**Call To Action
We are removing SURG From Our Speculative/Special Situation Model Portfolio
On April 8, 2022 we added Surgepays, Inc. (NASDAQ:SURG) $3.54; $42.6 M market cap) to our Speculative Long Model Portfolio on the heels of its recent acquisition announcement of Torch Wireless, a provider of wireless broadband with the FCC’s Affordable Connectivity Program (ACP). The acquisition enables SURG to be a provider in all 50 states, up from 14 prior.
However, we are removing SURG from the model portfolio as we think it’s prudent to take a deeper dive into the Company, the Torch acquisition and reasons behind the company’s recent shelf filing which caught us off guard.
It’s not that we have a complete aversion to companies raising money or filing a shelf to potentially raise in the future. But due to SURG’s prior dilutive capital raising history, many investors had approached an investment in the company with some trepidation (including us).
We slightly backed off this position after we believed it was clearly communicated by management that they understood that they could have dealt with their capital raising activities more efficiently in the past and that raising capital right now appears to be off the table, especially given the stock’s current valuation and the incredible momentum in the company’s subsidized broadband business.
In our opinion, a more prudent and shareholder friendly scenario would’ve been one where the company allows its subsidized business to start generating consistent positive earnings for the first time in the company's history and allow the stock price rise to a much more appropriate valuation, and then file a shelf.
In fact, recall that analyst estimates are implying that sales and earnings are going to be substantial.
Fiscal 2022 sales expected to be $129.6 million with $1.19 EPS
Fiscal 2023 sales expected to be $179.7 million with $2.91 EPS
The 2022 estimates imply the stock is currently selling at a price to earnings ratio of 2.9x!!!
Quite frankly, to be honest, these estimates would indicate to us that there is no reason to raise money at all and that the company can probably fund its growth organically for the foreseeable future.
One thing that we need to keep in mind is that the company’s legacy business is still losing money. So, does the company want to raise money for that piece of the business?
Again, as communicated in a prior email about this subject, we are not saying or implying that SURG is going to raise dilutive capital. We just don’t understand the move to file a shelf given the current circumstances and we think other investors are probably also confused about this action.
So, we just decided to wait it out a little bit to see how the story begins to play out and if the company addresses the reasons why it filed the shelf. We could be totally overreacting here. But given the history, we thought it would be the right move. This will also give us time to complete additional due diligence into the company.
