Valuing a Shell Stock
There are several considerations to review when valuing a Shell Stock:
- Verified Shell Stock Looking For An Acquisition: it should be actively looking for a reverse merger. Verification can come from SEC reports, news releases, or verbally from company management.
- Experienced Management: management must understand the mechanics of a reverse merger and know a good business opportunity. If management is not experienced, it is imperative they are working with an experienced consultant.
- SEC Reporting: it must report regularly to the SEC. This is known as a "reporting company." We want to be able to verify information about the company from public/legal filings . . . not by word of mouth or rumor. Believe it or not, there are public companies that are non-reporting.
- Clean: it has little or no debt, no pending law suites, and little or no outstanding convertible securities (preferred stock or warrants). We don't want anything that can complicate the reverse merger.
- Small Number Of Outstanding Shares: the smaller the number of outstanding shares, the better. A smaller number of outstanding shares lessens the chance of a Reverse Stock Split. A Reverse Stock Split can lessen the chance of price appreciation.
- Low Market Value: basically, this is the buy low sell high rule. A Shell Stock with a low Market Value will have a greater chance of price appreciation than one with a high Market Value. (Market Value = price X shares outstanding). NOTE: the Profile List by Market Value sorts the Shell Companies from low to high Market Value.
- Cash On Hand: some Shell Companies have cash remaining from their previous business endeavors. Having cash to fund the new company's business plan will attract high quality candidates.
- Tax Loss Carry Forward: the new company can offset future net income with the Shell Stock's Tax Loss Carry Forward (but may be limited in amount due to IRS change of control stipulations).
- Exchange Listed: it is better for the Shell Stock to be listed on a stock exchange (NYSE, AMSE, NASDAQ, OTCBB). But, there are some quality Shell Companies that are trading on the Pink Sheets.
INDICATORS OF A POSIBLE REVERSE MERGER
- Increased Volume/Price: increased volume and price with no news may be an indicator of a potential reverse merger. Information on a reverse merger sometimes leaks out and insiders/family/friends start buying before the reverse merger is announced.
- Corporate Activity: cleaning up debts, law suits, and issuing reverse splits can indicate management is getting the shell company ready for a reverse merger.