Shorts are increasing on AVH, page-131

Hi @Unit1122,

Thanks for your considered questions.

Firstly on the subject of shorts, I agree with your observations that the shorts combined with not so great announcements from the company have driven the share price down.

I also agree that if there is an announcement from the company that surprises to the upside - e.g. If they have been able to demonstrate that they can rein in costs and maintain good top line growth - the huge amount of shorts on this stock may not only stop the bleeding, but it is likely to give it a very sharp V-shaped bounce.

However, the question is what is the probability of the company delivering unexpectedly positive news, and when will it happen? They haven't been able to deliver one for quite some time, and so I agree with the market moves which suggests that the trend of disappointments will continue. Corona has had an impact on this business, but I am concerned they are also using it as an excuse to cover up a poor execution effort. With covid getting even worse in the U.S... should we extrapolate and assume that it will also translate into a terrible result for AVH over the next few quarters?

I am also deeply concerned that the shorts have undertaken channel checks and may know more than what the company has revealed to market, and that the result is not good. This involves contacting hospitals, burns centres etc to find out how the extent of product adoption, usage etc. This is nothing new, or nefarious, and I've heard a number of fund managers/analysts over the years do this for various medical devices companies I've invested in. I have been trying to find analyst reports on AVH to see if someone has done this and I haven't seen it yet, but the huge amount of shorts suggests to me, someone has done their homework and knows this company is going to struggle to get more traction without more copious amounts of cash being burnt.

This is just speculation and so I could be wrong, and maybe someone is just making a big short bet based on the impact of corona. But in my experience, shorts of this size aren't usually done on a hunch, they're often informed by real world information.


On your question about "What do you consider a fair value for AVH at this point? surely the dagger hits the floor sooner or later?"


At this point with the amount of uncertainty around, it is very hard to put a figure on this with a simple DCF. They say DCF's are a bit like the Hubble space telescope. You get a few figures wrong in your assumptions, and you're looking at a different galaxy.

With that caveat in mind, if you consider the amount of cash they have on hand, no debt, sales traction they have achieved to date, and uniqueness in their technology (ignoring the risk that goes with having very little left in terms of an IP moat), I'd suggest that we may be close to the floor.

However, bear in mind that with companies like this, while we may be close to the floor, with poor management, negative cash flow and high operating costs - the floor can very suddenly fall in.

I have seen this happen to companies, and I'm not embarrassed to say have actually lost money in companies like this (if you invest in many companies over a long period of time, you'll learn from some real doozies!). A recent example I have is AirXpanders, where a small investment actually went to zero as the company declared bankruptcy. Some of the warning signs there, I now see with AVH. Initially good success as they entered the market. Ramped up very quickly, resulting in high operating costs, big negative cash flow. Then when the sales growth stalled, excuses came. Then growth stalled again. Suddenly, a capital raising was a huge concern, then the ability to raise enough capital at all was an even bigger concern and then it went bust.

I'm not saying the same thing will happen here, but what I am saying is that a high growth company that has negative cash flow and high operating costs needs to consistently demonstrates very strong sales growth. The moment that it is not able to, for any significant period of time (often just a couple of quarters), its share price will very quickly come under significant pressure as the likelihood of bankruptcy or a very dilutive capital raising increases. The market looks ahead - it doesn't wait until the company needs cash to kill the share price, it will kill the share price at the first scent of the need for a capital raising.

The time for a company to raise capital is before it needs it.

On that note, if I had to put a number on it, I think at the moment from around $3.50 to - $5 is probably a hold for me, and it is a buy below $3.50.

The caveat on that however, as I said in a previous post, the presence of a huge short position and lack of a good track record by managements means that I probably would not even buy the stock if it dropped below $3.50 today:

"However I'm not going to buy when the shorters clearly have control of the stock. I'll wait for the trend to shift, then I might end upbuying this stock. It means I'm unlikely to pick the bottom, but those that have tried so far have been torn apart, so happy to not have to try to be a hero."

The presence of shorters is not always a good reason to sell. But it is a good reason to check your investment thesis and explore what the other side may be thinking.

If you have a good management team that are incentivised correctly, have demonstrated a good track record, and have a solid plan to achieve their goals - I am more than happy to buy and hold a company even if there is a big short in place. This is not the case with AVH though. Management have been given huge remuneration packages with little hurdles, allowed to consistently dump shares on market... and have used covid as an excuse for underachieving while many other companies have found a way through it. Covid is getting worse in the U.S, and other companies that fared better might even find it more difficult now. If that's the case, then AVH which has comparatively struggled most with the first wave, may very well be floundering in this huge second wave.

So for me, the time to buy is when the company has been able to deliver at least two good quarters to show they can get to break even without the need for additional capital. Until that is achieved, I'll keep watching from the sidelines. Yes, I might miss that initial big bounce, but I also won't risk watching my capital get eroded like it has for the past year.

In this market, you need to be keen on making money and protecting the gains you've made. Some people here bought in at 10c or less, and as a result, have given management enormous latitude because of the gains they made before... only to watch many of the bags they got evaporate.

People need to remember, money easily made, can also be easily lost by poor management. You need to always keep them accountable, not the latitude to rest on their laurels of past achievements.