Stocks finally strung together a big week to close out June and kick off July. In fact, last week the S&P 500 climbed a healthy 4%. Thats an impressive gain for an index in just a week.
But last weeks S&P 500s climb doesnt hold a candle to whats going on this week in Alanco Technologies (ALAN). The shares of this small producer of wireless tracking devices are off to the races.
Check this out
ALANs shares are skyrocketing up an eye-popping 77% this week. And thats after pulling back from over 100% gains.
So whats causing the big move? And more importantly, can it continue?
First off, lets talk briefly about ALAN
The company produces wireless asset management products, such as wireless monitoring and tracking devices for the transportation industry. Im emphasizing produces because ALAN hasnt produced anything since May. Thats when they sold off their only income generating business.
Wait, didnt ALAN shares just shoot up? How can this be possible if the company doesnt earn any money?
Simple the company just announced a merger – more specifically, a reverse merger.
If you arent familiar with the term, a reverse merger is when a private company takes over a public company in order to bypass the long and complex IPO process. In other words, its a relatively quick and easy way for penny stocks to get listed on a stock exchange.
In this case, the company purchasing ALANs slot on the NASDAQ is Signapores YuuZoo.
YuuZoo is a leading provider of mobile social networks, mobile advertising, and mobile payment systems. In a nutshell, the company is leveraging the social network buzz to push their payment systems.
Let me say this ALANs 2,700 remaining shareholders are as lucky as lucky can be.
ALAN has sold off its remaining functioning business unit. They were nothing more than a shell on the verge of being delisted and then liquidated. That the company found a merger partner its basically a miracle.
But does that mean you should buy ALAN too?
Well, put it this way youd really be buying YuuZoo. And while YuuZoo has an interesting business plan, its a fairly small company. They pulled in $17 million in revenues in 2010 and $1 million in profits.
Hey, thats not bad except at ALANs current price it means the stock is trading at a P/E of 100. Even if you take into account YuuZoos projected 2011 profits of $2 million, were still talking about a P/E of 50.
Seems pretty steep to me.
Look, ALANs reverse merger is an interesting story. But that doesnt mean the stock is worth buying. YuuZoo seems like a solid company, but the shares are extremely overvalued at current levels.
One important takeaway
ALANs shareholders are extremely lucky they got this huge move in the shares. Fortunate events like this generally do not occur in the stock market. Most importantly, its far better to be well informed than lucky. Do your research leave luck for the rookies.
Yours in profit,