Look at a list of the most actively traded public company stocks in Los Angeles last year and there aren’t many surprises: video game publisher Activision Blizzard Inc. and entertainment giant Walt Disney Co. top the list, followed by KB Home, DirecTV and Amgen Inc.
Each is a big company with a market cap of at least $1 billion, and most have the better part of 1 billion shares in the market.
But for the past few months, little plastic resin maker Cereplast Inc., whose stock closed March 13 at only 3 cents, has topped that list – and by a mile – despite having a market cap of less than $9 million and fewer than 300 million shares outstanding.
Since Jan. 1, an average of 23 million shares of the El Segundo company have changed hands each day. That’s more than twice the daily average volume of traditional volume leader Activision and of recent news-maker Herbalife Ltd., the second most active local stock this year.
Unlike Herbalife, which has seen a pickup in trading as high-profile hedge fund managers have engaged in a very public debate over the company’s prospects, trading in Cereplast has spiked because of an exodus of institutional investors and a flood of new shares.
The trouble began when the European debt crisis left Cereplast with lots of unpaid invoices from overseas customers. Shares tumbled as it struggled to find new markets. Eventually, prices got so low that institutional investors could no longer invest, said Frederic Scheer, Cereplast’s chief executive.
As they divested, the number of Cereplast shares outstanding started to balloon, the result of an arcane device known as an embedded derivative. With the company in debt and in desperate need of cash, it entered into complex funding and debt-relief agreements that created tens of millions of shares.
In one recent example, IBC Funds LLC of Bay Harbour, Fla., agreed in January to buy $330,000 worth of debt from Cereplast creditors. IBC then exchanged that debt for convertible notes – essentially bonds that can be turned into Cereplast shares. Last month, IBC converted the notes into 17.6 million shares and promptly sold them.
As a result of this and other such actions, there are about 282 million Cereplast shares outstanding, compared with just 34 million in September. At the same time, it has more than 13,000 shareholders, meaning the average shareholder has only about $650 tied up in the company.
“A large majority of our volume is created by small traders, day traders,” said Scheer. “You’ll rarely see a transaction that’s more than $3,000 or $4,000.”
He acknowledged such deals have diluted Cereplast shares, but said he had few other choices to keep the company going. “My job is to make sure the company continues to be in existence. We had to do these transactions.”
