If you’ve been an investor in microcaps for more then a few years, chances are you’ve been involved with some crazy stories. It doesn’t take long until you’ve experienced situations that sound like they should be in a novel. With Hurricane Sandy tracking overtop of us here in Lancaster, PA I can’t help but think of one such story from several years ago. The stock was Charys Holdings (CHYS —now bankrupt), the ultimate hurricane play that ended in disaster.
Right after Hurricane Katrina hit, disaster remediation companies were engaged by government agencies to clean up the mess. These companies were paid top dollar to be quick and thorough. Charys Holdings showed up at this time to roll up the disaster remediation industry. The year following Katrina, Charys closed on the acquisition of the third largest disaster remediation company in the US that did $280 million in revenues with Net Income of $84 million for the TTM. Post acquisition, CHYS only had 30m shares out and was trading at $2 per share, and the buzz was the following hurricane season was going to be even worse. Charys quickly signed an LOI to acquire the 4th largest remediation company. The stock looked very cheap. The market at the time agreed, pushing the stock up from $2.00 to $11.00 in 4 months. What most investors failed to understand (because they weren’t told) was that the business model really needed two category 3 hurricanes to directly hit populated areas to sustain the business. The next hurricane season came and gone and of course -0- measurable hurricanes and CHYS went from $11.00 to $2.00. During this time frame Chary’s received $250 million in convertible debt financing at $2 to close 7 more acquisitions. The fact remained their business model correlated to disasters and with a pile of debt on the balance sheet it wasn’t nimble enough to sustain a -0- hurricane season. Over the following year the stock went to 0 and ended up in bankruptcy. Quite a story.
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