Trading Strategy Around Lime Energy's Possible Feb 2 Delisting
Tom KonradSeveral readers have asked me if I still recommend buying Lime Energy (NASD:LIME) now that it looks like the company could be delisted from NASDAQ on February 2nd. I won’t go into the details of why, when, or how, since John Downey has done an excellent job of covering that in the Charlotte Business Journal.
Instead, I’ll look at the various possible scenarios, and how it will likely be best to trade the stock. To understand what will happen, we first have to decide A) will Lime’s appeal against delisting be granted? and B) Will Lime be able to file its financial reports by April 30?
Scenario 1: All’s Well (Appeal successful, on time reports)
One possibility is that everything goes as Lime management hopes. In this case, Lime’s appeal to NASDAQ to stop delisting is granted, and Lime manages to file its delinquent reports by April 30. As always, the time to buy will be during the period of greatest uncertainty, which will likely correspond with the stock price low and happen sometime between now and February 2nd.
Scenario 2: Late Filing or Appeal Denied
If Lime again is unable to file its reports on time (they have already been delayed repeatedly) or the stock is delisted, it’s probably best to stay away from the stock until after the reports are filed. Even then, Lime seems unlikely to meet the standards for initial listing on NASDAQ because of its low market capitalizationI don’t know if the requirements for relisting on NASDAQ are less stringent than for initial listings (as are the requirements of continued listing.) However, I cannot find anything related to a re-listing process, so I think it’s best to assume that Lime would have to go through the initial listing process if it wants a new NASDAQ listing. Until such time as it is relisted, it will trade on the over the counter (OTC) markets, where most stocks typically trade at a substantial discount to similar stocks on NASDAQ.
Once Lime begins to file financial reports again, we’ll have more information, and then we may have a good buying opportunity. Although filing reports will doubtless help the stock on the OTC market, the lack of an exchange listing will keep the price down and give investors interested in getting back in a chance to do so inexpensively.
Clearly the decision to buy now depends on the chances of the appeal being denied or of additional delays to filing financial reports. I think the chance of not getting the reports in on time by April 30 are low, since the consequences would be so dire for Lime, and I just find it hard to believe any audit could take that long.
The chance that the appeal will be denied is harder to know. Lime seems to be complying with the spirit of the rules, in that they are trying to file accurate financial statements, and it seems to me that NASDAQ’s panel should take that into account. But I have no insight into this process, and investors who focus on what “should” happen often get burned.
In the end, I’m doing what I usually do when I know I don’t know what’s going to happen. I sold some of my position, but kept most of it. The reason for that is mostly my own psychology. By recognizing some of my losses, I’m less emotionally attached to the idea that Lime has to go up, and I should be able to look at the question more objectively, as information emerges. However, since I still hold most of my position, I’ll still be watching the stock closely, and so will be able to react to new developments in a timely manner.
Disclosure: Long LIME
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.