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This picture taken on November 13, 2009 shows fake iPhones displayed in a shop at a market known for counterfeit U.S. goods and housed in the metro station connected to the Science and Technology Museum in Shanghai. (PHILIPPE LOPEZ/PHILIPPE LOPEZ/AFP/Getty Images)
This picture taken on November 13, 2009 shows fake iPhones displayed in a shop at a market known for counterfeit U.S. goods and housed in the metro station connected to the Science and Technology Museum in Shanghai. (PHILIPPE LOPEZ/PHILIPPE LOPEZ/AFP/Getty Images)

Schizas' Mailbag

Applied DNA Sciences: a high-risk, speculative stock Add to ...

Lou,

I have a stock for you to investigate. The stock is Applied DNA Sciences. It trades over the counter. A PhD scientist friend of mine is very excited about this stock and he is confident that it will be huge.

However, as Jim Cramer says “tips are for waiters”; so I would appreciate your perspective.

More Related to this Story

Thanks in advance,

Ron

Hey Ron,

Thanks for the assignment.

Applied DNA Sciences Inc. has developed DNA solutions to prevent counterfeiting of everything from microprocessors, nuts and bolts for jet aircraft, and fabrics. The company has also developed systems to replace dye packs used in protecting the transportation of cash and authentication of documents. On Aug. 16, 2012, the Defence Logistics Agency, an arm of the U.S. Department of Defence, named the company as the provider of authentication services for microcircuits supplied by defence contractors. The need for authentication surfaced in audits that found counterfeit parts in the supply chain for military contracts.

Having said all these wonderful things I want to bring to your attention the risks associated with investments that have the following characteristics. The market place where stocks are traded have an implied risk because of the reporting requirements expected of listed issuers. The reporting and listing requirements on the OTC BB are designed to encourage nascent organizations to use the public markets to raise money. In my evaluative process the OTC BB is a higher risk environment which has to be on your radar when considering investing your hard earned capital in a stock.

In addition the market capitalization of APDN is under $200-million which adds another level of risk. The smaller the cap the higher the risk. Also, the financial case for the investment needs to be considered. The due diligence conducted on your behalf indicated that revenue in fiscal year 2011 was reported at $970,000. The estimate for fiscal year 2012 is $2.1-million. What also has to be assessed is the cash burn rate which would suggest that the company will have to raise more money to accomplish their business plan. Finally the fact that one customer represents close to 50 per cent of sales raises the issue of revenue concentration.

Bottom line, this a speculative play. A review of the charts will add additional depth to your decision.

The three-year chart depicts the move higher in August on the announcement from the Defence Logistics Agency. What is worth noting is the resistance at $0.30 that has developed since September of 2012. It should come as no surprise that investors who caught the ride at $0.02 in July would be cashing in their 15 bagger win. The MACD and RSI both signalled that the advance was going to face some selling pressure.

The six-month chart illustrates the resistance at $0.30 and the sell signals generated by the MACD and RSI in late September. There is support that comes in at $0.175 and below that at $0.125. Currently the MACD and RSI are indicating that we can expect more selling.

Another factor you should consider in your evaluation is liquidity. The average daily volume over the last three months is 3.2 million shares. If you use the facilities of globeinvestor.com you will find a lot of useful information including this table. I use it to conduct volume analysis. It gives me a sense of investor enthusiasm for a stock. Over the last 30 days volume exceeded the average on only 5 days. I generally prefer an environment where volume is growing steadily. The large volume days where we saw fourteen to twenty three million shares trade are a classic case of distribution. Investors in profit were happy to cash in.

In summary APDN is a high-risk investment. If you are compelled to catch a ride don’t bet the farm on this mighty mite.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

 

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