Why Is Phil Frohlich Buying China Marine Food Group As It Delists From NYSE?

Phil Frohlich's Prescott Group Capital Management has been making our hedge fund news headlines for a couple of months now, mainly in account of its 'bullishness' on China Marine Food Group Ltd (NYSEMKT:CMFO), a seafood-based snack processor and distributor, and vendor of fresh and frozen marine products, as well as of algae-based soft drinks. Mr. Frohlich’s fund currently holds 6,325,795 shares.

China Marine Food Group

Prescott Group has been consistently increasing its stake in the company since late September, having made at least 6 purchases (on different dates, the last one yesterday) in the past couple of months. However, what’s interesting about these purchases is that they started just a month before the company decided to “go dark” in late October -delisting from every exchange for “avoidance of costs and management’s attention which are required in order to comply”- but also continued after this event.

All of these acquisitions were made at price points well below the stock's 50-day and 200-day moving averages ($0.39 and $0.68, respectively), and at very low multiples in relation to the firm’s sales and book-values, so upside potential is considerable. Actually, it seems like Prescott Group is loading up on the company's stock and betting on the delisting ameliorating its performance and financial figures.

Like Pengfei Liu, China Marine Food Group’s Chairman and Chief Executive Officer, stated: “The consequences of remaining an SEC-reporting company, which includes significant costs and management time associated with regulatory compliance, outweighed the current benefits of being a NYSE MKT listed company.” Apparently, Mr. Frohlich agrees with Mr. Liu in this matter.

However, another possible explanation for Prescott Group’s course of action could be found. The fund could have also been betting on the Chinese company buying the outstanding stock from shareholders once it delists (voluntarily).  As it usually happens in such cases, the company will most likely pay a price premium on its shares.

One way or another, the purchases make sense for Prescott Group’s portfolio, which is focused on small and mid-cap stocks, as China Marine Food Group’s market cap doesn’t even reach $10 million, although working capital surpasses $70 million. The fund has more than $450 million in assets under management, and has also recently disclosed a position at PharmAthene, Inc. (NYSEMKT:PIP), going quite activist (he requested a special shareholder meeting to discuss some particular issues).

Prescott's significant position in the company makes it, by far, the largest hedge fund bull on China Marine Food Group. The only other “hedgie” –amongst the funds we track - that has bet on this company is Jim Simons’ Renaissance Technologies, although its position is quite small (it doesn’t even make up for 0.1% of its portfolio).

Back to China Marine Food Group, the company was eligible to deregister its common stock because it had fewer than 300 stockholders of record. Yesterday, Nov. 12th, the stock traded at the New York Stock Exchange for the last time. Today, it started being sold on the OTC Pink Marketplace.

Disclosure: none

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