Tuesday, July 25, 2017

Hydromer and the Value of Potential

A common theme among my stocks is potential. Either a stock has to be incredibly cheap versus the current numbers, priced as if the company is dead, or packed with potential. Above all any stock I'm going to consider must be tiny, illiquid, and low priced.

When I say low priced I mean cheap, and when I say cheap I mean in every sense of the word. A $100 stock may be cheap relative to intrinsic value but it is not absolutely cheap. Even a $20 stock is not absolutely cheap so it would take something real special to get me to venture into that realm. Anything over a few dollars starts making me uncomfortable and my preference is really closer to a nickel. I'm looking for maximum stock price movement and that comes from four things: supply, demand, perception, and resistance.

Resistance is the enemy and a high price is a ceiling. Ten cent stocks double or triple all the time but how often does a $50 stock spike up to $150? Stocks at an all time high see resistance every day. When a tiny company signs a major contract you may see revenue double and the stock triple. What happens when a $50B company signs a contract?  A chart will tell you all you need to know about perception.  If the stock has been dormant for years the perception is boredom and it’s a good time to buy. With the stock at an all time low people think nothing good can ever come. Likewise the chart shows when perception is changing for the better and in those times I want the lowest supply of stock possible. If shares rarely change hands and there are few shares outstanding the stock will shoot to the moon when demand comes. That’s what I’m after and here I am waiting patiently.

Of course there is risk. The struggling little company may go out of business if that big contract doesn't come through. The stock might languish for a decade with no movement or volume. My goal is to capture large enough gains on the winners to make up for the losers.

Look at ZMTP below. A few years ago the stock was boring and illiquid at $0.15. It has gone as high as $3 and now sits around $2. One single contract with Motorola did that.


BMRA was below $0.50 for two years and now sits close to $3. It was a little medical device company scraping by, they kept developing and trying new products. One medical test development has done this.

And look at HEMA. Left for dead. Delisted, non-reporting, and without hope. Now up from $0.15 to near $3 in a few short years, all from one new division taking hold.

That brings us to Hydromer (HYDI). Much of what you need to know is right here in the chart. The stock is boring and unloved, sitting around the lowest low of the past 20 years. No trends and no volume.

Some stats (numbers from the latest annual):
  • stock price $0.55 
  • market cap $2.6M 
  • 4.8M shares out 
  • no preferred, warrants , or options
  • fully reporting on OTC Markets 
  • revenue $5.7M in 2016 vs 5.8 in 2015 
  • EPS -$0.04 vs 0.03 
  • BV $2.9M vs 3.1 
  • Long term mortgage debt of $2.3M
  • Real estate BV of $2M
$2.6M market cap with $2M in real estate and $5.7M revenue. Low stock price in absolute terms, low stock price on the chart, and low stock price relative to value. The icing on the cake, and the reason to own, is potential. HYDI is a polymer research and development company with a number of patents around their various products.  They develop hydrophilic polymer products with permanent lubricious coatings. When these coatings are wet they get very slippery. They have specialized medical equipment coating services for things like needles, industrial products like anti-fog coatings for windows and reduced friction coatings for boat hulls. There is a cosmetics division. They have teat treatments for dairy cows and hoof treatments for horses. I recommend you read pages 12-17 of the most recent annual report. I don't know how you can come away from that with anything other than excitement at the possibilities. 

In January the company was granted a patent for antimicrobial soaps:
This patent has a broad variety of product applications and will be the foundation of Hydromer's introduction into personal care products. Hydromer's antimicrobial liquid soap and alcohol-free hand sanitizer, created using this patented technology, are Triclosan free. Triclosan has historically been an ingredient of most antimicrobial soaps. The European Union and some states in the United States have already started the process of banning Triclosan based products. The United States Federal Drug Administration (the "FDA") has identified Triclosan as having adverse health effects and, in 2016, required manufacturers to provide more safety data on the use of Triclosan. The FDA is continuing its examination of the effects of Triclosan in the cosmetics field and may further prohibit or limit its use.
The most recent annual notes a number of new products coming to market:
we expect a large number of product introduction to happen in 2017, specifically in the area of material coating technology where we are preparing to establish a brand new technology base. 
Our anticipated growth projections, both organically as well as from the introduction of new products, were not entirely realized. The introduction of various T-HEXX Animal Health products, our new ABRATEX518TM abrasion resistant anti-fog coating and our new HerbaSafeTM consumer product line (comprised of a hand sanitizer, foaming hand soap and antiseptic crème) were delayed due to extended post development testing and marketing launch scheduling challenges. We are working toward a launch of some or all of these products during the 2017 fiscal year.
And the most recent quarterly provides some hope:
We look for an improvement in revenues from the correction of the timing difference and from entry into new markets and from new product introductions, including that of our all natural HerbaSafeTM consumer product line of a foaming hand soap, Triclosan free hand sanitizer and hand lotion.
Risk can be summed up in one statement from the most recent annual:
The industry in which the Company competes is characterized by rapid technological advances and includes competitors that possess significantly greater financial resources and research and manufacturing capabilities, larger marketing and sales staffs and longer established relationships with customers than the Company does, at present or will for the foreseeable future.
There's your potential.  The share count is low, the price is low, and the perception is low.  What do you think will happen if one of their products gains traction?

--Dan
disclosure: long HYDI
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13 comments:

  1. So is this how you go through stocks? Sort by price and then look at charts before digging in deeper? Or do you just run through everything A-Z?

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  2. First thing I do when checking out a new stock is look at the chart. Then balance sheet and income statement. I look at market cap, revenue, BV, earnings, share count and compare to the current price.

    If I were to screen it would be something like this: stock price < $3, market cap < $20M, revenue > 0, shares common < 10M.

    But no I do not go through everything A-Z. I also don't screen or really sort through random stocks. I am very lucky. Sometimes readers email me ideas. Sometimes I'll find an idea through a blog or message board. Mostly I have one friend who reads reports all day that is always sending me ideas. So I have a long list of stocks to check out.

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  3. They launched that T-hexx product in 2002, so I think the market potential is a bit overstated? And after reading reports back to 2010, They had several of these potentially huge upside potential products, but it never really materialized.

    Plus it seems they are protected by patents which have been going for a while?

    Other than that it looks promising, management is not milking the company. Have you had contact with management?

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    1. No I've never contacted management

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    2. As for overstating potential I hope I did not give the impression that I know the market because I don't. I didn't state any market size.

      To me their technology sounds cutting edge and impressive. They are spending on R&D, coming up with new things, and protecting themselves with patents. And that's the point of my post, these little companies go through life trying to survive. They scrape by and work on new things and move into new areas. Sometimes it works out and sometimes not. HYDI is doing that now with the hand soap, I hope it catches and grows but I don't know if it will.

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    3. Didn't want to give the impression I was accusing you of misleading, it says so in their annual report where they state a market size of a hundred million $ plus.

      I wonder why their T-HEXX product hasn't taken significant market share if it is much better? Lack of marketing due to constrained capital?

      Fwiw I do own some shares so thanks for pointing it out :).

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    4. Got it, thanks. Forgot about that being in the report.

      You could always contact management with questions

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  4. Did Hydromer just go non reporting? I could swear the stop sign wasn't there a week ago?

    A downside I discovered here is that executive compensation is a bit excessive.

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    Replies
    1. Interesting and yes the stop sign is new. Last year they released the annual on Oct 7 so I wonder if we'll have the stop sign just for a few days

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  5. hmm so they pretty much went dark I guess? Without saying anything? I suppose tomorrow I will try to contact management.

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    1. I just sent them an email. I suggest you contact them as well. In 2013 they filed the annual on Oct 23 so maybe this is nothing

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    2. CFO just responded to me and they look to have the annual filed "very soon". The audit is just not finished yet. I don't think it's anything to worry about and their standing with OTC Markets will be restored once they file. This happens.

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    3. Alright, thanks for the update. Curious to see if they had any progress with new products.

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