EATS. Dot.com Daze?

History repeats itself. We have encountered the reincarnation of dot com daze (with its mantra “business is different now”). It took a while but we all know how that philosophy worked.

First, let me congratulate the principals at Eat Beyond (EATS) because they have come up with an excellent plan and they are not conning anybody. They get to regurgitate the news releases of all the companies they have invested in. The problem is reality and the speculators who have no idea what they are doing.

EATS is an ETF (Exchange Traded Fund), pure and simple. There is nothing wrong with ETFs and many people use them because it allows them to simplify their speculating or investing and not to have to concern themselves with research on a large number of stocks. The ETF does that for them.

But everyone needs to remember – it’s just a fund. It doesn’t invent anything or make anything. Its potential upside and potential downside are limited to the value of the diverse investments that it has made.

All ETFs are supposed to be, and in most cases are, valued the same way using NPV (net present value) and dividing it by the number of units or shares.

Looking at the latest financial statements on Sedar.com, EATS has approximate current assets (cash and shares for sale) of $2.965M, current liabilities of $137K, and 19 million shares/units outstanding, Therefore the NPV is currently in the range of $2.828M or 15 cents per share.

That’s reality. So how is it possible that people are piling into the stock and raising the market cap to somewhere over 45 million dollars or $2.40 per unit? (actually traded over $3.00 today before somebody started getting smart).

Not only is there a huge disconnect between the NPV and the price of the stock, but there is also another big problem with this little ETF.

Most ETFs are administered by computer or, if not, by efficient humans so that the administration cost is only 1% or 2%. This ETF is being run like most Canadian listed junior companies with approximately 17% of the ETF paid out for overheads on a yearly basis.

It is not a sustainable situation.

So, are EATS shares destined to find their true level (15 cents)? Yes.

Can the principals do anything to up that “true level”. Yes.

The stock has traded over 13M shares over $1.50 in the last three days. If they could quickly close a private placement before the bloom comes off the rose (say 12M shares @ $1.50), the basic numbers would change substantially. The true level would be 67 cents, and overheads would be down to 2.5% on a yearly basis.

Let’s see what happens.

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