Conspicuously, against the backdrop of another soft session on Wall Street, entertainment and education specialist Genius Brands (NASDAQ:GNUS) popped higher. Management announced that it received notice from the Nasdaq exchange that it regained listing compliance. As a result, GNUS stock gained nearly 2% of equity value in the late-afternoon hours. However, it still remains a deeply risky and volatile venture.
Specifically, the company revealed in its press release that GNUS stock reached compliance with the minimum bid price requirement under Nasdaq Rule 5550(a)(2). According to the official rule, “[a] Company that has its Primary Equity Security listed on the Capital Market must continue to maintain a minimum bid price of at least $1 per share.”
Still, GNUS stock has a long road to travel before it regains the trust and confidence of non-speculating retail investors. On Feb. 13 of this year, MarketWatch noted that GNUS suffered a massive double-digit hit after it began trading on a reverse-split-adjusted basis. A few days prior, Genius stated that it would enact a 1-for-10 reverse stock split.
Per MarketWatch, management intended the reverse split to increase the price of GNUS stock to satisfy Nasdaq’s minimum bid-price requirement. While Genius may have saved itself to fight another day, it’s not exactly an effectual move.
GNUS Stock May Court Serious Questions
To be sure, reverse stocks splits by themselves feature no moral trajectory: they neither stand as “good” or “bad” procedures. However, context matters. Typically, the core reason why an enterprise decides to go this route can determine its effectiveness. Unfortunately, this framework raises uncomfortable questions about GNUS stock. As the U.S. Securities and Exchange Commission (SEC) states:
“A company may declare a reverse stock split in an effort to increase the trading price of its shares — for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade.”
Further, the Financial Industry Regulatory Authority (FINRA) gets straight to the point, pulling no punches: “If a reverse split is announced and actually occurs, proceed with caution. Reverse splits tend to go hand in hand with low-priced, high-risk stocks.”
High risk epitomizes GNUS stock. According to Gurufocus, Genius suffers from seven red flags. In particular, investors should pay attention to a distressed balance sheet, the ongoing issuance of new debt and worsening annual operating losses. If that wasn’t enough, the company’s three-year revenue growth rate (on a per-share basis) fell 38.4% below parity.
Why It Matters
Obviously, the market features an arena of bulls and bears: it doesn’t work very well if participants stack themselves exclusively on one side of the trade. In fairness, then, investors should also note that not every expert rates GNUS stock poorly.
Specifically, Dawson James’ James McIlree pegged Genius as a “buy.” As well, the analyst anticipates GNUS stock hitting $12.50. If so, this would imply upside potential of more than 294%.
On the date of publication, Josh Enomoto 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.