Small Cap Network Blog

I kinda’ wish I would have waited until today to officially end our coverage of micro cap stock pick SpongeTech Delivery Systems (SPNG), though I’m not entirely sure it would have mattered. CEO Michael Metter sent out what has become a fairly routine letter to shareholders. Once again, the company’s growth is mind-boggling. Yet, once again, the market doesn’t seem to care.

All the same, since we’re the ones who stirred the pot a little over a year ago by suggesting it, we’ll wind down our coverage of this micro cap stock by giving the company the next-to-last word. (We always get the final last word.)

Here are some of the highlights from the letter:

• The company is on pace to do about $11 million in sales during their fiscal Q2 (which they’re in now). They did about $5.5 in fiscal Q1, and about $4.0 million in last fiscal Q4.
• They still expect to do about $35 million for the full fiscal year.
• Earnings in Q2 will be equivalent (on a percentage basis) to prior quarters. Their net margin in Q4 was right at 30%, and about 18% in Q1. So, we’re assuming their net this time around will be $2.5 to $3.0 million.
• They’ve got a lot of new products and new venues yet to be tapped.

Our take? A year ago we would have been pleasantly stunned at any company’s ability to double revenues from one quarter to the next. However, we’ve seen big growth repeatedly from SpongeTech, and the stock didn’t budge once. The swing to a profit (a nice one at that)? Didn’t matter - the stock still didn’t budge.

The issue was two-fold, though each fold was related.

First, the market just couldn’t get past the dilution; nobody realized the dilution was more than worth it (i.e. the P/E and P/S got wildly lower).

The second issue was just the company’s lack of communication regarding said dilution. The management team just let investors find out about the dilution the hard way…by letting them stumble across it in the 10Q.

One or the other issue can be overcome. When you have to overcome both though, well, let’s just say I’m not entirely surprised the stock suffered.

Still, as we finish the final chapter on the SpongeTech story, I’ll repeat what I said a few days ago - this is one of the strangest occurrences of ‘undervalued’ that I’ve ever seen. I had faith that the market would eventually ‘get it’. And, they still might. They haven’t yet though.

As it stands right now, the forward-looking P/E is something like 2.16, and the forward-looking P/S is around 0.52. Just amazing. I have no reason to doubt they’ll get the results they’re looking for either; they’ve met or exceeded every forecast they’ve made since we’ve been covering them.

Another time and another place, SPNG may have been a monster winner. If you’re still holding it, I don’t think you’re crazy. We just have to move on (the site) to make room for some other ideas.

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