Torchlight Energy Resources and TRCH stock are now history. How so? Well, the company recently merged with Metamaterials to form the new Meta Materials (NASDAQ:MMAT) stock.
However, it’s not as simple as that. Rather, TRCH stock has made a lot of news lately and moved way too fast. Further, the mix of news behind this new company is a lot to grapple with. Now, the reasons for whether or not to buy MMAT stock are focused on two major questions: why did the stock move and what is the real story to analyze here?
Here’s what you should know about the latest incarnation of Torchlight Energy Resources: MMAT stock.
Why TRCH Stock Moved
With TRCH stock now “history,” the newly formed MMAT stock is up about 138% in 2021. Furthermore, it has a one-year return of 376%. Why has the stock moved so much?
In my view, the stock’s action is a product of the market’s current trends. Right now, special purpose acquisition companies (SPACs), short squeezes and social-media trades are what’s hot. As Reuters reported last month, Torchlight Energy shares surged as part of the “meme stock” phenomenon. But, looking at the details behind Meta Materials today, I don’t see any positive fundamentals to supplement that excitement.
For example, MMAT’s five-year financial summary shows a maximum revenue of $1.6 million all the way back in 2015. Plus, Meta Materials saw negative operating income from 2015 to 2018 as well as net losses during the same period.
When I see a price history like this one’s — with a price of less than $2 in early January and a high of $21.76 in June — I wonder why investors become so attracted to such stocks. In my opinion, things do not end well with most of these “meme stocks.” For instance, some investors bought into this name back when it was near $22. Now they have huge losses. That hurts.
But the story here is deeper than just memes.
More Behind the Move
What created the enthusiasm for Torchlight, making it the latest meme trade?
In part, the company caused an uptick in interest when it “declared a Special Dividend of Series A Preferred Stock to be issued on a one-for-one basis to Common Stockholders of Record as of the close of market trading on June 24.” More specifically, this issuance was to be connected with the “previously announced business combination transaction with Metamaterial.”
Essentially, Torchlight Energy implemented a 1-for-2 reverse stock split that would cause the share price to double but leave the market capitalization unchanged. What this means is that every two of its shares would become one, doubling the price of each share. The goal was to boost the TRCH stock price by reducing the number of outstanding shares.
But what makes this news more complicated is that Torchlight Energy Resources also made an upsized stock offering to $250 million to “take advantage” of the stock price surge. To me, though, this means a stock dilution with negative results for the valuation. Additionally, back in February, the company announced it was converting senor debt into stock. That move was good to reduce the amount of debt, but also negative for valuation as more shares were issued.
I would say that Torchlight Energy tried to minimize the negative impact of its stock offering with the latest reverse split. But, in general, reverse stock splits indicate weakness. For example, they can signal an imminent risk of being delisted. They can also be an accounting gimmick to increase the stock price when it’s at low levels after a prolonged selloff.
All in all, I do not see value in these recent decisions, apart from the reduction of the debt. However, what is even more negative to me is the real story behind this stock.
MMAT and TRCH Stock: The Real Story to Analyze Now
When it comes down to it, the business combination here is just odd.
TRCH stock represented a company that had its main operations in high growth oil and gas exploration and production (E&P), with a primary objective of acquisition and development of domestic oil fields. Meanwhile, Metamaterials — the other half of the equation — was a technology company. It worked in smart materials and photonics, designing and developing various functional materials and nanocomposites.
What’s the connection here? None that I can see. These were completely different business plans and operations. As such, I have my doubts about the value of this merger; it’s like combining a car manufacturer with a hotel company or some other business in the tourism sector.
All in all, it’s hard to see the value-added here. Plus, the poor fundamentals, the reverse-stock split-efforts and the “meme” narrative add to my doubts. Because of that, I would avoid getting into MMAT stock now. I can think of no solid argument to buy the stock.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.