Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Every once in a while a share price goes ballistic for no discernable reason other than retail investors firmly grasping the wrong end of the stick. Invariably reality soon sets in, and although timing is a bit hit and miss, shorting such situations almost always pays off.
Take Highlands Natural Resources (HNR) Its shares have more than tripled in three days last week after it announced some vague and detail free tie up with a Canadian fracking services company called Calfrac Well Services.
Highlands floated on the LSE in March last year. It consisted of £1 million cash, an American named Robert Price, who put up most of it, and an advisory board of (American)consultants. The plan was to take advantage of low oil prices by buying “controlling interests in oil and gas leases”.
Plans change and what actually happened shortly after listing was that Highlands acquired a 75% interest in pending patents for some fracking technology called DT Ultravert. The consideration was around 10% of Highland in new shares (ie worth around £100,000) and some way out of the money warrants (30m exercisable at 25p) The vendors? Advisory board member Paul Mendell (co-founder of AIM disaster Iofina (IOF)) and, you guessed it, Price himself.
The shares got going after it was announced that Schlumberger was testing the technology and this has allowed a couple of placings to raise about £1.3 million. Then we get the surge this week to 80p.
The market cap of £24 million is absurd enough but even that doesn’t tell the full story. Given that Highland has 28 million warrants outstanding (exercisable at 5p and 10p) on top of the 30 million at 25p, fully diluted the current share price (75p) effectively values DT Ultravert, (bought for peanuts last year from Price and Mendell) at north of £60 million net of any cash that would come in on the exercise of warrants.
This is madness and will end in tears for retail momentum traders. How much madder it will get is anyone’s guess but these shares will come back to earth in short order and should be shorted if borrow can be found.
Several days ago this article first appeared on the Nifty Fifty website which Lucian Miers runs with Tom Winnifrith & Steve Moore - sorry, it is paying customers first. To access the website ahead of the next share tip from Tom & Steve and a new shorting idea from Lucian shortly GO HERE
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