Alpha Pro Tech (APT) – Short Squeeze – Upside 100%+ (speculative)

Current Price: $15

Target Price: $30 (speculative)

Upside: 100%+ (speculative)

Expiration Date: TBD

This idea was shared by Dan.

 

This is a short note and, overall, a very speculative/risky case – definitely not one of the more usual SSI ideas. However, the times seem to be changing and some members might find this interesting.

The essence of the idea is this – the first wave of the terrific short squeezes that we’ve seen for the last couple of days is likely coming to an end and all the newly minted multi-millionaires from the Robinhood/Reddit will be looking for the next target in their crusade against short-sellers.

All of the recent pumps $GME (17x), $KOSS (50x), $EXPR (8x), $AMC (6.5x), $BB (over 2x), $BBBY (2.5x), $MAC (1.7x) are already up multiple times and its quite likely that ceiling is close/already has been reached. Trading in most of these stocks have already been suspended by some exchanges and once the volumes go down and profit-taking starts, the whole thing is likely to collapse. However, the chances are that the hype will continue as many retail investors will be left with incredible returns on their investments, while a bunch of new players will be keen to join, fascinated by the whole “French revolution of Finance” story. And it’s quite possible that they all will look to repeat the “success” and search for new targets to squeeze. This is where $APT comes in.

So the investment (or speculation) thesis here is based on the expectation that APT will be picked up for the next short squeeze. Obviously, this is just a guess and this might never happen. Short-squeeze mania might fade away. Aside from this catalyst, the company is most likely to be overvalued due to the temporary covid-induced spike in revenues.

Do not forget to do your own due diligence before putting down any money on this.

 

Alpha Pro Tech is the potential to be a new target for the WSB crowd

  • The most important factor to qualify as a short-squeeze target seems to be the short interest. That’s why GME became the first choice for Redditors with its short interest was over 100%. APT short interest rate is 25%, which probably qualifies for a potential squeeze. for a number of other targets short interest was at similar levels (e.g. EXPR had only 15%). The tweet that started KOSS says over 35% short interest rate, however, according to NASDAQ the stock had only 12k shares short on the 15th of January and I wasn’t able to find it on any top short squeeze/short interest monitors either.
  • APT appears in the lists (albeit on second pages usually) of the most shorted names, so there is a decent chance it will get noticed.
  • APT trading volume had already been materially higher yesterday and over the last couple of days. Moderate increases in volume quite often preceded the full-on short squeezes for the other names.
  • Market cap is only $200m – if this stock gets noticed by the WSB crowd, the pump would be substantial. Most of the other short squeeze targets (AMC, BB, BBBY, NOK, MAC) were multi-billion market cap companies. Low market cap names saw much larger increases in the share prices – KOSS with 50x with $26m initial market cap and EXPR 8x with $75m market cap.
  • APT’s free float is low. Insiders own 40% of shares, while various institutional investors hold an additional 25%. So the float is basically just 35% (4.7m shares) of a $200m market cap. This seems to be factor differentiating the returns for KOSS (50x) and EXPR (8x) versus much larger names.
  • So far APT was relatively unnoticed by the Redditors (it’s up only 7% since the 21st of Jan and +25% YTD) and is barely mentioned on Reddit/Twitter. One of the explanations is that due to its size it is not that prominent on the major short interest monitors. Moreover, if you browse through WallStreetBets Reddit page or related Twitter pages, it’s visible that most of the crowd is still very much focused on GME/AMC/BB. Once the excitement wave for these falls off, they will go on searching for new preys. As put by Steve Sosnick (chief strategist of IB): “It’s like a wolf pack seeking out the weakest member of the herd”. And with all that, it only takes one timely tweet or Reddit post to create a serious catalyst for the surge.
  • One additional catalyst that could positively impact the attractiveness of the stock to the new retail investors is that APT creates an impression of being cheap. The business is still riding the COVID waive (APT is manufacturer and marketer of protective apparel and equipment) with revenues up 2x-3x YoY each quarter. Run rate PE is close to 5x. Of course, all this is expected to revert quickly to pre-pandemic levels, hence a relatively high short interest. However, Q4 earnings are expected to be record-breaking and at least visually, this could bump the popularity of the stock as well as give additional legitimacy for the growth/cheapness story.
  • Finally, president Biden is expected to announce several executive orders to intensify the fight with COVID-19, which should act as an additional catalyst for the increase in APT masks and protective apparel demand.

To sum up, APT has got a strong potential to be the next Robinhood/Reddit crowds induced short squeeze. Given the size of its free float (only $70m or 4.7m shares) and the exuberance level the market has reached over the last few days, it’s not hard to imagine APT spiking 2x if it gets noticed by the Redditors.

 

Alpha Pro Tech

APT operates in three business segments:

  • disposable protective apparel – shoe covers, bouffant caps, gowns, coveralls, lab coats, etc.
  • infection control segment – face masks and eye shields.
  • building supply – construction weatherization products such as housewrap and synthetic roof underlayment, etc.

The first two segments of the business saw a massive upsurge due to the COVID-19 outbreak. Mask sales alone are expected to be $43m in 2020, which is almost equivalent to the total revenues of the company in 2019.

  • Q1 revenues were up 47%, net income increased to $5.3m vs $1.2m YoY.
  • Q2 revenues increased 123%, while net income was $6m vs $1m YoY.
  • Q3 revenues increased 149%, net income was $8m vs $0.4m YoY.

The company expects Q4 revenues to increase even further and mentioned this positive trend will continue in 2021 (PR):

We saw a dramatic increase in revenue from face mask sales throughout the third quarter, and we currently expect face mask sales to increase through the fourth quarter of 2020 and into 2021.

Before COVID the stock used to trade rather consistently around 12x PE. In 2020 the company is likely to earn around $2/share, so it currently trades at around 7.5x TTM PE. On quarterly run-rate basis PE is probably closer to 5x. However, assuming that the pandemic-induced business fades away eventually APT is actually very expensive – the company trades at more 50x CY2019 net income. The full reversal might take a couple of years so the downside in the short term should be relatively well protected.

32 COMMENTS

  1. Tom

    I purchased some OTM calls on SKT yesterday based upon a similar hope (I certainly can’t say it’s an expectation). SKT has short interest of just over 50% of its outstanding shares. It has had a small amount of attention on WSB and has moved up about 30% over the past week. It’s $1 – 2 billion market cap depending upon market sentiment.

  2. fishwithwings

    Thank you for keeping up with the times with this idea. Have a bit of gambling cash that I’ve been itching to use.

  3. hillegass

    I’m really surprised to see this type of post on here. If you buy in anticipation of the pump, are you not just part of it?

    1. patrick

      I was just about to post these exact words. I was shocked to see this type of junk here. Someone buying a stock then blasting it to members of a group to buy after them. That is reddit and tiktoc type of pump and dump crap.

      For a service that has a proven track record of doing DD and investing capital to get gains uncorrelated to the market, its sad to see it jump on the hype of what is hot.

      1. lacertaG1

        While I am not convinced by the post, I disagree with your sentiment here. Short squeezes and gamma squeezes are truly an unusual situation that could merit tactical investment, and I think it’s narrow-minded to dismiss them all off-hand.

        However, this post offers no real case as to why APT is likely to be squeezed. There are other small caps with much higher short interest.

      1. ijw

        There is value investing, special situation investing, momentum investing, but now we have also invented YOLO investing in 2021!

  4. ryanwalex

    I really like these types of new ideas. I would rather have more ideas that I can personally vet then too few, the quick ideas section I have often found more valuable. I think in “normal” markets going long on a high short interest stock is interesting to look at.

    That being said, I would be careful with this idea right now. I think yesterday’s 2% decline was likely a liquidity event where many short sellers had to close both short and long positions. Put yourself in the shoes of a short seller, you can’t possibly stay short in this market where investors are intentionally targeting high short interest. Even if you aren’t scared of retail investors or WSB, you are scared of other short sellers that will feel they have to close their positions. Either way, I would bet that most short sellers have closed a lot of their positions.

    I am seeing the borrow in IB for APT at only 5%, not sure what it was before. That doesn’t seem like a stock with a high short interest currently.

  5. DendriteResearch

    I agree with Ryan, I like these new types of ideas. It’s not like SSI is deluging us with too much to evaluate.
    That said, I’ll pass on this one because a) the fundamentals are not great — big drop coming after covid is gone, b) the short interest is not that high, and most of all c) the WSB crowd seems to focus mainly on companies that are household names, which APT certainly isn’t.

    1. ijw

      Yeah agreed, I think if you make this type of trade, you need to focus exclusively on what is known and what has meme potential, combined with technical factors like short interest and liquidity. Having a value driven approach is a handicap.

      In hindsight buying shares in the last block buster (although impossible to do in large numbers) would have been a smart move, as they are up 20x in the last few days. Although arguably an even smarter move, might be to stay away entirely from this madness.

  6. jwestern

    For what it’s worth, the covid spike for this company may not be so short-lived. I don’t think it’s that clear PPE will become a non-issue, what with the different mutations popping up and public-facing experts advocating wearing PPE even if vaccinated. Furthermore, the attitude towards preparedness by governments, institutions, and even individuals may be quite different going forward. So we might see the profit boost from covid settle to a higher level than 2019 would suggest.

    As far as the short squeeze angle, personally I’d rather have the downside protection in place and then get the chance of a short squeeze for free (rather than throwing caution to the wind for a more meme-able stock).

    1. jwestern

      So that said, if anyone can make a decent value case for any of these heavily shorted stocks, that would be great to hear about. I happened to own blackberry for many years so I benefited from this madness totally by chance. And some value-oriented folks have had strong convictions regarding Gamestop for a while.

      1. EC

        Yes, I think Gamestop had a value story. There were activist funds trying to get people on the board for years, but had never succeeded. I noticed when Ryan Cohen got on the board in January, and thought that was interesting, but didn’t really think too much of it. Those turn-around stories take time. But (in hindsight) I think that would have been the catalyst for this short-squeeze.

        In my opinion, I don’t think anyone could have foreseen that. If you were investing on value, it would have been a nice lucky bonus. And I think those redditors are funny, creating narratives to explain what happened, but I’ve seen this show before. This was a total surprise, and so will be the next one.

      2. jwestern

        I must also admit I’m having quite a laugh at what those redditors are posting. I wonder what will happen when those $1400 stimulus cheques come in. Academics in finance will have to invent a new term, “Discarded-asset price inflation.”

      3. DendriteResearch

        Yeah, Ryan Cohen, the guy who sold dog food online at a loss? I mean, good for him for tricking PetSmart into paying $3.35B for Chewy, but that’s hardly preparation for turning around a failing brick-and-mortar retailer.

      4. EC

        If I were Ryan Cohen, I’d sell now, quit and go onto the next thing. There is no way I’d be able to live up to expectations.

      5. ijw

        If Cohen cashes out and leaves, the stock probably craters, and he gets blamed for it. Since buying GME has become a somewhat political statement, he would likely unleash the fury of millions of people on himself, who bought in late and now hold him responsible for their losses and for not allowing them to squeeze ‘the evil hedgefunds’. So I think he is kinda trapped at this point in this thing. Especially if it lasts beyond a few weeks in any meaningful way.

    2. newellsits

      I agree with jwestern. It will be interesting to see more value case ideas for heavily shorted stocks. A few funds have been up high % this year by going long heavily shorted stocks, not entirely due to the WSB bonzana.

  7. DanX

    Had no intentions to present this as a ‘pump’, but thank you all for the push back.

    If one can guess correctly which stocks will be moved next by the retail crowd, is it really that different from other types of catalysts related to gaining investor attention (eg. relisting to more prominent exchange or sell-side analysts picking up – fundamentals the same, just the stock gets noticed by wider investor group).

    This was an idea mostly based on thin air. But I think I fairly presented it as such and did not delude myself or the board with anything more.

    Whether these types of ideas are suitable for SSI, is for Dt and SSI team to decide. I can see they added a number of additional disclaimers to my original write-up (speculative, not the usual siatuation, just a guess and etc), which I agree with.

    1. fishwithwings

      If this was an idea based on thin air shouldn’t it have been posted on the quick ideas section rather than the main board?

  8. Rodger

    I don’t think it’s been mentioned yet but part of the r/wallstreetbets rules are no posting stocks with market cap < $1B.
    I still like the APT risk/reward and have a small speculative position in one of the calls. I think copycats are looking for heavily shorted stocks (maybe helped to lift IFF?)
    I've spent the weekend following the wallstreetbets forums.
    Is it possible that a parabolic spike in internet traffic about stocks that are statistically cheap with a skewed risk/reward profile can trigger some algos into purchasing and the prophecy becomes self-fulfilling? Price forms the narrative/tail wags the dog… I think this 'collective' could be a passenger on something that they and the media think they're driving.
    Just an opinion.

  9. Rodger

    APT got a mention on r/wallstreetbets at 1345 EST 3 Feb. I think because he didn’t post it as $APT it got through the auto moderator.
    For general interest some of you may like to look at the accumulation during the day (I used 1min candles), and right before the post.
    Then watch the before and after price movement.
    The post was by: u/VaderLikesTitts

    1. nostradamus

      Times sure have changed if the success of an investment thesis hangs on whether or not u/VaderLikeTitts mentions a stock on a message board.

  10. fishwithwings

    Interesting article on the PPE market:
    “Do we have enough medical masks yet?
    The initial shortage has eased, but there still aren’t enough medical masks for health-care workers, let alone others. Demand for N95s is 500 to 1,000 percent higher than it was a year ago…
    Even many health-care workers at well-financed hospitals wear N95s for anywhere from a day to a month, instead of changing them in between patients like they did before the pandemic.

    https://www.washingtonpost.com/health/2021/02/02/medical-mask-shortage/

    1. ijw

      Still you would expect that when everyone is vaccinated demand will return to what it was in 2019? Or maybe 10-15% higher, but that is it. So in a pretty optimistic scenario, assume they earn $35m/y over 2021 and 2022, and then return to $4m a year. They would have $95m in net cash, and a business that is probably worth $60m. So $155m market cap in what I consider a pretty optimistic bull case. Vs a $230m market cap now.

      The only way this is cheap is if the virus keeps lingering around for another decade, with regular outbreaks, causing everyone to have to wear masks on a regular basis. But with the vaccines we have, that seems pretty unlikely?

  11. Rodger

    I think the ‘cheapness’ (if there is any) is in the volatility (tail outcomes). WSB fad, Vaccine recalls/shortages, over-reaction to the next seasonal influenza, etc. Budgeting also tends to cause organizational spending to stay close to the previous year for fear of your budget being reduced next year. I think expired unused protective gear and once used masks will be filling landfill sites for years. The left tail case is that we return to near pre 2020 ‘normal’ quickly and/or oversupply destroys demand. I’m putting $7 low vs $30 high as my probable outcomes for Jan 22. I think it’s binary in that respect. A lot of speculation involved and my position is undersized to reflect.

  12. Terence

    Q4 record financial results out before market open 3-9, and stock is down 20%.

  13. DanX

    Despite the initial spike to around $20.5, the thesis has clearly failed. Even the Q4 results, which I expected to be very positive, turned out the wrong way, as management has stated that demand for their products is being pressured due to competition from bigger players. This obviously was a very speculative idea, worthy of a speck-size position only. Anyways, I’m marking a 30% loss here. No further need to keep this idea active any longer.

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