So, yesterday I found this stock “Rewalk Robotics (RWLK)”, and I couldn’t believe my luck (or, so I thought).
ReWalk is a commercial bionic walking assistance system that uses powered leg attachments to enable paraplegics to stand upright, walk and climb stairs.
The company had almost as much cash as its market cap. It had minimal debt. Gross profit margins exceeded 40%. Net margins were negative, but the negative number kept declining every year. As a result, EPS was negative and also kept declining every year since 2017. The company seemed to be on a brink of profitability. And, the stock price was at an all-time low. It had to be a stock that was ignored by Wall Street.
I figured when wall-street recognizes its potential the stock would shoot sky high. This had to be a ill-priced opportunity, waiting to be found.
I spent the night dreaming about making millions.
The stock traded at $1.31. The PE Ratio was negative. I figured, for $13,000, I could buy 10,000 stocks. If the company produced profits of say, even $0.15 per share, and the PE turned positive to 15, the company would be trading at $2.25 per share. As the profits would grow, share price would grow too. As a growing company, the PE would probably end up around 30. Let’s say years from now if the company produced $3 per share in profits, and PE was at 30, the stock price would be $90 ($3/share X 30 PE). That would take my stock value to $900,000. Not bad, for a $13,000 investment.
Next, I wondered, why buy just 10,000 stocks. This seems like a ground floor opportunity. Why not buy 20, 30, or even 50,000 stocks? And, imagine the stock price shot up to $100 (quite possible for a robotics company) … that would get me a sizable fortune of $5,000,000. All for an initial investment of $50,000-$60,000. Not bad at all.
I woke up in the morning, and I couldn’t wait to dig into the stock. A voice deep inside me told me that I should research the stock some more before I invest a cool $50,000 into it. So, I did.
Side note: In past, I’ve lost money buying stocks without doing due diligence. Worst way to buy stocks is acting on a hot tip. It’s just horrendous. I’ve learned the lesson well.
So, I began my research.
None of its peers had gross margins anywhere near it. They were all at 30% or under. Rewalk on the other hand boasted over 40% in gross margins.
All of its peers had much higher debt compared to their assets. Rewalk’s debt levels were pretty negligible. So far, it all looked good and positive.
Then I looked at Rewalk’s all-time chart. The stock traded at over $700 when it first came on market. So, $100 seemed like fairly achievable.
Then I wondered …
What made the stock fall so far? I found an article I read that explained how while the surface story of the company seemed great, the company continually struggled to reach its target ever year.
The revenues were declining every year since 2017, but the share count were increasing. Something did not seem right. The math didn’t add up. So I decided to do some calculations of my own.
When a company is losing $100, and has 100 shares, the calculation is (-$100 in earnings / 100 shares) = -$1 in Earnings per share (EPS). Because the revenue declined, the earnings naturally would.
So, let’s say in 2018, the earnings were -$75, but the share count was 150, then the EPS would be (-$75 / 150) = -$0.5 per share. So, negative 50 cents is better than a negative $1.
Say in 2019, company sold even less products and continued losing money. So, now it’s profits are negative $50, but because they needed money for operations, they issued even more shares, so the share count is now 250. So what would the EPS be for 2019? (-$50 / 250 shares) = -$0.2 EPS.
Note: The numbers used in above calculation are not actual numbers from Rewalk Robotics. Rather, I’ve used numbers that are easy to calculate for the purpose of illustrating an example.
At first look, this declining EPS seems so good. The stock almost seems on a brink of positivity. But, when the sales keep going lower, and outstanding share count keep growing higher, the EPS obviously comes down. Understand, it is all legal. But the perception it gave me wasn’t appreciable anymore.
All of a sudden, things didn’t look so good. But, let’s give the company a benefit of doubt, I thought. It probably produces great products. It just hasn’t broken through the market yet. I mean considering how our government operates, the approval process takes a long time. Meanwhile, let’s check some reviews on the products.
I figured lot of people leave comments on YouTube, so let’s check that. Almost all the comments were about how wonderful it is that there exists a company which makes such products for people. No single comment about “I used the product, and this is what I thought”. So, definitely not a good source for research.
I thought maybe try Consumer Reports. I did. There were seven comments for one of its products, and that’s where I found the real deal.
While researching stocks, there are three most important things I need to do:
- Ask a lot of good questions
- Continue asking them until I find satisfactory answers
- Try to prove all my answers wrong.
If I cannot prove my answers wrong, then everything I’ve found and believe about the company is most likely true. But, if I find evidence against the answers I found earlier, then I don’t invest in the company.
This philosophy has served me well, and kept me away from several disasters. It’s also enabled me to handsomely profit from many stocks.
While looking through the seven comments, I found a comment where the person spoke about broken promises made by the company. The company also commented on it but it seemed their comment was mostly to keep them from legal trouble, without much heart into it.
While the surface level data was great, and products are good, deeper research into this company left me heartbroken.
And then I had a thought – The standards of our morality as a society, should be based upon how we treat the most vulnerable among us.
Lastly, I wondered what made the stock price fall so dramatically (over 99% since its inception). Well, the company had been on brink of being de-listed from the stock market several times, and at one point, it even did a reverse stock split (25 to 1). In other words, if you owned a 100 shares of the company before the split, you would only own 4 stocks after the split. This insight only added to the issues I already found.
I hope the company can fix its issues, improves its sales and serve its market.
But, I can’t invest in this company, not right now.