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Folks who have been with Private Briefing from the start know that I'm a big airplane nut. I fly radio-controlled models, have a huge library of airplane-related books – most of them historical in focus – and collect all sorts of flight-related memorabilia, including old letters, pictures and pilot log books.
All that reading has filled my brain with lots of flight-related trivia.
For instance, I'm familiar with the term "bolter" – a bit of naval-aviation slang that's used to describe an aborted carrier landing.
The way it usually works is that you'll have a jet pilot who's descending toward a pitching carrier deck in order to land. Carrier landings are often described as a kind of "controlled crash" because – to slow and stop in such a small area – the pilot needs to snag one of the "arrestor wires" that stretch in lattice-pattern fashion across the deck
Landings are made at a pretty high rate of speed. So if the pilot comes in high or misses the arrestor cable that's supposed to bring the aircraft to an immediate stop, there's a risk the jet can run off the front of the carrier deck – and get plowed beneath the gargantuan hulk of the still-moving ship.
So when there's a miss, the carrier's "Landing Signal Officer" (LSO) transmits the warning "bolter, bolter!" over the radio -and the pilot slams the throttle "to the stops" … the jet quickly "spools up" … and the aircraft roars into a steep climb that takes the aircraft up into the air and out of danger.
I'm relating that bit of flight trivia to you for a reason …
You see, in the first two trading sessions of the week, eOn Communications Corp. (NasdaqCM: EONC) has been a "bolter."
In the March 20 briefing "Why I 'Insisted' You Get This Micro-Cap Stock Pick," we recommended eOn as a "micro-cap" telecom play with a huge potential upside.
But we also underscored that – as alluring as the upside may be – this is a stock that poses exceptional risk.
After initially doing fairly well, the stock seemed to settle into a "cruise mode" – until it recently tipped into a dive that threatened an outright crash.
Then came Monday.
eOn shares "bolted" as much as 73%, and closed 45% higher during the first trading session of the week – apparently because some traders see a benefit from the AT&T Inc. (NYSE: T) move to acquire DIRECTV (Nasdaq: DTV).
And that "throttles-to-the-stops" climb continued yesterday. eOn shares zoomed as much as 42%, before closing 18.6% higher – thanks to an upbeat analyst report.
The report – a nine-pager that featured an "Overweight/Buy" call by Michael Anderegg, a senior research analyst for MRA Research Inc. – was issued yesterday, and has clearly been the catalyst for at least some of the bullish action we've seen in the stock in the week's first two trading sessions.
But several key dates also loom, meaning deadline decisions by investors are also responsible for some of the run we've seen in the past few days.
Radical Technology Profits Editor Michael Robinson, our resident tech-sector expert, made the recommendation to us. And in a talk I had with him late Monday, he reminded me that several important dates for eOn are coming fast. A planned merger that we believe will be a major business catalyst for eOn is scheduled for June 3.
"At that time, Bill, EONC leaders will discuss the upcoming merger with Inventergy Inc. – and that business 'combination' is a key to the investment case that we made for the stock," Michael explained. "The special shareholders meeting is important for another reason, too. Voters will also have the chance to approve payment of a special dividend totaling $1.65 million. Shareholders of record as of Friday will be eligible for this dividend. So it's clear that some of the movement we've seen is due to investors making a decision – one way or another – on this stock."
Michael believes the sell-off was fueled by worries that the merger may be falling apart.
"Based on the publicly available information at this time, I don't see any cause for concern," he said. "However, as we have seen with small-cap growth firms this earnings season, the slightest sign of potential problems can cause a huge sell-off. This underscores why we protect capital with such devices as 'trailing-stops' or split purchases – the strategy I recommended with EONC."
These fast-approaching deadlines were clearly part of the reason for all the new interest in eOn shares.
But there was a second catalyst.
To understand that one, however, we first need to revisit our own "investment case" for eOn Communications.
A "Legend" Has a Plan
This company was conceived by a legendary Silicon Valley intellectual-property expert named Joe Byers. Just a few months back, Byers launched privately held Inventergy Inc. as a patent-and-IP-licensing firm and has already locked up hundreds of valuable assets.
Detractors might dismiss Inventergy as nothing more than a "patent troll," a derogatory term for an operation that really just sues other companies over real or imagined patent infringements.
Byers viewed it much differently. He argued that his goal in creating Inventergy is to leverage his tech-sector expertise: He wants to take the technology that companies have spent so much time and money developing and get it out into the marketplace, where it can have a chance to develop a healthy stream of sales, cash flow, and profits.
That's where eOn Communications comes in.
"You see, Bill, Byers recently engineered what's known as a 'reverse merger' – a really brilliant move that combined Inventergy and eOn," Michael said. "This takeover is a unique way of making Inventergy a publicly traded firm while simultaneously allowing Byers to extend his global telecommunications reach. Once the merger is complete in the next few months, eOn will change its name to Inventergy Global Inc. in a move that underscores its radical transformation. As you can tell from my comments, I love this move – because it telegraphs big opportunities to come."
Founded in 1897 as a switchboard company, eOn today provides Internet telephony and phone services (referred to as 'unified communications') that blend wired phones and wireless messaging.
Byers clearly has bold ambitions for Inventergy. In early January – in a single move – he actually quadrupled the number of patents in Inventergy's telecommunications portfolio.
He did this by purchasing about 500 Panasonic Corp. (OTC ADR: PCRFY) patents that cover key 3G and 4G wireless communications technologies. Byers notes that these new IP assets provide geographic coverage in 18 countries with more than 80 telecom operators handling more than 2.5 billion mobile broadband connections.
Incidentally, some of the mergers announced this week could actually create new customers for the reconstituted eOn, which is one reason investors have suddenly become more bullish.
But it will take the looming merger to "unlock" that value.
And the new research report we mentioned seems to have reminded investors of this opportunity.
Wait and See
According to MRA Research, this new recommendation and the research that accompanies it were assembled without any compensation from eOn. We mention that for two reasons. First, MRA is not a top-tier institutional player, meaning it's one that we're not familiar with. That doesn't mean the research isn't valuable, or that this isn't one of the shrewdest and most-timely recommendations around. We just don't know the firm, and haven't yet had time to study the report.
Second, as many of you know, there's been a growing trend in which small-cap and mid-cap companies "hire" a firm to create, publish and disseminate "independent research reports" online. It's not a pump-and-dump scheme, but the U.S. Securities and Exchange Commission (SEC) recently described this as "a common abuse found among certain small publicly held companies. In recent years, many such companies have hired stock promoters to tout their shares on stock-picking websites and through mass-mailed e-mail messages."
As TheDeal.com said in its June report "Microcap Stocks Get Undeserved Promotions," the business of "stock promotion is not illegal, in and of itself. Investor relations specialists often promote their clients' stocks to investors and the media. Promotion is said by many small-cap market observers to be a necessary task for microcap companies, as even those with legitimate business prospects often have trouble attracting attention from investors."
But promotions "whose authors are not identified or who don't disclose their compensation, or that are not grounded in fact are often referred to as 'pumps,' and under SEC regulations, can be illegal," the dealmaking-news Website said. "They are often designed to benefit seed shareholders who have purchased large holdings of cheap stock. The promotion can allow those seed shareholders to sell their shares to naive retail investors who rush to buy, based on the claims of the promotion. When the promotions end, the stocks often crash."
We're not implying that MRA falls into that category. As noted, MRA specifically stated that it received no compensation for its research. But we also lacked the time to fully vet the company or to study the research.
And while the research note was clearly the catalyst for some of the big move the stock has made, from our vantage point it really doesn't matter: Michael made an investment case for eOn Communications that he continues to believe in. (In fact, I would urge you to go back and read our first report, which we updated yesterday.) And he believes that the case he made still holds.
We'll follow up with news on the annual meeting and with some details on the new report.
In the meantime, we have some new opportunities to tell you about.
See you all tomorrow.
[Editor's Note: Unless otherwise directed – as we've done with eOn Communications – we recommend investors employ a 25% "trailing stop" on all holdings.]
- Private Briefing: Why I "Insisted" You Get This Micro-Cap Stock Pick.
- Private Briefing: The U.S. Just "Called Out" Beijing Over Cyber-Spying.
- MRA Research: eOn Communications Corp. Special Situation – Pending Merger and Special Dividend Opportunity.
- TheDeal.com: Microcap stocks get undeserved promotions.