Final Washout?

I hope those are medical leaches, 'cause there was a bloodletting on Friday. I expect we are gonna see at least one more week of storm, maybe two before the clouds clear. If you are looking for panic, you will not find any here. Sorry, I know my calmness will incite some to be skunk kick'in mad. Cannot help it. This stock appears to be moving lower on the good news of the 2Q. When it moved lower previous to the 2Q some made the reasonable conclusion that the move was based on unreleased bad news: such as YAGI default and share dilution. That assumption was wrong. It was also earlier proven wrong to assume the drop between the Annual and the 1Q was due to Yagi default or dilution. (Excluding the 20M shares spent as a down payment for NextDiesel - the Outstanding Shares actually contracted both between the Annual and the 1Q - AND between the 1Q and the 2Q).


Now the (on balance) good news of the 2Q is out and as Gomer would say: "Surprise! Surprise!" Some will be sure (this time) the stock is moving lower on; guess what?- Behind the scenes Yagi default and dilution. Now being wrong between the last two previous reporting periods does not automatically make anyone wrong again. (But it might cause you to come up with theory "B".) The Skunk's plan "A" all along has been that the stock was overpriced as the metals extraction/garbage sorting business wound down. For a part of 2005, 2006 and even the first quarter of 2007 the company tried to make the shift to alternate energy. One can Monday morning quarterback and make good arguments that management over promised and failed to bring in legitimate new revenues over that period. The one defense GERS has is they did acquire enormous new technology "potential" and did "stay alive" to fight another day. The huge dilution and reverse splits that this period created followed us to the end of 2007 and generated deep seated investor fatigue, mistrust and cynicism. We have sat pretty rock solid at about one-sixth of our authorized shares since mid April, although few have noticed. A quick read of the investment boards shows we still live very much in this afterglow of cynicism. In fact, like old Hippies afraid to let go of their youth, with some, actual company performance is no longer a factor. It is all about "stickin' it to the man".


The Skunk sees these last months as being driven by the history above, accelerated by those who simply look at the charts and see the stock going down. They sell and create the falling stock prices that they expected. More see the falling prices and can truthfully shout from the rooftops: "The stock is heading down!" So they also sell into falling prices. A strong confidence builds, reinforced with experience, that the stock is going down! What we saw on Friday was a stock free falling as its real value increased. Hopefully this event will trigger the final flush out of beaten investors that will allow this stock to finally start anew. On the 13th of July I predicted the bottom over the next 60 days (between 13 July and 13 September), likely precipitated by the 2nd quarter release. Being near the bottom of its cycle I also predicted that GERS would produce good news in its 2Q and the market would react negatively to it. I predicted a period of 5 days in which at least 3 days would trade down with volumes over 500K. We may have seen the first one on Friday. Will I hit the call? All I can say is I have (uncharacteristically) been in the ball park so far. No one should be "Bettin' the Farm" on this high risk investment - (although the Skunk does have a prize rooster perched on the come line.)

Skunk? How can we judge your call?
The Skunk knows of no accurate technique to determine the low in this case. Maybe we saw it on Friday. Hopefully if will be short and violent enough to shake free from the grasp of (investors living in) the past and let everyone know "something just happened". A hard low like that leaves plenty of room to start the bounce up. Like I have said in previous blogs, at this point in the turnaround cycle, the Skunk believes that PPS is no longer tied to company value and is only a measure of sentiment. I will judge if we are past the low by the criteria I stated on 13 July:

1. Both monthly highs and monthly lows are higher than the previous month.
2. A secondary bottom develops at least 100% higher than the 52 week low.
3. A third bottom develops at least 50% higher than the secondary bottom.
4. The stock moves up on good news.

Now I expect that monthly criteria to show up as early as October and as late as November and likely will not be the first standard met. My #2 criteria is based on a double of the all time low. Just for discussion, if we assume that the nearly 50K shares trading at 2.5 cents 29 August is the all time low, then a secondary bottom setting up at or above 5 cents would likely be the first step. This bottom would be one that repeatedly stands firm against selling pressure. Once firm, the next bottom would be 7.5 cents or higher. As this second base is reached and investors feel the base is sufficiently secure, the stock will be able to begin its move up based on its value. The psychology change that comes from some speculators coming in and making a 3 bagger off the bottom, may finally be enough for the stock to begin to make higher monthly highs and higher monthly lows. This will lead to some move up on good news, and for new, legitimate investors to take a serious look.
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The next three paragraphs below are copied from the 13 July blog. Or you can just hit the link and read what I thought then and still think now will happen to this stock.
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http://greenshift-gers.blogspot.com/2008/07/musings-of-skunk.html

From July 13th:

What will trigger the bottom?
I now suspect that we may hit bottom after the release of the second quarter filings or perhaps in conjunction with some other unforeseen event. The reason I suspect the second quarter filings may produce the final low is not due so much to the lack of progress, but the failure to meet the high expectations of progress combined with investor fatigue.
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Lastly, we have not had a final technical washout. Sure we have had falling share prices, yet the volumes were very small. The price has moved up and down on small trades. In May we had a couple days above 500K shares sold. We have been below 300K since. We have had a few ol'investors sign off the message boards, but very few. I suspect before we can round the corner we may see a week with about three days above 500K shares selling into falling prices.
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In conclusion, I am more concerned with financing and COES construction/production, than I am with today's PPS. If we have not seen it already, I expect to see our all time low within the next sixty days. I would not be surprised to see the 2Q report as the trigger for the final low. I expect us to move to between a dime and a quarter from mid September to mid November. I expect us to move in the 45-75 cent trading range in the final six weeks of the year.
Finally - no surprise to you regular readers - I am not a biblical prophet. If there is one covering Greenshift - somebody please send me his blog address! What I do is mostly let you look over my shoulder at any dd I scrape up. Today I tried to fill in the road between where we are today and where I think we will be at the end of the year. I am an optimist by nature, and that tends to affect how I see the future. Expect significant changes as the tires hit the road! In case you missed it - the biggest call I am making - and the only one that really matters - is that I am saying that in the next six months I expect this stock to have convincingly turned the corner. **********
Skunk Note: Hopefully you read what I write and then make up your own mind based on your circumstances, dd, and a thousand life experiences. But if you have read this far down in the blog you have more than a passing interest in the stock. I would now like to set some objective value standards. Although we very much hand to mouth as far as cash is concerned, GERS has made many objective improvements over the last 12 months. GERS is going up tremendously in revenues. It is up in corn oil production. It is up in biodiesel production. It has up in technology and construction sales. It has gone up in the number of production facilities. It has reduced debt. It is increasing EBITDA. Has it a long way to go? You bet! But Friday it traded for .025 cents a share.
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REAL VALUE ASSESSMENTS**
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At the 82,751,515 OS shares @.025 a share - that is a market cap of just over 2M!
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Rising Revenues? The first six months of 2007 GERS produced $ 3,180,959 in revenues. In the same six months a year later it produced $22,973,655 in revenues. (GERS made 3,417,154 in gross profit in the 2Q alone!)
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Estimating Value by revenues and market cap. GERS produced revenues in the 2Q at an annualized rate of over 46M. That is a market cap of less than 5% of revenues! !

Look at this Fool Crew Article excerpted below

http://www.fool.com/investing/beginning/how-to-value-stocks-valuation-methods-revenue-base.aspx

"Companies that are relatively new in a high-growth industry are often valued off of their revenue and not their earnings. Revenue-based valuations are assessed using the price/sales ratio, or PSR. The price/sales ratio takes the current market capitalization of a company and divides it by the past 12 months trailing revenue. As with the PEG and the YPEG, the lower the PSR, the better. Ken Fisher, who is most famous for using the PSR to value stocks, looks for companies with PSRs below 1.0 to find value stocks that the market might be overlooking. This is the most common application of the PSR and is a pretty good indicator of value, according to the work that James O'Shaughnessey has done with S&P's CompuStat database."


If we quickly do GERS**:
Here are the 4 trailing quarters for GERS revenues ($40.7M):
$11.5M Q2 '08
$6.6 M Q1 'o8
$18.2M Q4 '07
$4.4M Q3 '07

If we take the 2M market cap (that .025 represents) and divide by 40.7M we get a PSR of .049!! If GERS sold for twenty times - or 50 cents a share today - it would still come up as a "value stock(s) that the market might be overlooking!


Taking a very conservative approach we can add the market cap to the 10.3M "long term debt" (p. 6 2Q) and get a 12.3/40.7 or .30 factor. If GERS sold for eight cents a share -today- it would still be undervalued, with a PSR at ".96". Coincidentally eight cents, would constitute the level of the third bottom in the criteria I stated above.


Another way to measure value (EPS)**
By the end of the 1Q '09, (In about seven months) we should have 12 COES producing corn oil, with all the upgrades, at or above capacity. Let me make this real simple. GERS says it needs (less than) 13M/year to pay the bills. 12 COES should produce close to 18M gallons of corn oil. At 1.40/gallon of operating income (2Q p.33 ) produced per gallon, that is 25.2M/year. Minus the 13M to pay the bills - that is $12.2M that can (almost?) all slide down into Net Income. At our present Shares OS that is an annual earnings per share of nearly 15 cents!! Show me another stock selling at one-sixth next years earnings! (.025/.15) Notice I did not say SIXTY or even SIX times next years earnings. I said ONE-SIXTH next years earnings. At a very, very conservative 10 times earning that is $1.50 per share fair value in the 2Q of '09! That is $1.50/share just counting the COES to Biodiesel. Is the very real potential to earn at a rate of 15 cents/share in less than a year, worth more than 2.5 cents today?

Skunk you know GERS will not make their goals - they will only have 10 COES producing at 80% Capacity!
Well if that is the case, they will be producing at just 66.7% of where they planned to be - Granted - a major disappointment. But that also means they will still be profitable and earning over 4.5 cents per share and at a conservative 10 times earnings - they will be at 45 cents a share. That is 18 times what it traded for on Friday.

Controlling the means of production:

Not to sound like one of the Marx brothers (Karl in this case) but controlling these companies and the synergy produced is worth something:

NextDiesel biodiesel plant worth some 20M; Sustainable Systems purchased in March 2007 for $12.6 million; Next Gen Fuels (purchased for $21,204,437 in Oct 2006) consolidated into GS Agrifuels (August 14, 2007 it had 27,792,001 shares OS -giving it a buy back market cap value at .50/share of $13.9M). Throw in three operational COES at a couple million retail each, add in 4 other COES significantly along in development. Now add in the assets of GS CleanTech, and the pilot algae bioreactor and the 10% stake in both Sterling Planet and Zero Point technologies and you tell me what you think the market cap should be? Is it more than .025 cents per share or the 2M of its recent market cap?

Com'on Skunk, I see your numbers and feel your logic, but if this was such a sure thing you WOULD be betting the farm.

There are no sure things except death and taxes. For me this is a calculated risk worth taking with a part of my portfolio. Yes, I do have other investments and although you will never hear me say it again, they range the full gamut from (blush) CDs - to this here wild west wild card. You see we are betting mostly on a stock here, and I feel pretty confident we have much better than even odds on that. But we are also betting that fickle human investors will eventually act in their own self interest and that's where it can get tricky.

Now lets say that gravity is the human emotion (fear). The metals waste sorting business was a spent star. Most of the time "spent stars" collapsing into themselves reach an equilibrium between gravity and density (value) (actually it is electron degeneracy pressure.) Some have enough mass to use helium fusion as a gravity counter thrust and some may actually have a helium flash! In any case the re-born stars become thousands of times bigger as Red Giants. In very rare cases, however, the mass is so great, and the gravity so strong, that common sense seems not to apply. The forces resistive to gravity are so overcome that the star collapses into itself to infinity. We then have not a star, but a black hole. (Ah........ unless you're short star dust - not good) The Skunk is confident that we will end up with a large star here, but a quick trip through the universe of stellar evolution is always fun. It also acts as a reminder that although humans as a group generally act in predictive ways - history is full of examples of people being lead away from their own self interest.

In this blog the Skunk reviewed what is happening in the market, why I think we within a couple weeks of the bottom, why I think today's prices are radically under priced, what we can expect when the market for this stock corrects itself, and the part human emotion plays in a turnaround stock. Oh yeah, almost forgot all the cosmic forces and stuff. So whether you are a buyer, seller or just holding to see the next card played - good luck next week.

**Note: I am a shareholder - I do not work for, nor do I receive any direct or indirect payment from GERS or anyone associated with them. (But it would be Kapitalist Kool if I did) I will not intentionally mislead - but I can be wrong (ask Mrs. Skunk for specific frequencies) - so do your own due diligence - and take responsibility for your own financial decisions – (and your own life in general) good or bad. I have been rightfully accused of being a rather cheery, positive individual who laughs at every opportunity. These tendencies may cause me to overlook deficiencies in this stock that are painfully obvious to others. Celebrate today - and some good garage logic luck to ya.


Skunk.