Wednesday, February 21, 2018

Take a Bite of This PEYE

Sorry I can only say 'cheap' in so many blog titles before I revert to puns.

Precision Optics (PEYE) is small, cheap, and illiquid.  The stock is boring and the price is low.  Market cap is only $5M.  They are in the exciting field of medical device optics.  How could I not be interested?!

Stock price = business value + perception 

This equation says it all and it's what everyone is trying to figure out.  The momentum crowd focuses completely on perception while chartists will tell you that's the end result of everything there is to care about.  Fundamental value investors look at business value.  I keep my eyes on both and one high level theme to my investment style is finding stocks where one of those can change dramatically.  I want maximum stock price change.  This is found in the small and unloved.

Business value can change in an instant for a tiny company if they land a new contract.  Perception can drive a stock through the roof with no business change at all.  Imagine a $2M market cap company that lands a $10M contract or a company on it's death bed that somehow scrapes back to life.

Take a look at SKAS below.  I bought this at $0.06 in early 2016 because they were small with chart support and a BV around $0.20.  As 2017 started the stock shot up under no news.  I frantically searched for news and found nothing.  I contacted management and they had no idea.  Eventually I sold at $0.30 when the uptrend broke and still the stock sits around $0.15.  Check out the volume!  There was no change at all to the company.  All perception.  Sometimes this happens to the tiny and unloved.


And our friend TCCO.  I wrote them up at $2.40 in early 2017 then sold out a few months later as the stock ran to $7 on the heels of a decent contract with potential for more.  Now the company is in the same place it was a year ago yet the stock ran up to $15!  Why would it do that?...because it's small, illiquid, and full of potential.  Perception changes can be drastic when the starting point is low.  Some day people will get bored and forget, the price will drop, and I'll buy again.  The cycle repeats.


PEYE Chart
Back to the point.  Let's check the charts on PEYE.  Forgetting about everything else, you can see a lot with only a chart.  The stock is at a low point and on top of support.   It rarely trades.  Whatever negative things may have happened over the past decade, the stock has almost never gone below the current price of $0.50.  It has been very flat and quiet over the past year.  Looks like everyone who was going to sell has sold.  Ted Warren would say the flat boredom is a good thing, the stock is building a base upon which it will surely climb.  According to these charts the question is when.



PEYE the Company
PEYE is my kind of stock.  Small, in an exciting field, and bursting with potential.  $5M market cap.  10M shares out.  No long term debt.  Annual revenue around $3M, no earnings, and not much in the way of BV.  Fully reporting and they even do conference calls, though no one types up a transcript.  I don't think anyone knows they exist and my hope is that changes some day.

The company makes very small optical components with the bulk of the their business in the medical device field.  Tiny cameras.  Revenue is split between engineering and production.  The company supports customers with engineering work to integrate PEYE optics into their customers's application with the hope of turning that into high margin, recurring production orders.  PEYE has been losing money for years and you can see that in the charts but what's not shown is the growing potential.  PEYE has been working on new products and engineering revenue has been growing.  They recently released a 1mm CMOS camera with illumination, the smallest ever built.  Management has been talking about getting to profitability by way of production orders for years.  The stock drop and low level is due to unfulfilled promises.  They have been surviving by selling stock so share count has grown.

A company description from the most recent 10Q:
We have been developing and manufacturing advanced optical instruments since 1982. Today, the vast majority of our business is the design and manufacture of high-quality medical devices and less than 10% of our business is the design and manufacture of military and industrial products. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. Much of our recent development efforts have been targeted at the development of next generation endoscopes. Over the last ten years, we have funded internal research and development programs to develop next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery. 
Our unique proprietary technology in the areas of micro optical lenses and prisms, micro medical fiber and CMOS based cameras, and custom design of medical grade instruments, combined with recent developments in the areas of 3D displays, has allowed us to begin commercialization of related product and service offerings to a widening group of customers addressing various medical device, defense and aerospace applications. Thus, a portion of our revenues are now derived from engineering and design services we performed for our customers to incorporate our technologies and capabilities into their medical device products. We believe that new products based on these technologies provide enhanced imaging for existing surgical procedures and can enable development of many new medical device products and related medical procedures. 
Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms, which we believe are ready for general application to medical device projects requiring surgery-grade visualization from sub-millimeter sized devices and 3D endoscopy. We market directly to established medical device companies primarily in the United States that we believe could benefit from our advanced endoscopy visualization systems. Through this direct marketing, referrals, attendance at trade shows including Medical Design and Manufacturing West and MD&M East, and periodically a presence in online professional association websites, we have expanded our on-going pipeline of projects to significant medical device companies as well as well-funded emerging technology companies. We expect our customer pipeline to continue to expand as development projects transition to production orders and new customer projects enter the development phase.
What got me to buy this stock was the hope of a return to profitability.  As I said, perception changes can be drastic when the starting point is low.  In Nov 2016 warrants were issued with revenue and income criteria.  The following is from a company that only two weeks prior had posted quarterly revenue of $850k with net loss of $290k:
The warrant exercise price is variable and depends on our achievement of certain performance criteria (both defined below). The warrant exercise price will be $0.40 per share if we achieve both of the revenue and income performance criteria, the exercise price will be $0.20 per share if we achieve one of the performance criteria, and the exercise price will be $0.01 if we do not achieve either of the performance criteria. 
Pursuant to the revenue criterion, we must achieve at least $1.85 million of revenue in any one quarter during the fiscal year ending June 30, 2017. Pursuant to the income criterion, we must achieve positive net income in any two quarters, during the fiscal year ending June 30, 2017.
Being the optimist I am, I bought in and waited for the profits to roll in.  Think perception change.

Since then quarters have come and gone with delay after delay on the production orders that were going to take us to the promised land.  It's disappointing to hear but completely normal in every industry.  PEYE has been working on a few major engineering programs they expect to go forward to production...the problem is this transition taking longer than expected.  The 10Q and conference call we got a week ago gave us our first glimpse of positivity.  My notes from the conference call (I cannot type as fast as those transcribers, they deserve respect):
  • The program transitions from prototype into production remain on track.  
    • First time we've heard that.  Last quarter the company said they thought this would happen around end of 2017 / start of 2018.  
  • CEO went to two medical device and optics industry trade shows recently: Photonics West and Medical Design and Manufacturing. Interest in the market is growing as he has been forecasting for the past few years.  . 
  • Released a 1mm CMOS camera with illumination. Smallest CMOS camera with illumination ever built. 
  • In less than 1 week already pursuing engineering project interest with two large customers from shows.  This is on top of already existing customer pipeline.  
  • Can now provide sub-millimeter camera modules
  • Demand for micro optics in medical device market is growing, as company hoped and predicted.
  • Expect new production orders will lift revenue in coming quarters
  • Engineering revenue was 45% of total and grew 75% YOY. Adding headcount to deal
  • Production revenue grew 16% YOY. Over 30 customers. 
  • Anticipate production revenue to grow with the upcoming transition from engineering to production over next two quarters
  • Have manufacturing production orders from 3 customers for $2.1M rev over next 12-18 months. Follow on orders depend on customer success in their fields. Fields are large so even modest success could have a significant long term effect on PEYE
  • Signed new master service agreement with a large customer. Multiple early stage projects with this customer.
  • Will have to manage costs as company grows with new large orders and customers to keep break even point from rising too much. Company knows it will rise.
If you're into considering risk then here it is.  The new products may not catch on and the company may continue diluting.  Losses could mount, technology could race beyond, and bankruptcy could call.  It's always possible with these types of companies.

But what if revenue jumps and a profit is reported...

--Dan
disclosure: long PEYE

8 comments:

  1. Interesting! Are there any other sites or blogs that I can follow to find more companies like this?

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    1. You can follow the links for other blogs on my site and the Savvy Trades and Investments chat board on Ihub mentions similar stocks.

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  2. I noticed that they haven't received a patent since 2010 and, though there have been applications since then, those applications were abandoned and/or rejected with no response as of the end of 2017. Curious... do patents/patent activities play into your analysis?

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    1. Nice digging. Thanks.

      No I haven't thought about patents for PEYE. To me PEYE is the same as HYDI, ELST. Small company, limited debt, low range on the chart, illiquid, good share structure, exciting industry, lots of potential. I think the company will continue to survive and at some point the share price will be materially higher than it is now.

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  3. Happened upon your site and was taken aback by the overlay between your some of your trades and my dabbling in little-known nano-caps. (Our SKAS entries & exits were eerily similar.) Not sure if this will be paying it forward (or not) but you may want to look at TCOR. Yes, I own shares and you may too once your due diligence is complete. Very much in your wheelhouse. Thanks for your posts. Good luck.

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    1. Excellent. Thanks I'll check that out

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  4. Solid quarter reported yesterday:
    https://finance.yahoo.com/news/precision-optics-corporation-inc-announces-201500471.html

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    1. Yeah it's looking like perhaps they've finally turned the corner. Stock has come way up as a result. Question is will it be sustained

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