Castor Maritime (NASDAQ:CTRM) has been one of the most popular penny stocks of 2021. That’s a bit of a surprise, as Castor is an obscure Cyprus-based shipping company. That’s not usually the sort of thing that rises to the top of the trading radar. However, CTRM stock has seen wild volatility this year, and that can attract a crowd.
While Castor posted big gains earlier this year, lately the stock is taking on water. Shares peaked at $1.95 this past winter, but tumbled below the 50 cent mark on heavy selling pressure in recent days. Those prices are pre-reverse split, as the company is about to change up its share structure.
The Reverse Split
Castor announced that it will be doing a 10-for-1 reverse split on Friday, May 28. This means that someone holding, say, 1,000 shares at 40 cents each would own 100 shares at $4 each after the split is effected.
Castor needed to make this move to keep its Nasdaq listing, as stocks must be above $1 to remain trading there. Additionally, a very low share price tends to scare off institutional investors. Having the share price back above $1 will give Castor some more credibility. That’s not the only thing the split will cause, however.
Prepare for Short Selling
Let’s be blunt. Reverse stock splits tend to be a short seller’s best friend. For one thing, many brokerages place additional limits or outright forbid shorting certain penny stocks. Getting shares up to a higher price makes it easier for short sellers to bet against a company.
Additionally, a reverse split tends to disarm short squeezes. It’s not hard for folks to get excited about the possibilities of a 50 cent stock. At $5, the shares don’t look as “cheap” even though the market capitalization is exactly the same.
At pre-split levels, Castor Maritime was the lowest price shipping stock around, and one of the lowest-priced highly-traded stocks out there period. If people on Robinhood wanted to buy a few shares of something without spending more than a couple bucks, CTRM stock was an option. Once the split is done, CTRM stock will lose that feature. And let’s face it, without the trading angle, Castor wouldn’t hold much appeal. Dry bulk shipping isn’t a very glamorous business, after all.
CTRM Stock Isn’t Nearly As Overvalued As Before
While the reverse split will hit Castor in the short-term, it’s not all bad news. The company’s fundamentals are actually improving. I’ve been extremely negative on CTRM stock before. In recent times, Castor had a market capitalization of as much as half a billion dollars while owning just a few vessels. This made little sense. Castor, on a per ship basis, was valued at way more than other comparable bulk shipping companies.
Now, however, Castor has at least 17 ships on hand with a bunch more set to arrive shortly. Meanwhile, the market cap has generally held stable. The company’s ballooning share count has been offset with its rapidly falling share price, leading to a steady valuation for the overall enterprise.
With that in mind, a buyer now is getting way more vessels for the same price as before. As Castor gets more ships while its market cap remains level, its assets per share are rising. This hardly means that CTRM stock has to rally from here, but the valuation is starting to get more in-line with its peers.
The Verdict on Castor Maritime
Castor Maritime is one unusual situation. Management has taken what was a tiny business and is building it up into something significant. That’s not all bad. However, Castor is funding itself almost entirely with capital from newly issued stock. This has created a virtually endless supply of new shares of CTRM stock on the open market. Prior to the reverse split, Castor was up to 900 million shares of stock outstanding. That’s an exponential increase from 3 million in 2019 and 68 million in 2020.
Regardless of how many Reddit posts people write about Castor, it’s hard for retail traders to absorb so much newly printed stock. As a result, the share price has been in steady decline for weeks now. Once the reverse split is out of the way — assuming management finally stops issuing more shares — CTRM stock may be able to stabilize. Until the reverse split is digested, however, expect at least one more downside push in Castor’s stock.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.