had been recognized prematurely were, or are expected to be, recognized in subsequent quarters, including quarters subsequent to the quarters impacted by the investigative findings. The investigation further found that certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.”
As a consequence of these financial errors, their CFO and their independent accounting firm were resigned and a more rigid audit structure was put in place earlier this year to increase the level of financial controls. All this has led to a big price decrease since September. The price fell from $16 to around $3.5 yesterday with major drops when the delayed filing and resignation of the accounting firm were announced.
But is this correction justified in light of the wrong figures published? The CEO mentioned that “... On a net basis, the proposed aggregate reduction to previously reported revenues relating to these transactions is not expected to exceed $5.5 million.” Is a correction of $5.5 million on a yearly estimated revenue of $100 million (~ -5%) justifying this stock price move? We don’t share that view and assume some panic selling happened!
1) Announcement of next earnings call: Last year, their earnings call was around mid-February. We anticipate that when they will finalize the corrected 2018 and last quarter earnings and that an announcement of their next earnings call will be done shortly.
2) Publication of 10-Q and 10-K: The 8-K filing of January 14 mentioned that the investigation of the errors was finished and their focus is now on filing the 10-Q for 2018 and the 10-K for the latest quarterly earnings: “… Although the investigation has been substantially completed, additional time will be required for the Company to finalize and file the Annual Report and the Quarterly Report, including completing its analysis of the proposed adjustments to previously reported revenues identified by the investigation and determining whether or not a restatement is required in connection with any previously filed financial statements. Additionally, the Company’s independent auditor has indicated that it will require additional time in order to complete its audit procedures…”
We anticipate that these reports will be published soon.
3) increased institutional investors: The price dropped substantially yesterday on February 7th following the news of the resignation of their accounting firm. This price drop opportunity was ceased by asset manager BlackRock to take a 6.5% stake or 3.8M shares. This will not only have other institutions consider to buy but for sure avoid current institutional investors (~90%) to hang on to their shares. We will be looking out for more filings related to institutional stakes.
USA Technologies Stock Play
Blackrock didn’t wait for a second before taking their initial stake recently, so why should we! Looking at an intraday support level recently, $3.2 could act as a short-term support level. Even in December it bounced off this level. No major sellers have showed up since the initial drop and any positive news or formal filing of their earnings could launch this price back into the gap and run above $4.
Do me a favor, keep your eyes open for my next email, as I reveal my next catalyst swing trade alert.
Disclosure: Jason Bond is long USAT stock.
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