Let’s Go Fly A Kite

Let’s go fly a kite
Up to the highest height
Let’s go fly a kite
And send it soaring

Up through the atmosphere
Up where the air is clear
Oh, let’s go, fly a kite

CareView Communications (CRVW) is that “kite”, and its stock is soaring into the stratosphere and beyond.

CareView attempts to provide video monitoring systems to health care providers. The term “attempts” is used because, up to now, they have barely sold anything. Revenues were only $87k in 2009, and were even less in 2008. The company had a net loss of $6.2M and negative EBITDA of $3.4M in 2009, doubling the negative results from the prior year. No news of any substance has been released so far in 2010. As of December 2009, debt was at $2.5M and cash was at $0.2M.

What appropriate market value should be assigned to this company? Well, today (23 April 2010, $2.34 per share) it is trading at a market cap of $254M.

Welcome to the world of the OTC bulletin board and pink sheets where a Christian video games company (EARI) with no product yet still has a market cap of $510M after falling 30% since our blog last month. We would have shorted EARI a long time ago, but we have yet to locate any shares. However, we were able to short 25k shares of CRVW net of buy-ins, and are currently losing a bundle as it more than doubled over the last month. We have been average-shorting-up when shares were available.

The major risk is the powerful insider Board members that are backing the company. The Chairman of the Board is Tommy Thompson. Mr. Thompson had served as the Secretary of U.S. Department of Health and Human Services under President George W. Bush, and prior to that was the Governor of the State of Wisconsin for 14 years. T2 Consulting owns 13% of CareView. Other Board members include Craig Benson, the former Governor of New Hampshire, and some other well-connected businessmen. The CEO is an industry veteran. The COO increased his stake in the company to 12% in 2009 when the stock usually traded at around $1.

A secondary risk is that management makes a huge announcement about signing up customers. Any such announcement will have a low probability of justifying the current valuation. It may create further pumping fuel, or also lead to a sell-on-the-news market reaction.

Up to now, the insiders and market-maker had the firepower and trading techniques to resist short sellers and hold the stock at around a $1 low in 2009 (or $100M+ market cap), despite the extreme overvaluation. Apparently, they have the ability to push the stock even higher today to $2.34 versus $1 only one month ago.

I am not sure how much longer this will last. But it is only human nature for insiders to cash in some of their tens of millions in paper profits. One possible sign of a top is when no more shares are available to lend to shorts for a while. This occurred last Friday, after recently being bought-in earlier in the week. If this continues, then there is a good chance that the stock sales are being saved for insiders and other natural sellers, and the stock should start declining in the medium term. Where it goes over the coming weeks is anybody’s guess.

You would think that investors should make a bundle in shorting these extremely overvalued stocks with no fundamentals. But if it were that easy, then these ridiculous valuations would not exist in the first place.

As a side comment, I just saw Mary Poppins with my 9 year-old daughter, and we both loved it.


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