Stocks finally strung together a big week to close out June and kick off July. In fact, last week the S&P 500 climbed a healthy 4%. That’s an impressive gain for an index in just a week.
But last week’s S&P 500’s climb doesn’t hold a candle to what’s going on this week in Alanco Technologies (ALAN). The shares of this small producer of wireless tracking devices are off to the races.
Check this out…
ALAN’s shares are skyrocketing… up an eye-popping 77% this week. And that’s after pulling back from over 100% gains.
So what’s causing the big move? And more importantly, can it continue?
First off, let’s talk briefly about ALAN…
The company “produces” wireless asset management products, such as wireless monitoring and tracking devices for the transportation industry. I’m emphasizing “produces” because ALAN hasn’t produced anything since May. That’s when they sold off their only income generating business.
Wait, didn’t ALAN shares just shoot up? How can this be possible if the company doesn’t earn any money?
Simple… the company just announced a merger – more specifically, a reverse merger.
If you aren’t familiar with the term, a reverse merger is when a private company takes over a public company in order to bypass the long and complex IPO process. In other words, it’s a relatively quick and easy way for penny stocks to get listed on a stock exchange.
In this case, the company purchasing ALAN’s slot on the NASDAQ is Signapore’s YuuZoo.
YuuZoo is a leading provider of mobile social networks, mobile advertising, and mobile payment systems. In a nutshell, the company is leveraging the social network buzz to push their payment systems.
Let me say this… ALAN’s 2,700 remaining shareholders are as lucky as lucky can be.
ALAN has sold off its remaining functioning business unit. They were nothing more than a shell on the verge of being delisted… and then liquidated. That the company found a merger partner… it’s basically a miracle.
But does that mean you should buy ALAN too?
Well, put it this way… you’d really be buying YuuZoo. And while YuuZoo has an interesting business plan, it’s a fairly small company. They pulled in $17 million in revenues in 2010 and $1 million in profits.
Hey, that’s not bad… except at ALAN’s current price it means the stock is trading at a P/E of 100. Even if you take into account YuuZoo’s projected 2011 profits of $2 million, we’re still talking about a P/E of 50.
Seems pretty steep to me.
Look, ALAN’s reverse merger is an interesting story. But that doesn’t mean the stock is worth buying. YuuZoo seems like a solid company, but the shares are extremely overvalued at current levels.
One important takeaway…
ALAN’s shareholders are extremely lucky they got this huge move in the shares. Fortunate events like this generally do not occur in the stock market. Most importantly, it’s far better to be well informed than lucky. Do your research… leave luck for the rookies.
Yours in profit,