Investors in Houston American Energy (NYSEAMERICAN:HUSA) prior to March 4 are very happy. HUSA stock has shot up from around $1.90 to a peak of over $16 briefly. Since then, it has been declining and by Friday, March 18, it closed at $5.95.
However, there is every reason to believe that it could fall to no more than $1.83 or so. This article will discuss this and what investors should do if they own the stock or want to take advantage of its projected fall.
What the Company Is Worth
As of Q3, the company’s assets simply do not support its March 18 $65 million market capitalization (and potentially higher with insider options). It has just four producing oil and gas wells, and the company has been losing money.
As a result, revenue for the 9 months ending Sept. 30 was less than $1 million. But its general and administrative expenses were over $1 million. Unless something has changed in the last six months that we don’t have access to yet, this guarantees that the company won’t be profitable going forward.
So, effectively at $65 million, its market cap is about 58 times sales, assuming 2021 revenue comes in at $1.2 million. That is just too high for an unprofitable company.
Moreover, its asset values don’t support this high a market cap. As one Seeking Alpha analyst points out, its reserves are not worth more than about $13.5 million. This is based on the 2020 10-K filing but could be adjusted slightly higher if the 2021 10-K comes out with higher reserves.
The good news about its balance sheet is that as of Sept. 30, Houston American Energy had no debt and $4.94 million in cash. So if we add these two together — the PDP oil and gas assets worth $13.5 million, plus the $4.94 million in cash — the total is just $18.4 million.
Let’s call it $20 million to be generous. That represents 30.8% of its present $65 million market cap. Therefore, HUSA stock is worth no more than 30.8% of $5.95, or $1.83. That is why I think the stock is likely to fall significantly.
What Investors Should Do With HUSA Stock
Any smart investor would sell the stock on any kind of positive news, including the company releasing its fourth-quarter financials. Short of that, look for ways to profit from its downfall.
The problem is that shorting the stock is likely very expensive, and from what I can tell, there is no volume in the out-of-the-money puts. That leaves buying in-the-money puts, which are also fairly expensive and do not have much volume. Nevertheless, a few small investors might be able to do this profitably.
Another way to follow this strategy is to either short or buy puts on other stocks in the same camp. Look to make a smattering of short investments (buying puts, or shorting) small oil and gas producers those that have spiked and could be overvalued.
The bottom line here is that most value investors will stay clear of this hyped-up stock. If you own it, it probably does not make sense to wait for the Q4 and final year financials. That is likely to be a “sell on the news” event for HUSA stock.
On the date of publication, Mark Hake did not hold (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.